An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Tuesday, November 27, 2012
Irony comes full-circle. Paul Krugman touted as "MMT grand-poobah"
Anyone seen any pigs flying recently? A snowball still frozen in hell? Is the 2nd coming of the New Deal imminent? Has the Ghost of Marriner Eccles been visiting Scrooge?
If those people are trading their talk, most of them must be broke by now. Betting against the yen has been called "the widow maker." Same with US tsys.
Warren Mosler, who moved to St. Croix in 2003 to run for Congress in’04, ran a fixed-income arbitrage fund for 15 years without, he claims, a single losing trade. He turned it over to his partners in 1998 with over $3 billion of capital. He’s the progenitor of some of the derivative products traded today and even has his own ultra-cool car company, Mosler Automotive.
What about Japan? It's trade balance is deteriorating, but it can't afford to raise interest rates because the debt service would become too large... Should they be worried?
This is interesting the first sentence in the first comment from the first moron 'evan37' over there:
"It is sad to see how many people are buying into this Modern Monetary Theory mumbo jumbo."
Right on cue comes the metaphor...
This is just like Miller in Mike's video on The Blaze: "...gobbledegook" immediately.
Or Becky Quick to Warren on CNBC: "...I wish I could do that in my checkbook" immediately.
etc... suggest start to watch for this immediate appearance of false metaphor... it happens EVERY time.
It looks like these falsehoods depend on the communication (either spoken or written) of false metaphor for survival...
Your comment didnt contain any metaphor just some operational observations and further references.
These language techniques may be equivalent to what happens between the protein receptors on the surface of the cells of the parasite and the surface of the cells of the host upon first contact.... seems like something would have to be "communicated" there too which somehow corrupts the system...
You want to witness false metaphor writ large right now? Then turn on MSNBC. The full court press of misinformation is on and it is sickening. They trot out every centrist dweeb they can find and have them dress down the "extremist" left, and scold them on the inevitable "math" if they don't take their castor oil like the rich need to.
Japan would like to raise interest rates to prevent its trade balance from "deteriorating" further.
I'm not attached to the word "deteriorating", by the way. Replace it with another term if you prefer. I suppose I use it because it seems better to build up net savings rather than net debts, but you may feel differently about this, of course.
"Well stated! As I see it MMT does not comprehend the law of unintended consequences. But, too many academics are hell-bent-for-leather to push this pseudo-economics. Just read their grand-poobah Paul Krugman."
What about Japan? It's trade balance is deteriorating, but it can't afford to raise interest rates because the debt service would become too large... Should they be worried?
But increasing interest rates will strengthen the yen, making their exports less competitive.
I was going to post this, but was too lazy to create one more account somewhere else...
I find it sad at how poorly understood money creation is amongst the average person and particularly self-appointed smart people. When a bank extends credit it creates deposits which we all treat as money. When a government deficit spends, whether it issues bonds or prints money, it creates money. Why we carry one when the government creates money and not when the banking system creates money is beyond me – and especially when that said government is fully sovereign in its currency – meaning it can’t ever go bankrupt – unlike its private sector citizens and businesses.
When foreigners buy Japan’s exports Japanese workers get paid in Yen. Did you ever ask yourself where did that Yen come from? In almost all cases it came from the Japanese banking system. Foreigners created Yen deposits by obtaining Yen based loans (credit). As Japan moves from an export nation to an import nation money creation is still going to happen – it’s an economic/accounting requirement – the question is who is going to be responsible? The solvency constrained domestic private sector or the sovereign fiat currency issuer?
I think that this sort of stuff is easily confused because there are so many factors to take into account.
Higher interest rates - > less consumer demand for imports - > improved trade balance.
Also (by the same token), higher interest rates - > higher domestic savings - > no need to import foreign capital to finance investment.
Finally, if you are running a CAD, you need to either import capital, and this means that you will need to offer it some kind of competitive return, or go into a BOP deficit and begin to run down official reserves, or face the consequences.
"When a bank extends credit it creates deposits which we all treat as money." - Adam1
Banks create money and negative money simultaneously. One should avoid making the claim that banks create money and leave it at that. The liabilities are a big deal.
The only reason credit (debt) works at all is because the government follows through with deficit spending.
Without net money creation, 95% of the "money" in existence would not be credit (debt).
What!? Derivatives were at least partially to blame for '08-'09 crisis. Does that mean Mosler was part of the problem and helped cause the crisis? Is MMT his way of redemption? :)
You mean less consumer spending on imports but not necessarily more sales of exports, due to stronger Yen. Basically just an economic contraction?
