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.
While as usual Neil is right, his terminology and description may not help everyone. Abba Lerner did not "fail at foreign" and frequently explicitly split things up into a foreign vs. rest of world sector. E.g. in his great Economics of Employment. The errors Neil criticizes - obsession with net exports, fixed exchange rates do not follow from this split if we understand it as Lerner did. But as Keynes noted, Lerner's thinking (& hence MMT) are much subtler than they can appear at first glance.
I prefer to describe standard errors as- not making this split at all. There is one thing which is money, created at the beginning of time, and nations "compete" to get it. There is an old post at the Gang of 8 of a member recounting a dinner with a finance minister who thought that the only way that a country could create money would be by buying foreign exchange. Not just an opposition to money creation for public (or any) purpose, but a denial that it is possible! This kind of error is made frequently by MMT fans and others - who think FF/ MMT needs something extra for international economics, who ascribe magical powers to international finance, who think that concerted action over and above obeying the ordinary rules of trade is not just a nice thing, but a necessary one.
So a different recommendation is not to change the words and the pictures, but to understand what they meant all along.
A side point is that "model" vs "reality" picture is singularly inappropriate to monetary economics -where the map frequently is the territory being mapped. I think it is better to avoid such issues at first for most purposes, or approach them very carefully.
All I see in foreign. Is red tokens and blue tokens.
If a person with red tokens wants something denominated in blue tokens. He needs to find someone willing to give him blue tokens in exchange for red tokens.
If you are responsible for red or blue token stability, you have to understand what drives the desire to exchange tokens.
By bafflement is with different use and definitions of terms like capital flow.
Here in US if you go to a BMW dealer they don't sell their cars in EUR....
Same with Toyota dealers they don't price Camry in JPY....
I don't have to find somebody to exchange some USDs for JPY with before I go to the dealers of foreign brands ... They readily accept USD balances (at varying terms)
"I don't have to find somebody to exchange some USDs for JPY with before I go to the dealers of foreign brands ... They readily accept USD balances (at varying terms)"
They do, but ultimately the exchange has to happen somewhere along the line in an actual trade between two countries. Otherwise the trade cannot happen since the financing arm fails.
When we're talking corporates that isn't necessarily the case. There can be an entirely US based subsidiary of a Japanese company selling within the USA. In that case they will operate entirely in dollars and only the value of the shares will be transcribed to the group and 'converted' into the reporting currency of the group.
In reality nothing is converted or exchanged at all and the conversion is entirely an accounting illusion. (You'll find the national accounts suffer from this as well. Domestic owned foreign subsidiaries end up on your national account balance sheet. Foreign owned foreign subsidiaries obviously do not. Even though the actual foreign operation of the subsidiaries is identical).
Larger corporates can do internal swaps within their Treasury operations to such an extent that real goods and services moving between the parts of the corporate are paid for via internal contras - which just moves balance sheets in different countries.
It's very complex. Hence my irritation with the mainstream economic mental model.
Consider what happens to the Chinese Cos that export to here. As a matter of policy, Bank O' China exchanges yuan for dollars for its exporters at some set(ish) price thru the exporters' banks. So in the end you have real goods coming to the USA, brand new yuan created in China and the US currency just stays at the Fed. And the BOC cant do anything with all those trillions, if they exchange them for other foreign currencies, the exchange rate gets away from them, its not like the BOC needs to buy trillions in worth of consumer goods and there is no way the US Govt would ever allow the BOC to use those trillions to buy up companies or real estate here domestically. So whats the problem? Why is this an "imbalance"? So BOC puts there currency in TSY CDs, which allows the US Govt to create some brand new US fiat to provide to citizens here.
We are effectively getting our imports for free in this case and the BOC is paying its domestic folks to send us stuff by creating new currency, no wonder its so stimulative!
"and there is no way the US Govt would ever allow the BOC to use those trillions to buy up companies or real estate here domestically"
The UK government is currently allowing China to buy all sorts of things in the UK. They seem to be worried about the imbalanc, but then again the UK is much more fundamentally dependent on imports than the US.
Chinese citizens buying up UK real estate with their own UK currency savings is vastly different then the Bank O CHina buying up UK real estate with its UK currency savings.
Matt-
Just another in a long line of examples that prices are largely effected by the prices Govt pays for things, or the terms it sets on loans and exchange rates etc.
