Tuesday, August 28, 2012

Sergio Cesaratto — A reply to Wray - Part I & II

The debate continues for those following it.

Naked Keynesianism
A reply to Wray - Part I

A reply to Wray - Part II

Sergio Cesaratto
(h/t Anonymous in the comments)


NeilW said...

Overthinking it again.

Pretty much every crisis put forward can be explained by the authorities not failing an institution that had failed.

Judicious use of bankruptcy makes sure that creditors take their losses. You have to have a system where the core functions are protected even if all the entities cascade into bankruptcy *including the banks*.

Matt Franko said...

" I found particularly timely the reference by Ramanan, in the discussion of one of my posts, to the Mexican case of 2008 that well illustrates a typical case of a country with full sovereign monetary that has to recur to the IMF and accept its conditionality to avoid an exchange rate crisis. "

Because our southern amigos couldnt make good on their USD denominated gambling debts... that's not MMT's fault.

Tom Hickey said...

@ Neil Wilson


Redundancy (engineering)

JK said...

By definition, according to MMT, Mexico must have either 1) had debt denominated outside of their sovereign currency, or 2) they were attempting some sort of exchange rate peg.

Otherwise, there wouldn't have been a problem. right?

Ramanan said...


Yes note (hate repeating this) there was an MMT paper in 2005 written as if nothing bad could happen to Mexico with the knowledge that the Mexico government has debt in foreign currency.

Also, nations running into balance of payments problems usually end up having official sector debt before crisis hits. Try googling "original sin".

Most nations have official sector debt in foreign currency.

One more thing. There are various definitions of "monetary sovereignty" by MMTers. In one, whether the government has debt in foreign currency or not doesn't enter the definition.

Clonal said...


Yes - nations cannot run sustained current account deficits that are denominated in currencies that are not created by them! You can, however, just as the US currently does, run current account deficits denominated in a currency that you have complete control over.

Ryan Harris said...

Important, I suppose, to outline clearly the limitations of MMT. Politicians have a tendency to overreach with policies and systems that ultimately abuse the most well designed economic systems until they break. Ultimately the economics and NOT the politician take the blame when catastrophe ensues. These debates have clarified and will provide a C-Y-A should government officials ever take notice of MMT.

Ramanan said...

"You can, however, just as the US currently does, run current account deficits denominated in a currency that you have complete control over."

For a moment lets assume that the United States does not have a balance-of-payments problem.

Can you list countries which have all imports invoiced in their own currency? Or a significant proportion of it?

Ryan Harris said...

Interesting the critics focus on current accounts rather than capital accounts. Rapid capital accounts flows usually were the source of most consternation for countries like Brazil and Mexico. Current accounts rarely lead to BoP problems by themselves.

AndyCFC said...

Ramanan look you know im not happy with CADs and agree with you in part on capital controls,tariffs etc but Mexico was a bad example with that BIS paper i linked to, Mexican coporations were playing with exchange rate swaps leaving them at risk and the central bank having to intervene.

AndyCFC said...

1) had debt denominated outside of their sovereign currency

This is point really, what Ramanan points out is correct of course when he says "Most nations have official sector debt in foreign currency." but only because its allowed as governments etc dont realise what is happening and should stop it... Hungary is a great example with allowing mortgages in CHF thats complete fuckwittery to put it bluntly (Ramanan linked a great chart on FTAV today about NIIP, Hungary was 2nd or 3rd on the list of world debitors and i bet all because of that mortgage debt)

paul meli said...

1. MMT is a framework based on system math principles.

2. CA distortions are problems based in math.

3. Therefore MMT causes CA distortions.

Tom Hickey said...

Sergio Cesaratto post A reply to Wray updated with Part II

Ramanan said...


"but only because its allowed as governments etc dont realise what is happening and should stop it."

Not really. Most governments find themselves necessary to intervene in the currency markets when sudden portfolio shifts happen in foreign currencies by nonresidents.

The idea that the exchange rate just depreciates to a lower rate doesn't work in practice.

Second, it is true that Hungary had a lot of foreign currency denominated mortgage debt by households but a loan by itself doesn't increase the net indebtedness of a nation. The net indebtedness arises (with some qualifications) from a current account deficit. Hungary had huge current deficits before the run-up to the crisis. Repatriation of profits by foreign banks is a source for this deficit but there are other items in the current account of balance of payments as well.

So in the case of Hungary it is due to a lot of factor which led to the external sector problem. Just blaming it on foreign currency mortgages isn't the whole story.

paul meli said...