Well, the goal is to avoid an economic contraction. Lower consumer spending isn't the same thing as a recession.
Do you mean ship Yen notes over from China?
Not sure I understand this comment. I mean import capital, i.e., sell assets to the rest of the world.
Or do you mean shift credits from one account to another at the BOJ?
Don't understand this either. Can you explain what you mean, please?
...Or the currency will depreciate, reducing imports and increasing exports?
Anything is possible, right? But the exchange rate is not a market clearing mechanism that always brings you back to a good equilibrium, and I would be wary of people who treat it as such.
It's kind of weird and counter-intuitive, though. Think about what's implied in your question. Say that the currency depreciates, where is the current account going to end up? What else is going to move?
ok, but how exactly? Higher interest rates - less spending - more saving - ...
That's not a recession!
Is there any actual 'importing' going on though?
"Importing capital" is kind of a metaphor. No physical object is brought into the country. Instead, ownership of assets is transferred to foreigners, so you could think of it as "importing ownership of the capital stock".
The money used to buy assets is created in Japan isn't it?
In a literal sense, I suppose so, because Japan is the source of Yen, but I'm not sure what that has to do with the flow of savings in and out of Japan.
By definition, if Japan is borrowing from foreigners, the savings it is borrowing are not created in Japan.
Not sure. What do you reckon?
It could go anywhere, right? The point is that the exchange rate is equating supply and demand for foreign exchange. It's not equating imports and exports or the current account balance and the capital account balance. Just because the exchange rate appreciates, assuming that's what happens, doesn't mean you end up anywhere you want to be.
The money used to buy assets is created in Japan isn't it?
In fact, think of the assets as Yen denominated bank deposits. The assets are Japanese, but the money used to buy them is obviously not created in Japan.
If you have lower spending, higher saving, what's going to make up for the reduction in demand?
"Importing capital" is kind of a metaphor."
That's what I meant. We have these terms that are often inaccurate metaphors. Perhaps 'importing capital' comes from gold standard days, when gold was shipped around the world?
"if Japan is borrowing from foreigners, the savings it is borrowing are not created in Japan"
My basic understanding is that when people in Japan buy imported goods, money essentially moves from their account in Japan to the foreign exporter's account in Japan. If the foreigner saves it, it remains in the Japanese banking system. The savings are created and held in Japan and not abroad.
"the exchange rate is equating supply and demand for foreign exchange"
Ok, but in Japan, a stronger yen has been associated with a fall in exports. Higher interest rates are likely to strengthen the currency, negatively affecting exports.
"The stronger yen and weak overseas demand will also keep squeezing exports. Until 2009 exports had been buoyed by an abnormally weak yen, as foreign investors borrowed in yen to invest in higher-yielding currencies. But that carry trade has now been unwound as interest rates elsewhere have plunged.
The stronger yen and high corporate taxes are also encouraging manufacturers to shift production abroad."
http://www.economist.com/node/21542794
"The assets are Japanese, but the money used to buy them is obviously not created in Japan."
What do you mean? As far as I can tell the money is created in Japan, the foreign exporter receives it in payment, and if he saves it stays in the Japanese banking system.
Alternatively the foreign exporter sells the yen he receives to buy his domestic currency. The yen still stays in Japan of course, but if sellers of yen outnumber foreign currency buyers, then the yen will depreciate.... (?)
"money essentially moves from their account in Japan to the foreign exporter's account in Japan"
Or of course it could be that a domestic importer receives payment in yen and then sells yen for foreign currency to pay the foreign exporter.
"Importing capital" would then mean getting foreigners to buy yen. Really it's a question of exchange rates and currency strength/weakness, rather than "getting money from abroad", if that makes sense.
If you have lower spending, higher saving, what's going to make up for the reduction in demand?
There isn't any reduction in demand, so nothing needs to happen to offset it. There's a reduction in consumer spending, and an increase in saving.
That's what I meant. We have these terms that are often inaccurate metaphors. Perhaps 'importing capital' comes from gold standard days, when gold was shipped around the world?
I think "importing capital" is okay as far as metaphors go. Savings are borrowed from foreigners: a capital inflow.
Everything is confusing at first, and international macro is more confusing than most, but this seems pretty straightforward to me.
I think that perhaps you'd like to extend the kind of claims that MMT makes about the government to the country as a whole. The Japanese government doesn't really borrow, because it issues money. In the same way, Japan can't really be said to borrow from (or lend to--Japan was a surplus country until very recently) the international sector, because it issues yen.
Ok, but in Japan, a stronger yen has been associated with a fall in exports. Higher interest rates are likely to strengthen the currency, negatively affecting exports.
