Gene Frieda — China’s Difficult Balancing Act

China needs to keep growth high enough to maintain social stability, but also must preserve external stability via the renminbi’s exchange rate. How China manages its currency during its economic policy shift could have important global consequences.

China is not sovereign in its currency since it pegs to the dollar. Currency sovereignty requires floating the rate whereas as peg sets a fixed rate. This means that China domestic policy is constrained by have to manage the exchange rate within the corridor of the peg.

China needs to float the RMB to return to currency sovereignty and manage its economy instead of managing the exchange rate. As Russia did when hit by US sanctions.

Project Syndicate
China’s Difficult Balancing Act

Gene Frieda | executive vice president and global strategist for PIMCO

Brian Romanchuk — The U.S. Debt Limit (Preliminary Primer)

The debt limit in the United States is currently not an object of worry, but it represents one possible avenue to default. From the perspective of a non-American, it is rather difficult to understand how such a strange custom could arise. This article outlines very briefly the history of the debt limit, and then moves to discuss the risks associated with it. This issue underlines the argument that default risk in floating currency sovereigns is political risk, not financial....

Bond Economics
The U.S. Debt Limit (Preliminary Primer)
Brian Romanchuk

Brian Romanchuk — How Can A Floating Currency Sovereign Default?

I have been toying with an idea of writing a book with the title "How Can a Floating Currency Sovereign Default?" As a follower of Modern Monetary Theory (MMT), this is a bit of a joke, since the text of the book would just be: "They can't." The book can then be submitted to the World's Shortest Book Competition.

Thinking about this has led to me to the realisation that the usual way of discussing sovereign default is inherently defective. (This criticism extends to my earlier book Understanding Government Finance, unfortunately.) The usual technique is to describe the mechanisms for default, look at some models, and argue why a default is unlikely. This then runs into a hurricane of whataboutery - what about the external constraint, Russia, Iceland, etc.

I think we need to follow a different tack, and I expect to turn that into a somewhat longer book.... 

Bond Economics

How Can A Floating Currency Sovereign Default?
Brian Romanchuk

Yu Yongding — China must release the renminbi

Float it already! No float, no currency sovereignty.

East Asia Forum
China must release the renminbi
Yu Yongding is a Senior Fellow at the Chinese Academy of Social Sciences and former member of the monetary policy committee of the People’s Bank of China.

This article is abridged from Yu Yonding, ‘The reform of China’s exchange rate regime’ in Ligang Song and Ross Garnaut (eds.), Forty Years of Chinese Reform, China Update, ANU Press, 2018.

Bill Mitchell — Trade and external finance mysteries

I have received many E-mails and direct twitter messages overnight and today following the ‘debate’ on Real Progressives yesterday, where trade issues and related financial transactions were discussed. I saw that section of the debate (after the fact) and concluded that only one of the guests knew what happened when nations exported and imported. But it appears that readers of this blog who listened to the debate were confused by what they heard. So, today, by request, I aim to clarify a few of these issues.

They are in fact fairly simple to understand once you trace through the transactions carefully, so it is a surprise that basic errors were expressed in the ‘debate’. So here is the way Modern Monetary Theory (MMT) helps you understand trade transactions.

There appears to be a lot of confusion about the external economy in a fiat monetary system. Many economists do not fully understand how to interpret the balance of payments in a fiat monetary system.

So it is no surprise that the general public struggles in this domain...

If you don't read billyblog regularly, this is one you probably should. Also see Neil Wilson's comments.

Bill Mitchell – billy blog
Trade and external finance mysteries
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Cecchetti & Schoenholtz — China's Awkward Exchange Rate Regime

Float that sucker.

Perhaps the best way for China to counter President-elect Trump’s outdated claims of manipulation would be to let the currency float. In the short run, however, that would almost surely trigger a plunge versus the U.S. dollar. Given China’s strong penchant for market intervention—including its unfortunate role in the 2015-2016 stock market boom and bust—Chinese savers may simply rush for the exit, fearing that anxious policymakers will slam the gate quickly.

