Wednesday, May 23, 2018

Bill Mitchell — A surplus of trade discussions

Bill clarifies the MMT position on trade for those who haven't gotten it yet. It is very clear and concise. Anyone that still doesn't get it after reading this doesn't want to get it.

Must-read — and study. It's the MMT elevator speech on trade.

Bill Mitchell – billy blog
A surplus of trade discussions
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also

Bond Economics
On The "Everyone Cannot Run Trades Deficits" ArgumentBrian Romanchuk


Detroit Dan said...

Elevator speech? Must be to the top of the Empire State Building and back.

GLH said...

How can imports that involve exporting jobs and wages be a benefit? Only importing raw materials can be a benefit. Importing manufacturing is a war on workers. If Prof. Mitchel is correct then we can just import our way to wealth. Are Americans better off over the last thirty years importing goods from China and jobs to China? Maybe the financial sector is better off.

Matt Franko said...

(shhhh GLH... don't say that... you'll get an F in Bill's class....)

GLH said...

I accept my grade.

NeilW said...

"How can imports that involve exporting jobs and wages be a benefit?"

They are a benefit when you dump the current obsolete monetary theory that locks you into the death grip of 'export led growth'.

"Export led growth" only works if you can offload your unemployment and poverty onto another nation. And you do that by holding their currency 'hostage' reducing the domestic circulation.

Once a state learns MMT and realises that they can simply accommodate this leakage, and eliminate any interest or income payments to foreigners, then the import nation can gain the benefit of the exporters while at the same time maintaining their domestic circulation at full output.

Eventually the export-led nation realises they are being had, and switches back to domestic circulation and an exchange of goods and services rather than accumulation of financial products that add no domestic value.

It's the savings stupid.

Matt Franko said...

"Eventually the export-led nation realises they are being had,"

Well Trump is currently having to hit Chyina over the head with a shovel to get them to realize this it seems....

You are leaving out the irrational USD zombie factor present in these zealous USD accumulating nations...

We being citizens of one of the premier western nations may not be able to fully understand what it is like to live in one of these shit hole nations... and how that makes one view one's own nation's currency vs. others... they end up desirous (zombie) of other premier nation's currencies..

Tom Hickey said...

"Imports (of real goods) are a benefit in real terms of trade" is a truism. It just says that the importer is receiving real goods that would not otherwise be available for use domestically.

All the other stuff swirling around this truism comes from reading things into the tautology that are not there.

Of course there are situational implications and contingencies involved when it is looked at from the POV in a wider picture, but that is not what the truism says definitionally.

It's sort of like saying that an equation holds cet. par. when things are seldom equal over time, that is, dynamic rather than static.

Same with an accounting identity and interpreting it causally.

There is a huge amount of confusion around all of these things, quite unnecessarily.

Tom Hickey said...

Well Trump is currently having to hit Chyina over the head with a shovel to get them to realize this it seems....

You are leaving out the irrational USD zombie factor present in these zealous USD accumulating nations...

Neither China is being had, nor the US. Deals are made that in the interest of the parties for a variety of reasons and those reasons are changeable.

I have explained a much of this in comments previously, so I won't go through it again. Some of this is firms' decisions and some policy choices.

Trump is trying to change US policy by negotiating what it perceives is a better deal for the US. This will involve policy compromises on both sides, or it will end in trade war and eventually hot war if not resolved, because both sides (all uses actually, it's about more than China and the US) are pursuing a kind of mercantilist policy rather than "free trade," there being no "free markets."

Ryan Harris said...

Concise for BM means 20pgs. I'd love to be his editor, I could trim his writing down to 10% of size and lose almost nothing

AXEC / E.K-H said...

Additional proof of MMT’s inconsistency
Comment on Tom Hickey’s ‘Bill Mitchell — A surplus of trade discussions’

Bill Mitchell argues: “MMT economists are not unique in their focus on real things rather than nominal things, although we certainly differ from the mainstream in that there are situations where the nominal level is crucial to understanding the consequences of a change. … Giving some real thing away is a cost. Getting some real thing is a benefit. That doesn’t equate, as I have been reading the last few weeks, in a conclusion that MMT’s preference is for a nation to have a current account deficit. It just states the obvious fact that exports, by definition, involve sacrificing real resources and depriving a nation of their use. Imports on the other hand clearly involve receiving final goods and services where the real resource sacrifice has been made by the exporting nation.”

This is the real argument. Let us now turn to the nominal argument. MMT’s sectoral balances equation/national income identity is given with (X−M)+(G−T)+(I−S)=0 (i).#1

From equation (i) follows (G−T)=S (ii) for the simplified case X, M, I = 0.

This means: “Based on the national income identity, MMT states that it is possible for the non-government sector to accumulate a surplus [S] only if the government runs budget deficits [G−T greater 0]. As most private sectors want to accumulate a surplus, MMT economists usually advocate for government budget deficits.”#2

From equation (i) follows (X−M)=S (iii) for the simplified case G, T, I = 0.