Right, you would expect a stronger yen to lower exports, ceteris paribus, because they would become more expensive. But that's a very partial analysis, isn't it?
You want to say, it seems to me, that it doesn't matter what happens to Japans current account, because a deficit will cause the yen to appreciate.
Suppose that this were true. But so what? What will an appreciation in the yen give you? Implicitly, you're assuming that whatever the yen does, it's going to bring the system to some kind of sustainable equilibrium.
But what has to happen to bring that equilibrium about and how do you know it will be sustainable?
Let's say that the yen strengthens. That doesn't mean that Japan isn't going to have a current account deficit does it? It just mean that the yen strengthens. Suppose that we end up with a stronger yen, a moderate CAD and lower equilibrium income and employment. What's to prevent that?
What do you mean? As far as I can tell the money is created in Japan, the foreign exporter receives it in payment, and if he saves it stays in the Japanese banking system.
So, the money is an asset. In your example, the importer didn't pay for the asset using money printed in Japan. Money printed in Japan is the object of the exchange. He paid for it with some flow of goods or services.
Japan's worry is not that it will run out of money in the sense of its banks being unable to issue the stuff. The worry is that no one will want to hold it.
As a tangent, Ed Dolan has a new blog post up talking about fiscal policy and MMT. I really liked it, he's not "in paradigm" but imo he gives a fair account of MMT positions from which he establishes points of common ground. He also mentions in the comments that he's been corresponding with Wray, so it's really encouraging to see a piece like this come out of it.
"Importing capital" would then mean getting foreigners to buy yen. Really it's a question of exchange rates and currency strength/weakness, rather than "getting money from abroad", if that makes sense.
If more foreigners are buying yen than selling it, then Japan is necessarily importing capital, not money.
When Japan runs a trade deficit, it is importing goods and services from abroad. In order to do this, it sells claims against itself.
So that, when an exporter to Japan holds a yen denominated bank deposit, it holds one of these claims.
The issue is not that some mysterious force will render these claims impossible to find, or prevent the Japanese from issuing them, but that foreigners will no longer wish to acquire them.
less spending = less sales... less sales = ... more investment?
If you have lower consumer spending and higher saving, won't either exports or government spending have to rise, to avoid a 'paradox of thrift'? But if interest rates rise and the yen strengthens, won't this further reduce exports?
Yen borrowed by the Japanese obviously originates in and is held in Japan. If foreigners want to buy yen, save yen, etc, that's going to strengthen yen. If they want to sell it that's going to weaken it. But yen doesn't come from anywhere other than Japan, that's all I meant.
"a deficit will cause the yen to appreciate." Don't you mean depreciate?
"The worry is that no one will want to hold it.". Sure, that would be a currency collapse. It seems more likely that the yen would simply fall to a level at which enough people would want to buy it for it to stabilise again. With a country like Japan, it seems unlikely that it would have to fall very far for that to happen, though I could be wrong.
"Japan is necessarily importing capital, not money". Ok, an increase in foreigners buying or holding yen increases its value, so that's an increase in ‘capital’, correct?
However you said:
higher interest rates - > higher domestic savings - > no need to import foreign capital to finance investment.
If "importing capital" really means supporting the exchange rate (rather than 'providing funds' for investment), increasing domestic saving doesn't provide a ‘different source of funds’ to 'imported capital', it just reduces domestic spending.
If you raise interest rates, consumer spending decreases and saving increases, the yen will probably strengthen and exports will probably fall. Why would investment increase? If government spending doesn't increase aren't you going to end up with higher unemployment?
I would prefer to view it in real terms, i.e. wrt real resources instead of financial resources. Export-driven countries produce more than they consume and therefore supply net resources to other countries. Import-driven countries consume more than they produce and therefore use more net resources from other countries. This is a an imbalance of real resources and it shows up in employment, for example. The financial resources involved are just an ex post accounting record of this non-financial activity.
Net imports "is a an imbalance of real resources and it shows up in employment ... "
ONLY if they resources gained by the importing community are wasted, instead of being plowed into building yet more capacity and/or capabilities, by pursuing yet bigger challenges!
ONLY if they resources gained by the importing community are wasted, instead of being plowed into building yet more capacity and/or capabilities, by pursuing yet bigger challenges!
Yes, but developed countries are now exporting jobs that will be robotized as wages pick up in developing countries, in exchange for trinkets. It's moronic. China is already robotizing.
Imagination is far more important than technology.
Human biology may once again become the limiting factor. If we can't throw away & rebuild entire cultures at the same rate as youngsters do cell phones ... we won't know what to do with what we can produce.
