Saturday, April 13, 2019

Ricardo Martin — Monetary Sovereignty

The main lesson I want to draw from this post is (excluding being autarkic/poor or being in a monetary union): 
If a country wants to maintain a fixed exchange rate, the country must accumulate a lot of foreign reserves to be sovereign (or maybe some capital controls?) 
If a country wants to have floating exchange rates, it must convince its trading partners (or its trading partners’ trading partners) to hold its national currency as foreign reserves.
Monetary Sovereignty
Ricardo Martin


Roman said...

Nice post

Calgacus said...

No, he is confused.

This is the most confused and wrong sentence: If a country wants to have floating exchange rates, it must convince its trading partners (or its trading partners’ trading partners) to hold its national currency as foreign reserves.

Fixed exchange rates = Doing Something. Something which is only occasionally possible.
Floating exchange rates = Doing Nothing = Not fixing, not Doing Something. This is always possible and easy.

You do nothing by doing nothing. There is no precondition to floating exchange rates. That's what floating means. One can try to do a lot of intellectual gymnastics to convince yourself of whatever, but floating is the natural, default thing, by definition. Monetary sovereignty is not utopian, but easy and natural, the default and ordinary and normal thing.

Floating your exchange rates = a country facing up to the real world. Equals not imagining that some magical monetary manipulation will make the country rich - rather than making some already rich parasites richer. Floating has a likely, possible effect of the currency being a good store of value, being saved domestically and by foreigners.

So he is reversing cause and effect and saying that there is some magical obstacle to just doing nothing. The military stuff is also wrong, reverses causality and the historical sequence, and reverses the actual effect. The dollar isn't strong because the US has a big military (except for beneficial effects of even military Keynesianism (the worst kind) vs moronic austerity cultism.) The strength of the dollar helps make the US economy and the military strong. The historical sequence was strong US economy, strong dollar, then big military.

Calgacus said...

And the actions- basically all are crimes - of today's US military weaken the dollar, not strengthen it. If we spent the same amount but just kept all the forces at home, the dollar would be stronger, not weaker.

For the umpteenth time, this upside down thinking was completely and exhaustively debunked by Abba Lerner long ago.

Tom Hickey said...

I agree with Calgacus with one qualifier. The debate usually assumes that a country will attempt to have a standard of living that is approaching global standards, if not to emulate the developed world.

MMT and a floating rate will not make this possible magically through the operation of markets. The limitation is the availability of real resources and if a country has to import goods, it is limited by what it can afford to pay. Should other countries not wish to save in that currency, this "keeping up with the Joneses" generally entails borrowing in a foreign currency that the country must obtain to service its debt, if it takes on debt, which it must if exports don't generate sufficient foreign reserves.

Often there are political pressures to live beyond one's means (real resources and economic capacity) as a country. and there predatory lenders just waiting to "help out." This generally ends up with having borrow from the IMF to service debts held by predatory creditors, with the result that the country loses control of its economic policy. This story repeats over and over again. Bill Mitchell, for example, has explained how most emerging countries are constrained by real resources domestically and must use their available policy space judiciously to avoid falling the IMF trap. They have a great deal of space if they float, but this means that they have to develop economically from within rather than depending on imports that would need to pay for in borrowed foreign currency.

MMT generally speaks of the general case in terms of a conceptual model based on institutional arrangements, one of which is accounting and another law. But there are no general cases existing in the real world. The general case is conceptual — abstract — while the specific cases are actual — concrete. Specific cases approximate the general case to one degree or another, and this is regardless of whether they are currency sovereigns. All countries fit somewhere in the larger conceptual model of monetary systems, the floating rate system being a less general case of monetary economics as a whole that includes all possible arrangements.

MMT economists keep all of this in their heads. I haven't seen many others who do.

A lot of confusion arises from conflating the real (actual events) and the ideal (conceptual models). This is compounded by conflating general and specific. This is not possible to figure out from a quick read, even for experienced economists and financial professionals. As a result, MMT concepts and proposals are often misunderstood.

Almost all the mistakes are made over failure to make the proper distinctions and to stick to them. More difficult for most than it may look. The MMT economists are very good at doing this. They have the models burned in.

André said...

Just passing to say that I agree 100% with Calgacus... A country may have floating exchange rates without convincing anyone of anything... witjouw anything at all, actually