In nominal terms, a foreign trade surplus [X−M greater 0] is absolutely equivalent to a government deficit. By logical consequence, MMT should not only advocate government deficits but also export surpluses. This is not the case, an export surplus means for MMTers that a “real resource sacrifice has been made by the exporting nation.”

Conclusion: The recent discussion about foreign trade#3 confirms that MMT is logically defective in all dimensions.#4 This means that MMTers do NOT understand how the monetary economy works. This confirms what has already been established elsewhere: MMT is proto-scientific garbage.#5

Egmont Kakarot-Handtke

#1 Down with idiocy!

#2 Wikipedia, Modern Monetary Theory

#3 Steve Keen, MMT’s ignorance of economic thought

#4 Rectification of MMT macro accounting

#5 How MMT enlightens Washington

AXEC / E.K-H said...

Additional proof of MMT’s inconsistency (II)
Comment on Tom Hickey’s ‘Bill Mitchell — A surplus of trade discussions’

The preceding post (I) concluded: “This means that MMTers do NOT understand how the monetary economy works.” More specifically, MMTers have no idea how the real and nominal variables of the monetary economy interact. This inevitably leads to the question, how, then, does the monetary economy work?

Economics is axiomatically false, therefore, it has to be reconstructed from scratch. As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. Under the conditions of (C1) market clearing X=O and (C2) budget balancing C=Yw the price is given by P=W/R, i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. The axioms define the interaction between real and nominal variables. More details and a graphical representation have been given elsewhere.#1

In order to deal with foreign trade, two economies are needed. For a start, it is assumed that we have the USA and Europe. Both are described by the axioms (A1)/(A3) and the conditions (C1)/(C2). Both economies are identical, except for the currency. For a start, we have an exchange rate 1$ = 1€. So, both economies differ only in nominal terms.

Initially, the national accounting balance of the US household sector is balanced, i.e. C=Yw [$]. Now, the consumers decide that they want more stuff and that they want to buy it from Europe.

Things unfold now in the most elementary case as follows:

(i) The US household sector takes a credit at the US central bank of the amount EX $.

(ii) The balance sheet of the US central bank lengthens: household sector’s overdrafts EX are equal to household sector’s deposits.

(iii) The US central bank turns to the EU central bank in order to get Euros.

(iv) The balance sheet of the EU central bank lengthens: US central bank’s overdrafts in $ are equal to US central bank’s deposits at the EU central bank in €, i.e. = EX.

(v) The US central bank switches the US household sector’s $ deposits for € deposits at the EU central bank.

(vi) As a result, the US households have $ overdrafts at the US central bank and € deposits at the EU central bank. On the other hand, the EU central bank has $ deposits at the US central bank.

(vii) Finally, the US household sector spends the € deposits in Europe.

See part 2

AXEC / E.K-H said...

Part 2

Initially, national accounting in Europe and the USA looked like this: Qm≡C−Yw and Sm≡Yw−C or Qm=−Sm, Legend Qm monetary profit, Sm monetary saving in € resp. $.#2 With the additional spending of the US households this gives for the European business sector Qm=C+EX−Yw or Qm=EX−Sm.

Initially, Qm in EU has been 0 because of budget balancing, just as in the US. It is now assumed for a start that EU households spend less, i.e. save, thus that Sm exactly compensates the additional spending of US households, i.e. Sm=EX. As a result, business sector’s profit Qm is again zero, just as in the initial period.

At the end of the period, EU households have deposits at the EU central bank and US households have overdrafts at the US central bank. EU households have given up part of the real output O in Europe = Sm in nominal terms. As a mirror image, US households have increased real consumption and gone into debt vis-a-vis the EU households.

Economically, EU households have lent real stuff to US households. On the accounts of the central banks, the whole transaction comes down as an increase of $ assets at the EU central bank.

At some point in time, the whole transaction has to be reversed. That is, the US households have to return real stuff and to redeem their debt. In this case, the US runs an export surplus and EU a deficit. So, at the end of the whole process, all real and nominal balances are balanced. And this is exactly as it should be. The whole process comes down to a time shift of real consumption between two countries.

Needless to emphasize that a lot of practical problems arise if the US cannot, for whatever reasons, achieve an export surplus and finally redeem the debt. No problems arise, of course, as long as the EU central bank holds the debt = $-assets for an indefinite time.

In the case that the EU households do not exactly save the amount the US households spend, i.e. Sm less than EX, the profit of the EU business sector becomes greater than 0, i.e. Qm=EX−Sm is positive. In this case, the market clearing price in EU increases.The US business sector is neither affected in real nor in nominal terms. There is no loss of employment because of the trade balance deficit.

MMTers neither get the real nor the nominal nor the monetary side of the whole process right. To recall, the MMT balances equation is provably false because MMTers are too stupid to understand the elementary mathematics of national accounting.#3

Egmont Kakarot-Handtke

#1 True macrofoundations: the reset of economics

#2 Rectification of MMT macro accounting

#3 For the full-spectrum refutation of MMT see cross-references MMT