What's the point of producing stuff, if you can't get or won't allow people to use it?
At this rate, people will be Luddites by age 20, and retired by age 30. Can we drive change that fast, through these brains?
Who says human evolution is slowing down. In 100 years, ONLY the ADHD may have survived, and 3 seconds may be considered a long attention span.
instead of the Singularity, we may get the Psychosity (where individual human intelligence declines, to accommodate scaling of network intelligence; humans will become just one classs of dumb neurons in a vast brain);
It's inescapable that cultural scaling requires componentization - i.e., simplification of system nodes, to allow transition to intelligence on another scale of magnitude.
lots of implications from this; for example; we're squandering Trillions taking potshots at Taliban. Why bother? Their own kids will render them into Talidandruff in one generation.
I have a bad feeling about this. Sad, really. If we can't use what we can produce, then we're in the process of wasting our capabilities.
Reminds me of that finding that all kids score at "Imagination Genius" level ... UNTIL they arrive at school, where we beat it out of them.
There's hope, of course, but ONLY if adults get out of the way faster than they do now. That'll require a whole new culture, and the transition could get ugly. Or not.
"Import-driven countries consume more than they produce and therefore use more net resources from other countries. This is a an imbalance of real resources and it shows up in employment"
But it seems unlikely that an importing country can reduce that 'imbalance' by just consuming less/saving more, unless other countries are prepared to consume more, without some sort of recession or rising unemployment in the importing country. Could be wrong.
But it seems unlikely that an importing country can reduce that 'imbalance' by just consuming less/saving more, unless other countries are prepared to consume more, without some sort of recession or rising unemployment in the importing country. Could be wrong.
Markets don't solve all problems as neoliberals claim. They often create problems that people have to solve. This is the case with international trade as the world goes into the global economy will a lot of imbalance among countries and regions, roughly sectioned into developed (eg. West,including Japan, Australia), emerging (eg. BRIC), developing (e.g. Indonesia), and under-developed (e.g. much of Africa) — with the petro-rich countries of MENA the wild card.
Without concerted action and close coordination, this transition is going be messy and painful.
Well that appears to be the view of vimothy. i.e. save more, reduce consumption, and investment will increase (I'm guessing here because vim is being his usual cryptic self).
“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so selfevident that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce”,
If those people are trading their talk, most of them must be broke by now. Betting against the yen has been called "the widow maker." Same with US tsys.
ReplyDeleteRoger,
ReplyDeleteYou said, "And also maybe the currency & bond-trading profit record of Warren Mosler."
Where can I find the profit record that you mentioned?
TIA
Where can I find the profit record that you mentioned?
ReplyDeleteI'd be interested as well. I think the answer is "great" except for Russia, which wasn't his fault.
Off topic, but looks like John Taylor is experiencing a deflation on his Taylor Rule book. Trying to extract last few dollars from it.
ReplyDeletehttp://johnbtaylorsblog.blogspot.com/2012/11/taylor-rule-book-now-near-zero-bound.html
Warren Mosler, who moved to St. Croix in 2003 to run for Congress in’04, ran a fixed-income arbitrage fund for 15 years without, he claims, a single losing trade. He turned it over to his partners in 1998 with over $3 billion of capital. He’s the progenitor of some of the derivative products traded today and even has his own ultra-cool car company, Mosler Automotive.
ReplyDeletehttp://blogs.reuters.com/rolfe-winkler/2010/01/06/mosler-vs-rickards-on-fixing-the-economy/
re: Warren Mosler's profit record
ReplyDeletedo a google search (for outside opinions)
Contact him directly, his email's posted at most of his articles, and his phone # is posted at his website.
http://moslereconomics.com/valance/
http://moslereconomics.com/about/
http://moslereconomics.com/contact/
and his old firm (outdated website?)
http://www.avmlp.com/AboutUs/Leadership.aspx
some anonymous guy said what now?
ReplyDeleteWhat about Japan? It's trade balance is deteriorating, but it can't afford to raise interest rates because the debt service would become too large... Should they be worried?
ReplyDeleteRoger,
ReplyDeleteThis is interesting the first sentence in the first comment from the first moron 'evan37' over there:
"It is sad to see how many people are buying into this Modern Monetary Theory mumbo jumbo."
Right on cue comes the metaphor...
This is just like Miller in Mike's video on The Blaze: "...gobbledegook" immediately.
Or Becky Quick to Warren on CNBC: "...I wish I could do that in my checkbook" immediately.
etc... suggest start to watch for this immediate appearance of false metaphor... it happens EVERY time.