Free market my ass (as if their could ever be such a thing)
Interesting point about the corporation, the goods may be assembled in one country with components from another country and sold in another country. All internal transactions are in the corporations nominal denomination.
So a US company using USD sells product in EUR, pays labour in Yuan and suppliers in say AUD. All is internal, so in a real life treasury operation, AUD sales might be offset with payments to AUD suppliers. Only the residual currency balances have to pass through the forex exchange. It must be even more complex in banks with customers thinking they are investing in overseas stocks, whilst the banks are using OTC derivatives and all kinds of accounting tricks. I doubt anyone in the world understands the real risks and we are probably a hairs breadth away from total meltdown at any point in time.
Chinese citizens buy assets in developed nations, the same way other wealthy elites in other countries do, in other nations because political and legal reasons. There is no collective USD-zombification or anything like that. States DON'T buy assets or invest outside, except for strategic reasons (like the chinese investing heavily in Africa in resource extraction spots). Certain individuals extract the wealth from there and then move on because legal security and easiness of life.
Capitalism is great at protecting the wealthy, and the wealthy in other countries know very well that capitalism kool-aid in the West will protect their (many times, ill-gotten) gains in the future and let them live an exuberant life without having to worry about the politics of their nation.
From our western PoV is hard to grasp how the internal power-games are in most of there world where you can be killed (literally) easily if you misstep or there are deep political changes. The actual idiots re on our governments for thinking that "we need their money", or that is a good idea to erode your own industrial and knowledge base because of money, and build an extremely not resilient system like our current international production system which is a couple weeks away of total collapse in case of serious problem.
Increased complexity and connectivity without local resilience is bound to fail (all complex networks that work in the real world, like any ecosystem or the functioning of a multicellular organism, have a high degree of local resilience, our system has close to zero local resilience in most places, and not even getting down to the blackholes that are cities like London or NY, one week away of massive starvation).
13 comments:
"Fair exchange is no robbery"
Let's assume I've wings and can fly.
While as usual Neil is right, his terminology and description may not help everyone. Abba Lerner did not "fail at foreign" and frequently explicitly split things up into a foreign vs. rest of world sector. E.g. in his great Economics of Employment. The errors Neil criticizes - obsession with net exports, fixed exchange rates do not follow from this split if we understand it as Lerner did. But as Keynes noted, Lerner's thinking (& hence MMT) are much subtler than they can appear at first glance.
I prefer to describe standard errors as- not making this split at all. There is one thing which is money, created at the beginning of time, and nations "compete" to get it. There is an old post at the Gang of 8 of a member recounting a dinner with a finance minister who thought that the only way that a country could create money would be by buying foreign exchange. Not just an opposition to money creation for public (or any) purpose, but a denial that it is possible! This kind of error is made frequently by MMT fans and others - who think FF/ MMT needs something extra for international economics, who ascribe magical powers to international finance, who think that concerted action over and above obeying the ordinary rules of trade is not just a nice thing, but a necessary one.
So a different recommendation is not to change the words and the pictures, but to understand what they meant all along.
A side point is that "model" vs "reality" picture is singularly inappropriate to monetary economics -where the map frequently is the territory being mapped. I think it is better to avoid such issues at first for most purposes, or approach them very carefully.
All I see in foreign. Is red tokens and blue tokens.
If a person with red tokens wants something denominated in blue tokens. He needs to find someone willing to give him blue tokens in exchange for red tokens.
If you are responsible for red or blue token stability, you have to understand what drives the desire to exchange tokens.
By bafflement is with different use and definitions of terms like capital flow.
All I see are 'blue token zombies'....
A person with something wants to exchange that something for 'blue tokens' (at some level of blue token terms which can vary )
Here in US if you go to a BMW dealer they don't sell their cars in EUR....
Same with Toyota dealers they don't price Camry in JPY....
I don't have to find somebody to exchange some USDs for JPY with before I go to the dealers of foreign brands ... They readily accept USD balances (at varying terms)
"I don't have to find somebody to exchange some USDs for JPY with before I go to the dealers of foreign brands ... They readily accept USD balances (at varying terms)"
They do, but ultimately the exchange has to happen somewhere along the line in an actual trade between two countries. Otherwise the trade cannot happen since the financing arm fails.
