Frances Coppola’s concerns about fixed versus floating exchange rates for developing countries is presumably interesting to some, but it tells us little about the validity of MMT...Bond Economics
The Myth Of The Myth Of Monetary Sovereignty
Brian Romanchuk
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ReplyDelete"The “Japan exception” is not the result of the mainly Japanese holdings of Japanese debt. Japan is in a strong position because Japanese nationals have massive claims on foreign countries."
ReplyDeleteJapan has world-class quality (the real terms) this is their strong position... people seek out many Japanese products as a primary/preferred source...
iow Japan is not a shithole...
For foreign exchange rates, the Japanese firms control the price of their products in whatever nation/currency they do business in (firms directly control the global financial terms of their products) ...
A change in price made by the firms effects risk asset (product inventory loan) levels at the banks financing the products so banks (as regulated entities) have to in response adjust their stated exchange rate (conversion rate) between their non-risk asset domestic reserve balances and their risk asset foreign reserve balances between the two nations systems to maintain a constant regulatory Leverage Ratio of Capital/Total Assets...
ALL THREE asset types are terms in the denominator ie 1 Stated export inventory Loan Values + 2 non-risk asset domestic Reserve Balances + 3 risk asset foreign reserve balances...
If any of the 3 terms in the denominator are adjusted, then (sorry tyranny of the math) the other terms have to be adjusted in an opposite response to maintain a constant ratio.. and non-risk domestic reserve assets cannot be adjusted (they are maintained at unity) so that leaves only the risk asset foreign reserve balances for adjustment in terms of the domestic reserve regulatory reporting unit...
So when firms lower their prices in foreign terms then the domestic currency has to go down and vice versa... to reflect the financial adjustment in terms of trade..
IMO any other explanation has to be Monetarist/QTM...
which the whole Monetarist thesis represents a major human cognitive error/deficiency via reification of what are in fact abstractions...
None of the people working in this area have adequately developed skills in abstraction...
ReplyDeleteBrian Romanchuck says "The next problem is that the external value of the currency is related to capital market valuations, which are inherently unstable. This is not the 1960s, where capital controls had the side effect that trade flows determined currency values; in 2018, capital flows rule the developed country forex markets."
Matt Franko says "So when firms lower their prices in foreign terms then the domestic currency has to go down and vice versa... to reflect the financial adjustment in terms of trade..
IMO any other explanation has to be Monetarist/QTM... "
So what you're saying is that the common belief that speculation dwarfs real trade in determining currency levels is wrong. Firms adjusting prices leading to banks adjusting their balance sheet leads to changes in currency values. Speculators are the last in line. Would this be a correct understanding of what you're saying?
MMT Sez: “ALL prices are necessarily a function of what govt pays for things and what they let their banks lend against things...”
ReplyDeleteBank asset prices (both risk and non risk assets) are regulated via an effectively fixed Leverage Ratio of stated capital/total assets...
Which has to include the price of foreign currency reserve assets vs the domestic currency...
"Speculators are the last in line."
ReplyDeletethink of them like the "bond vigilantes!" in the figurative speech of the morons...
Thank you Matt for the replies. It's very interesting. Man I wish Neil Wilson's stuff was still around, I do believe he makes similar points to what you're saying regarding trade and adjusting currency levels but it was a bit more fleshed out. Btw if anyone on MNE has a copy of his writings saved somewhere I'd appreciate if you can post a link.
ReplyDeleteI know., Neil was an MVP......
ReplyDeleteI think the MTT brain trust ran Neil off when they all converted themselves to partisan politicians and eliminated any science in it...
I know exactly what Neil said about this idea....
ReplyDeleteThe problem with our friends in the US is that they can only think in US dollars and that tends to cloud their view about how the rest of the world works.
Switch yourself around to the point of view of a Chinese producer. Put yourself in their shoes.
Then what happens is this.
There is insufficient demand at home to keep your factory going. Just not enough orders coming in. So you either close or you entertain these orders from a foreign nation offering funny green bits of paper that are worthless to you.
So you have a word with your local PBC branch and they let you know that they'll take the funny green bits of paper and give you real money in exchange. And they can even tell you how much real money you'll get.
That reassures you and off you go producing safe in the knowledge that you'll get real money for your output which you can spend in the shops in China.
So how does the PBC do that.
Again, put yourself in the shoes of the PBC. In the hands of a bank foreign currency is a loan asset. It's collateral. What does a bank do with collateral? it discounts it for the local currency.
The transactions are DR Foreign currency assets, CR local factory owner's deposit account
Now read that again. What has happened?
The bank has gained ownership of a valuable foreign asset *and created local money against it*.
This is how foreign export-led economies maintain circulation of their local money in the face of the drain to savings. They hold foreign currency assets to make the balance sheet look good. It is far, far easier politically to discount against so called 'hard currency' than it is against the apparently nebulous 'taxpayers equity' asset. Even though functionally it has precisely the same effect - injection of local money into the economy.
Let's take another example of Norway.
You're an oil producer in Norway and you earn in US dollars. But the Norwegian government taxes you heavily in Krone to avoid a 'Dutch disease' issue and to 'save' for future generations.
So what happens?
The government pays the tax amount, in Kroner, into the Government Pension Fund using the usual mark up routine. It charges the oil funds the tax amount (as corporate taxes and licence costs). To get the Kroner, the oil company swaps USD for Kroner - effectively with the Pension Fund. The Oil company now has the Kroner and can settle its tax bill.
The Pension Fund now has USD which it uses to buy equities from abroad and that approach drain more USD in income (and Euros, GBP, etc). The fund puts a huge 'hard asset' on one side of the national balance sheet which can be discounted quietly by the Norwegian central bank to maintain the circulation of Kroner in the face of the drain to savings.
You can do much the same with Denmark - except that the pension funds there are privatised.
So the bit out American friends miss is that exporters are not just making money. They are generally wanting to make the local money in export-led nations, and it is the finance system that does the saving in foreign currency bit - all the way up the pyramid to the top if necessary.