It looks like these falsehoods depend on the communication (either spoken or written) of false metaphor for survival...
Your comment didnt contain any metaphor just some operational observations and further references.
These language techniques may be equivalent to what happens between the protein receptors on the surface of the cells of the parasite and the surface of the cells of the host upon first contact.... seems like something would have to be "communicated" there too which somehow corrupts the system...
rsp,
Vimothy,
ReplyDelete"It's trade balance is deteriorating"
You mean it's importing more than it's exporting. Why exactly is this a "deterioration"?
"it can't afford to raise interest rates because the debt service would become too large"
ReplyDeletewhy should it raise interest rates?
This comment has been removed by the author.
ReplyDeleteMatt,
ReplyDeleteYou want to witness false metaphor writ large right now? Then turn on MSNBC. The full court press of misinformation is on and it is sickening. They trot out every centrist dweeb they can find and have them dress down the "extremist" left, and scold them on the inevitable "math" if they don't take their castor oil like the rich need to.
Mal,
ReplyDeleteThe centrists often use the "unsustainable path" metaphor...
rsp,
Japan would like to raise interest rates to prevent its trade balance from "deteriorating" further.
ReplyDeleteI'm not attached to the word "deteriorating", by the way. Replace it with another term if you prefer. I suppose I use it because it seems better to build up net savings rather than net debts, but you may feel differently about this, of course.
Roger,
ReplyDeleteHere is the "gh1616" comment:
"Well stated! As I see it MMT does not comprehend the law of unintended consequences. But, too many academics are hell-bent-for-leather to push this pseudo-economics. Just read their grand-poobah Paul Krugman."
Metaphors highlighted.
rsp,
wouldn't higher interest rates strengthen the yen, increasing the trade deficit?
ReplyDeleteWhat about Japan? It's trade balance is deteriorating, but it can't afford to raise interest rates because the debt service would become too large... Should they be worried?
ReplyDeleteBut increasing interest rates will strengthen the yen, making their exports less competitive.
I was going to post this, but was too lazy to create one more account somewhere else...
ReplyDeleteI find it sad at how poorly understood money creation is amongst the average person and particularly self-appointed smart people. When a bank extends credit it creates deposits which we all treat as money. When a government deficit spends, whether it issues bonds or prints money, it creates money. Why we carry one when the government creates money and not when the banking system creates money is beyond me – and especially when that said government is fully sovereign in its currency – meaning it can’t ever go bankrupt – unlike its private sector citizens and businesses.
When foreigners buy Japan’s exports Japanese workers get paid in Yen. Did you ever ask yourself where did that Yen come from? In almost all cases it came from the Japanese banking system. Foreigners created Yen deposits by obtaining Yen based loans (credit).
As Japan moves from an export nation to an import nation money creation is still going to happen – it’s an economic/accounting requirement – the question is who is going to be responsible? The solvency constrained domestic private sector or the sovereign fiat currency issuer?
I think that this sort of stuff is easily confused because there are so many factors to take into account.
ReplyDeleteHigher interest rates - > less consumer demand for imports - > improved trade balance.
Also (by the same token), higher interest rates - > higher domestic savings - > no need to import foreign capital to finance investment.
Finally, if you are running a CAD, you need to either import capital, and this means that you will need to offer it some kind of competitive return, or go into a BOP deficit and begin to run down official reserves, or face the consequences.
This comment has been removed by the author.
ReplyDelete"When a bank extends credit it creates deposits which we all treat as money." - Adam1
ReplyDeleteBanks create money and negative money simultaneously. One should avoid making the claim that banks create money and leave it at that. The liabilities are a big deal.
The only reason credit (debt) works at all is because the government follows through with deficit spending.
Without net money creation, 95% of the "money" in existence would not be credit (debt).
"improved trade balance".
ReplyDeleteYou mean less consumer spending on imports but not necessarily more sales of exports, due to stronger Yen. Basically just an economic contraction?
"import capital"
Do you mean ship Yen notes over from China?
Or do you mean shift credits from one account to another at the BOJ?
"you will need to offer it some kind of competitive return"
...Or the currency will depreciate, reducing imports and increasing exports?
He’s the progenitor of some of the derivative products traded today and even has his own ultra-cool car company, Mosler Automotive.
ReplyDeletehttp://blogs.reuters.com/rolfe-winkler/2010/01/06/mosler-vs-rickards-on-fixing-the-economy/
What!? Derivatives were at least partially to blame for '08-'09 crisis. Does that mean Mosler was part of the problem and helped cause the crisis? Is MMT his way of redemption? :)
Why not go over to his place and ask him personally. Warren generally answers questions posed in the comments.