Part II exposes the arguments of Cesaratto as being applied to the wrong problem or to a system that doesn't exist in the real world.

His criticisms of things MMT says but has never really said is telling. I've come to expect these as the major crux of most disagreements.

Cesaratto and many heterodox economists like him are caught in a paradigm netherworld and just can't quite see the whole picture. Part of the curtain remains.

AndyCFC said...


"So in the case of Hungary it is due to a lot of factor which led to the external sector problem. Just blaming it on foreign currency mortgages isn't the whole story."

Got any figures? cant seem to find the info... be intresting to see what the figure would be taking out those mortgages. I think you may be underestimating them but have no proof either way.

Ramanan said...


Yes I have the figures from the IMF Balance of Payments Statistics Annual Manual. (not available online).

Hungary has a lot of foreign banks. However these are considered residents and hence a loan in foreign currency does not enter the balance of payments. However these banks are controlled by foreign entities and their profits (from interest income) is entered in the balance of payments.

The source of this balance on income (due to interest payments) also arises from mortgages in domestic currency.

Yes, the income is high but its not that the balance on goods and trade is good either. Negative in initial periods 2003 and turning to slight positive in 2007.

I have data only from 2003 to 2010 yearly but even at the end of 2003, the nation was a large net debtor (meaning balance on income was spoilt not just by foreign banks profits but also due to interest/dividends paid on such large net indebtedness.

Okay bad attempt to summarize the data in words!

I agree with you that foreign currency mortgages were really important but it's not that the contributions of other things in the current account were not significant.

However, if one takes the attitude that the current account is harmless, then what I am saying doesn't matter!

Sergio Cesaratto said...

Please, note that I changed note 2 of Part 1 in this way:
"[DELETED: MMTs should, however, detach themselves from the open support to the bad-mannered conduct of the presumed guru (a journalist) of the Italian MMTs. This is irrelevant for me and the colleagues of mine victims of various vulgarities – we are appreciated by the international (heterodox) scientific community and well-known by the serious Italian progressive forces, so we do not take care of this, really –, but not for the reputation of the academic institutions some MMTs are attached to. The Italian contribution to the heterodox tradition has been and still is second to no other country, so one would expect that foreign economists with little knowledge of the Italian situation to enter in the Italian debate seeking in the first place to be in touch with their local colleagues, e.g. here. To do otherwise would sound a wasp-neocolonial or an American Evangelic mission to educate less gifted people, a mission fortunately confined to political (let alone cultural) irrelevance.] NEW: Things have changed in the meanwhile. Stephanie Kelton has showed great understanding for us, and I believe that her feeling is shared also by other MMTs. We are thinking about having an event together in Rome during her visit to Italy (with Auerbach and Mosler). Even if we shall not be able to organize it, the very fact that we tried is very encouraging."

Tom Hickey said...

Than you for sharing that with us, Professor Cesaratto. Very happy to hear that you and your Italian colleagues will be getting together with the MMT economists. The opposition should be focused on the people who are at the bottom of this global mess instead of people already close to each others' positions focusing on minor disagreements. Differences need to be addressed, of course, and that is what debate is all about.

Glad to hear that all of you will be working toward this understanding. Perhaps you can lay the groundwork for something cooperative there in the future. Italy's problems don't look like they will be resolved soon the way things are going. All people of understanding and good will need to be coordinating to turn this neoliberal debacle in the EZ around as soon as possible through enlightened policy based on operational realities.

Warren Mosler said...

in a monetary union like the US or EU, for purposes of this analysis the only kind of regional problem you can have is an unemployment problem. In other words, if there happens to be full employment in all regions there's no problem, regardless of what the inter regional trade numbers happen to be. If there is unemployment, it's a problem whether related to trade or not, and subject to the same adjustments regardless of source.

When some regions are at full employment it can be problematic to simply increase aggregate demand at the macro level to sustain full employment in all regions. Should that be the case the 'answer' becomes 'fiscal transfers' where the central govt. directs public spending to the areas of high unemployment. While this works well to sustain full employment throughout the region, it's unfortunately misunderstood as a transfer of wealth to the areas of high unemployment from the taxpayers of the low unemployment regions.

In fact, while it's an addition of nominal wealth to the high unemployment regions, the production and exportation of public goods and services to other members of the union is in fact a reduction of real terms of trade for the high unemployment regions doing the production relative to the low unemployment regions doing the consumption, as exports are real costs and imports real benefits.

So while fiscal transfers for the production of public goods and services that serve the entire union are commonly presumed to be benefits to the high unemployment regions and costs to the low unemployment regions, in real terms the reverse is almost always the case.