One of the first things that conservatives (and most economists which is typically a highly overlapping set) raise when Modern Monetary Theory (MMT) proponents suggest that increased deficits are essential to reduce mass unemployment is the so-called balance of payments constraint. Accordingly, we are told that the capacity of a nation to increase domestic employment is limited by the external sector. And these constraints have become more severe in this age of multinational firms with their global supply chains and the increased volume of global capital flows. I will address the specific issue of a balance of payments constraint on real GDP growth (that is, the limits of fiscal stimulus) in a future blog. But today I want to consider the so-called Exchange Rate Pass-Through (ERPT) effects of that are part of the balance of payments constraint story. The mainstream narrative goes like this. Higher wage demands associated with full employment and/or stronger imports associated with higher fiscal deficits lead to external imbalances due to rising imports and loss of competitiveness in international markets (eroding export potential). In a system of flexible exchange rates, the currency begins to lose value relative to all other currencies and the rising import prices (in terms of the local currency) are passed-through to the domestic price level – with accelerating inflation being the result. If governments persist in pursuing domestic full employment policies the domestic inflation worsens and the hyperinflation is the result, with a chronically depreciated currency. Real standards of living fall and a general malaise overwhelms the nation and its citizens. I am sure you have heard that narrative before – it is almost a constant noise coming from the deficit phobes. Like most of the conservative economic claims and I include the austerity-lite Leftist parties in this group, it turns out that reality is a bit different. Here is some discussion on that issue.…Bill Mitchell – billy blog
Stock market bubbles are fulled on speculation – on what Guzman and Stiglitz (2015) call tellingly ‘pseudo wealth’. It is the collapse in that pseudo wealth that causes aggregate demand collapse in the wider economy.Karl Marx called it "fictitious capital," which is the term that Michael Hudson uses for it now.
Last Tuesday the PBoC surprised the markets with a partial deregulation of the currency regime, prompting a great deal of discussion and debate about the value of the RMB. Part of the discussion was informed by a consensus developing in one part of the market that the RMB is no longer undervalued but is in fact overvalued. Why? Because if left to the “market”, that is if the PBoC stopped intervening, the excess of dollar supply over demand would force the RMB to fall.
This argument is based on a pretty confused understanding of how markets work and why investors do what they do. I thought it might be useful if I were to try to lay out the issue a little more clearly, and along the way address related issues. Because it isn’t necessarily easy to tie all of the topics together in an essay, I thought it might be better if I put it in the form of a series of questions.China Financial Markets
When the US embarks on perennial quantitative easing, that's OK. When the EU does QE as well, that's OK. But when the Bank of China decides it's in the best interest of the nation to let the yuan go down a bit instead of infinitely up, that's Armageddon.
It took the Bank of China to devaluate the yuan on two consecutive days — moving within the 2 percent band that it's allowed to — for the proverbial global financial banshees to go completely bonkers.
Forget the hysteria. The heart of the matter is that Beijing has stepped on the gas in a quite complex long game; to liberalize the yuan exchange rate; allow it to free float against the US dollar; and establish the yuan as a global reserve currency.
So this is essentially exchange rate policy liberalization — not a currency "war", as the frenetic spin goes from Washington/Wall Street to Tokyo via London and Brussels.Sputnik
No country is pursuing a fiscal strategy for increase demand and reduce unemployment. Ultimately, fiscal is all that will work, so we have our mix of deflationary low interest rates, increased risk of credit problems, and export-driven devaluation.Winterspeak.com
Loan Guarantees For UkraineThis raises two sets of questions, about what we're doing domestically, and why, compared to what we're doing internationally, and why. Initial questions about why domestic US/EU electorates can't guarantee fiat investment in themselves, and instead submit to austerity ... is exceeded only by the sheer number & depth of half-truths, mis-conceptions and outright lies included in this article.
I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.
Previous parts:
- Case Study – British IMF loan 1976 – Part 1
- Case Study – British IMF loan 1976 – Part 2
- Case Study – British IMF loan 1976 – Part 3
- Case Study – British IMF loan 1976 – Part 4
- Case Study – British IMF loan 1976 – Part 5
- Case Study – The British IMF loan in 1976
The November 1967 Devaluation
[PRIOR DISCUSSION RELATING TO THE BUILD-UP TO THE DEVALUATION ... NEW MATERIAL NOW]Bill Mitchell – billy blog
I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it. Previous parts:
▪ Case Study – British IMF loan 1976 – Part 1
▪ Case Study – British IMF loan 1976 – Part 2
▪ Case Study – British IMF loan 1976 – Part 3
▪ Case Study – British IMF loan 1976 – Part 4
Case Study – The British IMF loan in 1976
[This Blog Takes Us Up To The 1967 Devaluation - And Establishes The Theme That Persisted Into The 1970S - I Will Try To Get Up To 1976 Next Week And Then Examine The Actual Episode The Week After. This Will Not Be All Reproduced In The Text Book But Will Form Part Of Our On-Line Site Which Is In The Process Of Construction. A Shorter Version Will Appear In The Text Book]
Post War Period to the 1967 DevaluationBill Mitchell – billy blog
There are perhaps more myths about QE than almost any other monetary policy instrument. Here are five of the most pernicious QE myths:...
The Expectations Fairy is no more real than the Confidence Fairy, the Inflation Monster or the Bond Vigilantes. It is time for all of them to be consigned to the realm of mythology, and for monetary and fiscal policy to be grounded firmly in reality and redirected towards achieving the best quality of life for ordinary people.Coppola Comment
But the trickle could soon turn into a flood. The speculators of the world have been told by the new head of the BOJ, Haruhiko Kuroda, that they can now speculate with borrowed yen which has not only no cost but no currency risk. The borrowings, then, could be infinite. The foreigners increased their holdings of Japanese Government Bonds from four percent to nine percent in the two years before the break. No doubt much of that was sold on the break.
And the BOJ may well lose control of the pace of the descent in both the yen and JGB market. The Japanese domestics with a lag might start to sell big time. The faster and farther the yen falls the more likely that will happen. The situation is now very unstable. A deeper fall in the yen is going to force all of emerging Asia into a devaluation and that is gong to cause big problems down the road in places like Europe, particularly Germany.Pinetree Capital — Macrobits
WASHINGTON, DC - Much of the hype surrounding last month's meeting in Moscow of G-20 finance ministers and central bankers was dedicated to so-called "currency wars," which some developing-country officials have accused advanced countries of waging by pursuing unconventional monetary policies. But another crucial issue - that of long-term investment financing - was largely neglected, even though the endgame for unconventional monetary policy will require the revitalization or creation of new long-term assets and liabilities in the global economy....
... global leaders should work to maximize the liquidity that unconventional policy measures have generated, and to use it to support investment in long-term productive assets.Caijing
Money is a social construct. It also facilitates many complex, interrelated social relations. As a result, it’s difficult to pin down for the average person what the effects of a particular policy will be, especially with regard to economic policy. While inflation may have negative effects in certain times or places, it’s difficult to figure that out just by looking around a city or country. As a result when politicians or other figures with agendas want to talk about inflation, they inevitably go for the most visceral descriptions available. For some number of decades now, the example they go to do decry inflation is people carrying around “wheelbarrows full of money” to go buy something such as bread. One of their favorite examples is Weimar Germany. So let’s talk about it.Naked Capitalism
I am so bored of the “government is stealing from us by debasing the currency” argument.
I understand why some people are predisposed to this way of thinking. It relates to society’s general predisposition to treating savings and savers as sacred relics.
You worked for these savings, thus you and your savings must always be protected.
What people forget is that everything is relative.Toward a leisure society