ReplyDeleteYou mean less consumer spending on imports but not necessarily more sales of exports, due to stronger Yen. Basically just an economic contraction?
ReplyDeleteWell, the goal is to avoid an economic contraction. Lower consumer spending isn't the same thing as a recession.
Do you mean ship Yen notes over from China?
Not sure I understand this comment. I mean import capital, i.e., sell assets to the rest of the world.
Or do you mean shift credits from one account to another at the BOJ?
Don't understand this either. Can you explain what you mean, please?
...Or the currency will depreciate, reducing imports and increasing exports?
Anything is possible, right? But the exchange rate is not a market clearing mechanism that always brings you back to a good equilibrium, and I would be wary of people who treat it as such.
It's kind of weird and counter-intuitive, though. Think about what's implied in your question. Say that the currency depreciates, where is the current account going to end up? What else is going to move?
"the goal is to avoid an economic contraction"
ReplyDeleteok, but how exactly? Higher interest rates - less spending - more saving - ...
"I mean import capital"
Is there any actual 'importing' going on though? The money used to buy assets is created in Japan isn't it?
"Say that the currency depreciates, where is the current account going to end up? What else is going to move?"
Not sure. What do you reckon?
ok, but how exactly? Higher interest rates - less spending - more saving - ...
ReplyDeleteThat's not a recession!
Is there any actual 'importing' going on though?
"Importing capital" is kind of a metaphor. No physical object is brought into the country. Instead, ownership of assets is transferred to foreigners, so you could think of it as "importing ownership of the capital stock".
The money used to buy assets is created in Japan isn't it?
In a literal sense, I suppose so, because Japan is the source of Yen, but I'm not sure what that has to do with the flow of savings in and out of Japan.
By definition, if Japan is borrowing from foreigners, the savings it is borrowing are not created in Japan.
Not sure. What do you reckon?
It could go anywhere, right? The point is that the exchange rate is equating supply and demand for foreign exchange. It's not equating imports and exports or the current account balance and the capital account balance. Just because the exchange rate appreciates, assuming that's what happens, doesn't mean you end up anywhere you want to be.
The money used to buy assets is created in Japan isn't it?
ReplyDeleteIn fact, think of the assets as Yen denominated bank deposits. The assets are Japanese, but the money used to buy them is obviously not created in Japan.
"That's not a recession!"
ReplyDeleteIf you have lower spending, higher saving, what's going to make up for the reduction in demand?
"Importing capital" is kind of a metaphor."
That's what I meant. We have these terms that are often inaccurate metaphors. Perhaps 'importing capital' comes from gold standard days, when gold was shipped around the world?
"if Japan is borrowing from foreigners, the savings it is borrowing are not created in Japan"
My basic understanding is that when people in Japan buy imported goods, money essentially moves from their account in Japan to the foreign exporter's account in Japan. If the foreigner saves it, it remains in the Japanese banking system. The savings are created and held in Japan and not abroad.
"the exchange rate is equating supply and demand for foreign exchange"
Ok, but in Japan, a stronger yen has been associated with a fall in exports. Higher interest rates are likely to strengthen the currency, negatively affecting exports.
"The stronger yen and weak overseas demand will also keep squeezing exports. Until 2009 exports had been buoyed by an abnormally weak yen, as foreign investors borrowed in yen to invest in higher-yielding currencies. But that carry trade has now been unwound as interest rates elsewhere have plunged.
The stronger yen and high corporate taxes are also encouraging manufacturers to shift production abroad."
http://www.economist.com/node/21542794
"The assets are Japanese, but the money used to buy them is obviously not created in Japan."
What do you mean? As far as I can tell the money is created in Japan, the foreign exporter receives it in payment, and if he saves it stays in the Japanese banking system.
Alternatively the foreign exporter sells the yen he receives to buy his domestic currency. The yen still stays in Japan of course, but if sellers of yen outnumber foreign currency buyers, then the yen will depreciate.... (?)
"if he saves it stays in the Japanese banking system."
ReplyDeletei.e. it gets "lent back into the Japanese economy" through either private or government borrowing (or used to buy other financial assets).
"money essentially moves from their account in Japan to the foreign exporter's account in Japan"
ReplyDeleteOr of course it could be that a domestic importer receives payment in yen and then sells yen for foreign currency to pay the foreign exporter.
"Importing capital" would then mean getting foreigners to buy yen. Really it's a question of exchange rates and currency strength/weakness, rather than "getting money from abroad", if that makes sense.
If you have lower spending, higher saving, what's going to make up for the reduction in demand?