When we're talking corporates that isn't necessarily the case. There can be an entirely US based subsidiary of a Japanese company selling within the USA. In that case they will operate entirely in dollars and only the value of the shares will be transcribed to the group and 'converted' into the reporting currency of the group.
In reality nothing is converted or exchanged at all and the conversion is entirely an accounting illusion. (You'll find the national accounts suffer from this as well. Domestic owned foreign subsidiaries end up on your national account balance sheet. Foreign owned foreign subsidiaries obviously do not. Even though the actual foreign operation of the subsidiaries is identical).
Larger corporates can do internal swaps within their Treasury operations to such an extent that real goods and services moving between the parts of the corporate are paid for via internal contras - which just moves balance sheets in different countries.
It's very complex. Hence my irritation with the mainstream economic mental model.
Consider what happens to the Chinese Cos that export to here. As a matter of policy, Bank O' China exchanges yuan for dollars for its exporters at some set(ish) price thru the exporters' banks. So in the end you have real goods coming to the USA, brand new yuan created in China and the US currency just stays at the Fed. And the BOC cant do anything with all those trillions, if they exchange them for other foreign currencies, the exchange rate gets away from them, its not like the BOC needs to buy trillions in worth of consumer goods and there is no way the US Govt would ever allow the BOC to use those trillions to buy up companies or real estate here domestically. So whats the problem? Why is this an "imbalance"? So BOC puts there currency in TSY CDs, which allows the US Govt to create some brand new US fiat to provide to citizens here.
We are effectively getting our imports for free in this case and the BOC is paying its domestic folks to send us stuff by creating new currency, no wonder its so stimulative!
Auburn the problem comes in because the Chinese dont realize this is what is happening...
iow they dont understand it at the higher order systemic level at which you explain it in your comment here..
They understand the lower order transactions yes, but they don't understand it at the highest systemic level...
"and there is no way the US Govt would ever allow the BOC to use those trillions to buy up companies or real estate here domestically"
The UK government is currently allowing China to buy all sorts of things in the UK. They seem to be worried about the imbalanc, but then again the UK is much more fundamentally dependent on imports than the US.
Philippe-
Chinese citizens buying up UK real estate with their own UK currency savings is vastly different then the Bank O CHina buying up UK real estate with its UK currency savings.
Matt-
Just another in a long line of examples that prices are largely effected by the prices Govt pays for things, or the terms it sets on loans and exchange rates etc.
Free market my ass (as if their could ever be such a thing)
"The UK government is currently allowing China to buy all sorts of things in the UK. They seem to be worried about the imbalance"
The UK government is worried it is running out of money. Cos they're idiots.
Neil,
Interesting point about the corporation, the goods may be assembled in one country with components from another country and sold in another country. All internal transactions are in the corporations nominal denomination.
So a US company using USD sells product in EUR, pays labour in Yuan and suppliers in say AUD. All is internal, so in a real life treasury operation, AUD sales might be offset with payments to AUD suppliers. Only the residual currency balances have to pass through the forex exchange. It must be even more complex in banks with customers thinking they are investing in overseas stocks, whilst the banks are using OTC derivatives and all kinds of accounting tricks. I doubt anyone in the world understands the real risks and we are probably a hairs breadth away from total meltdown at any point in time.
Chinese citizens buy assets in developed nations, the same way other wealthy elites in other countries do, in other nations because political and legal reasons. There is no collective USD-zombification or anything like that. States DON'T buy assets or invest outside, except for strategic reasons (like the chinese investing heavily in Africa in resource extraction spots). Certain individuals extract the wealth from there and then move on because legal security and easiness of life.
Capitalism is great at protecting the wealthy, and the wealthy in other countries know very well that capitalism kool-aid in the West will protect their (many times, ill-gotten) gains in the future and let them live an exuberant life without having to worry about the politics of their nation.
From our western PoV is hard to grasp how the internal power-games are in most of there world where you can be killed (literally) easily if you misstep or there are deep political changes. The actual idiots re on our governments for thinking that "we need their money", or that is a good idea to erode your own industrial and knowledge base because of money, and build an extremely not resilient system like our current international production system which is a couple weeks away of total collapse in case of serious problem.
Increased complexity and connectivity without local resilience is bound to fail (all complex networks that work in the real world, like any ecosystem or the functioning of a multicellular organism, have a high degree of local resilience, our system has close to zero local resilience in most places, and not even getting down to the blackholes that are cities like London or NY, one week away of massive starvation).
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