Nick Edmonds — The Net Internation Investment Position and the Trade Balance

 

Paul Krugman oversimplifies the actual situation by assuming cet. par. when all things other than the independent variable almost never remain the same in the real world. It's the same kind of pseudo-argument about the future as debt and deficit hysteria based on "unfunded obligations" coming due in the future, along with eventual runaway interest on debt.

Reflections on Monetary Economics
The Net Internation Investment Position and the Trade Balance

Nick Edmonds

Peter Dorman — The Identity-Equals-Causation Fallacy, Yet Again

Informal fallacy of false cause.

Econospeak
The Identity-Equals-Causation Fallacy, Yet Again
Peter Dorman | Professor of Political Economy, The Evergreen State College

Ramanan comments on operation reality in fx

One will always find government debt in foreign currency for a nation having external issues. After the Bretton Wood system broke down and nations freely floating their currencies, they realized it is actually difficult to just float and let the fx markets find the clearing price. Hence there is official intervention in the currency markets, issuance of debt in foreign currency, holding of foreign reserves etc. Most people look at official intervention as the central bank preventing the price from falling too much but it’s more than that. It clears markets and prevents a prophecy to build up. For example if the currency falls, it may lead to expectations building leading to further outflows. So I saw STF in the mikenormaneconomics thread saying that the government didn’t behave in an MMT prescribed way and such – but it is impossible for the Treasury of most nations to behave that way. It’s “operational reality”.

Ramanan in a comment at Modern Monetary Realism

According to MMT, there are two constraints on a currency sovereign, inflation rate and fx rate. There continues to be disagreement over the conception of the fx rate, in that the MMT position is generally understood to be that in a non-convertible flexible rate monetary system, floating rates are self-correcting so that markets will always clear for a currency the issuer of which does not take on foreign debt or fix its fx rate. While some qualifications are added, opponents do not believe they are sufficient and a more detailed analysis is necessary.

Ramanan and others dispute the MMT stance, holding that it needs to be carefully qualified with respect to the general case and specific instances, with the US being a special case that cannot be extended to many other countries, and that even the US cannot presume to enjoy its "special privilege" forever without capital flight and therefore exogenous pressure to raise interest rates to attract capital and curtail demand in order to decrease imports.

I hope I summarized both positions correctly. Please correct me if I did not.

Michael Pettis on understanding global trade in terms of current and capital account balances

Europe’s underlying problem is not budget deficits or even unsustainable debt.  These are mainly symptoms.  The real problem with Europe is the huge divergence in costs between the core and the periphery – in the past decade costs between Germany and some of the peripheral countries have diverged by anywhere from 20% to 40%.  This divergence has made the latter uncompetitive and has resulted in the massive trade imbalances within Europe.

Trade imbalances, of course, are the obverse of capital imbalances, and the surge in debt in peripheral Europe in the past decade – debt owed ultimately to Germany and the other core countries – was the inevitable consequence of those capital flow imbalances.  While European policymakers alternatively sweat and shiver over fiscal deficits, surging government debt, and collapsing banks, there is almost no prospect of their resolving the European crisis until they address the divergence in costs.  Of course if they don’t resolve this problem, the problem will be resolved for them in the form of a break-up of the euro.

The best resolution, and the one Keynes urged without success on the US in the 1920s and 1930s, is that Germany take steps to reverse its trade surplus....

Read the rest at China Financial Markets
If no trade reversal now, then when?

by Michael Pettis