ReplyDeleteThere isn't any reduction in demand, so nothing needs to happen to offset it. There's a reduction in consumer spending, and an increase in saving.
That's what I meant. We have these terms that are often inaccurate metaphors. Perhaps 'importing capital' comes from gold standard days, when gold was shipped around the world?
I think "importing capital" is okay as far as metaphors go. Savings are borrowed from foreigners: a capital inflow.
Everything is confusing at first, and international macro is more confusing than most, but this seems pretty straightforward to me.
I think that perhaps you'd like to extend the kind of claims that MMT makes about the government to the country as a whole. The Japanese government doesn't really borrow, because it issues money. In the same way, Japan can't really be said to borrow from (or lend to--Japan was a surplus country until very recently) the international sector, because it issues yen.
Ok, but in Japan, a stronger yen has been associated with a fall in exports. Higher interest rates are likely to strengthen the currency, negatively affecting exports.
Right, you would expect a stronger yen to lower exports, ceteris paribus, because they would become more expensive. But that's a very partial analysis, isn't it?
You want to say, it seems to me, that it doesn't matter what happens to Japans current account, because a deficit will cause the yen to appreciate.
Suppose that this were true. But so what? What will an appreciation in the yen give you? Implicitly, you're assuming that whatever the yen does, it's going to bring the system to some kind of sustainable equilibrium.
But what has to happen to bring that equilibrium about and how do you know it will be sustainable?
Let's say that the yen strengthens. That doesn't mean that Japan isn't going to have a current account deficit does it? It just mean that the yen strengthens. Suppose that we end up with a stronger yen, a moderate CAD and lower equilibrium income and employment. What's to prevent that?
What do you mean? As far as I can tell the money is created in Japan, the foreign exporter receives it in payment, and if he saves it stays in the Japanese banking system.
So, the money is an asset. In your example, the importer didn't pay for the asset using money printed in Japan. Money printed in Japan is the object of the exchange. He paid for it with some flow of goods or services.
Japan's worry is not that it will run out of money in the sense of its banks being unable to issue the stuff. The worry is that no one will want to hold it.
As a tangent, Ed Dolan has a new blog post up talking about fiscal policy and MMT. I really liked it, he's not "in paradigm" but imo he gives a fair account of MMT positions from which he establishes points of common ground. He also mentions in the comments that he's been corresponding with Wray, so it's really encouraging to see a piece like this come out of it.
ReplyDeleteWhat Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives
"Importing capital" would then mean getting foreigners to buy yen. Really it's a question of exchange rates and currency strength/weakness, rather than "getting money from abroad", if that makes sense.
ReplyDeleteIf more foreigners are buying yen than selling it, then Japan is necessarily importing capital, not money.
When Japan runs a trade deficit, it is importing goods and services from abroad. In order to do this, it sells claims against itself.
So that, when an exporter to Japan holds a yen denominated bank deposit, it holds one of these claims.
The issue is not that some mysterious force will render these claims impossible to find, or prevent the Japanese from issuing them, but that foreigners will no longer wish to acquire them.
"money essentially moves from their account in Japan to the foreign exporter's account in Japan"
ReplyDeletey, you're on it here imo with the 'metaphor'... ie nothing "moves".
Saying "money moves" is not edifying/scientific. I believe this is termed "teleological" and should be avoided...
These events/phenoms are probably best described using a series of accounting transactions.... instead of statements where "money moves"...
rsp,
"There isn't any reduction in demand"
ReplyDeleteless spending = less sales... less sales = ... more investment?
If you have lower consumer spending and higher saving, won't either exports or government spending have to rise, to avoid a 'paradox of thrift'? But if interest rates rise and the yen strengthens, won't this further reduce exports?
Yen borrowed by the Japanese obviously originates in and is held in Japan. If foreigners want to buy yen, save yen, etc, that's going to strengthen yen. If they want to sell it that's going to weaken it. But yen doesn't come from anywhere other than Japan, that's all I meant.
"a deficit will cause the yen to appreciate." Don't you mean depreciate?
"The worry is that no one will want to hold it.". Sure, that would be a currency collapse. It seems more likely that the yen would simply fall to a level at which enough people would want to buy it for it to stabilise again. With a country like Japan, it seems unlikely that it would have to fall very far for that to happen, though I could be wrong.
"Japan is necessarily importing capital, not money". Ok, an increase in foreigners buying or holding yen increases its value, so that's an increase in ‘capital’, correct?
However you said:
higher interest rates - > higher domestic savings - > no need to import foreign capital to finance investment.
If "importing capital" really means supporting the exchange rate (rather than 'providing funds' for investment), increasing domestic saving doesn't provide a ‘different source of funds’ to 'imported capital', it just reduces domestic spending.
If you raise interest rates, consumer spending decreases and saving increases, the yen will probably strengthen and exports will probably fall. Why would investment increase? If government spending doesn't increase aren't you going to end up with higher unemployment?
Instead of "importing capital" we could perhaps follow the old Samuelson textbook and say "exporting IOUs".
DeleteThis would have the advantage of implying a + sign to counterbalance the minus sign that is the result of the trade deficit.
It would clarify the discussion, I think.
I would prefer to view it in real terms, i.e. wrt real resources instead of financial resources. Export-driven countries produce more than they consume and therefore supply net resources to other countries. Import-driven countries consume more than they produce and therefore use more net resources from other countries. This is a an imbalance of real resources and it shows up in employment, for example. The financial resources involved are just an ex post accounting record of this non-financial activity.
ReplyDeleteNet imports "is a an imbalance of real resources and it shows up in employment ... "
ReplyDeleteONLY if they resources gained by the importing community are wasted, instead of being plowed into building yet more capacity and/or capabilities, by pursuing yet bigger challenges!
ONLY if they resources gained by the importing community are wasted, instead of being plowed into building yet more capacity and/or capabilities, by pursuing yet bigger challenges!
ReplyDeleteYes, but developed countries are now exporting jobs that will be robotized as wages pick up in developing countries, in exchange for trinkets. It's moronic. China is already robotizing.
It's as many have long said.
ReplyDeleteImagination is far more important than technology.
Human biology may once again become the limiting factor. If we can't throw away & rebuild entire cultures at the same rate as youngsters do cell phones ... we won't know what to do with what we can produce.
What's the point of producing stuff, if you can't get or won't allow people to use it?
At this rate, people will be Luddites by age 20, and retired by age 30. Can we drive change that fast, through these brains?
Who says human evolution is slowing down. In 100 years, ONLY the ADHD may have survived, and 3 seconds may be considered a long attention span.
instead of the Singularity, we may get the Psychosity (where individual human intelligence declines, to accommodate scaling of network intelligence; humans will become just one classs of dumb neurons in a vast brain);
ReplyDeleteIt's inescapable that cultural scaling requires componentization - i.e., simplification of system nodes, to allow transition to intelligence on another scale of magnitude.
lots of implications from this;
for example; we're squandering Trillions taking potshots at Taliban.
Why bother? Their own kids will render them into Talidandruff in one generation.
I have a bad feeling about this. Sad, really. If we can't use what we can produce, then we're in the process of wasting our capabilities.
Reminds me of that finding that all kids score at "Imagination Genius" level ... UNTIL they arrive at school, where we beat it out of them.
There's hope, of course, but ONLY if adults get out of the way faster than they do now. That'll require a whole new culture, and the transition could get ugly. Or not.
I'll get out of the way now. :)
"Import-driven countries consume more than they produce and therefore use more net resources from other countries. This is a an imbalance of real resources and it shows up in employment"
ReplyDeleteBut it seems unlikely that an importing country can reduce that 'imbalance' by just consuming less/saving more, unless other countries are prepared to consume more, without some sort of recession or rising unemployment in the importing country. Could be wrong.
"But it seems unlikely that an importing country can reduce that 'imbalance' by just consuming less/saving more"
ReplyDeleteYa think? Hibernation worked for bears, for awhile, but even Polar Bears may soon be extinct.
Rip Van Winkley never endowed a chair in economic development ... as far as I know. It just didn't work out.
But it seems unlikely that an importing country can reduce that 'imbalance' by just consuming less/saving more, unless other countries are prepared to consume more, without some sort of recession or rising unemployment in the importing country. Could be wrong.
ReplyDeleteMarkets don't solve all problems as neoliberals claim. They often create problems that people have to solve. This is the case with international trade as the world goes into the global economy will a lot of imbalance among countries and regions, roughly sectioned into developed (eg. West,including Japan, Australia), emerging (eg. BRIC), developing (e.g. Indonesia), and under-developed (e.g. much of Africa) — with the petro-rich countries of MENA the wild card.
Without concerted action and close coordination, this transition is going be messy and painful.
"Ya think?"
ReplyDeleteWell that appears to be the view of vimothy. i.e. save more, reduce consumption, and investment will increase (I'm guessing here because vim is being his usual cryptic self).
“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so selfevident that it would be absurd to attempt to prove it. But
in the mercantile system, the interest of the consumer is
almost constantly sacrificed to that of the producer; and it
seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce”,
(Adam Smith, 1776).