In the end, there is no way to make such a fixed exchange rate regime less awkward without risking a bout of instability. Over the long run, capital controls won’t solve the problem; instead, they will further diminish the efficiency with which the country’s savings are used. For a large economy like China that is integrated into the global trading system, the global norm is a floating currency. Absent a trade war (and perhaps even with one), that’s still probably where we are headed within a few years. And, it’s increasingly a question of when, not if.

Money and Banking
China's Awkward Exchange Rate RegimeStephen G. Cecchetti, Professor of International Economics at the Brandeis International Business School, and Kermit L. Schoenholtz, Professor of Management Practice in the Department of Economics of New York University’s Leonard N. Stern School of Business
ht Mark Thoma at Economist's View

Cecchetti & Schoenholtz are the authors of Money, Banking and Financial Markets.

Frances Coppola — Understanding balance of payments crises in a fiat currency system

Frances appends a note to her post:

As I don't wish to get caught up in arguments about whether governments do or don't create money when they spend, I am preserving the fiction of central bank and government separation. This means that the language in this post is that of monetarism, rather than MMT. I do not apologise for this: it is my firm belief that MMT and market monetarism are brothers under the skin, and the differences between them are largely semantic. Though there might be a difference in political ideology too.

Coppola Comment
Understanding balance of payments crises in a fiat currency system
Frances Coppola

Lingling Wei — Loosening the Peg

China moving closer to floating the RMB.

Across the Curve
Loosening the Peg
Lingling Wei

Michael Bordo and Harold James — Trilemmas in capital flows, and domestic and international order

The classic exchange rate trilemma presented a formulation for analysing the trade-offs between the incompatible macroeconomic goals of capital mobility and monetary autonomy within a fixed exchange rate regime. This column shows how policy trilemma analysis can be extended to other domains, specifically financial stability, political economy, and international relations. It argues that analysing these trade-offs can help to identify policy options that balance macroeconomic objectives and political realities in the face of globalisation.

VoxEU.org

Trilemmas in capital flows, and domestic and international order
Michael Bordo, Professor of Economics, Rutgers University, and Harold James, Professor of History and International Affairs and the Claude and Lore Kelly Professor of European Studies, Princeton University and CIGI Senior Fellow

Peter Cooper — What is Modern Money?

A modern money system, as that term is applied in Modern Monetary Theory, typically has three key features. Two of these features are always present. The third is optional but normally should be in place for the full benefits of modern money to be enjoyed: 

1. The currency is a public monopoly. Government issues the currency and is the only entity allowed to do so. 

2. The currency is nonconvertible. It is a fiat currency. The government does not promise to convert its currency into a precious metal or some other commodity at a set price. 

3. The exchange rate is allowed to float. The government does not promise to maintain a fixed exchange rate with any foreign currency. Instead, the exchange rate is ‘flexible’ or ‘floating’. As already mentioned, this feature is usually operative, but not always. 

Taking these three features together, we can say that modern money normally involves a ‘flexible-exchange-rate nonconvertible currency’, or ‘flex-rate currency’ for short....

heteconomist
What is Modern Money?
Peter Cooper

Peter Martin — Classical economists don’t understand real people or real economies.

There is at last some evidence that the political mainstream is coming around to the idea that “places {in the same currency zone -PM} in deficit have to be easily financed by places in surplus”. At least there is, if we can consider John Redwood, a British Conservative MP, to be representative of the mainstream. He, himself, may well question that assertion, but nevertheless this recent quote shows that it isn’t just Greece’s Syriza and the political left who are making the argument.…

Modern Monetary Theory: Real Economics
Classical economists don’t understand real people or real economies.Peter Martin

Business News Europe — Ruble is now truly floating

During the worst of the ruble's plunge in recent weeks traders were completely wrong-footed: they expected the Central Bank of Russia (CBR) to step in and defend the national currency's value, but it did nothing.

"Where is the CBR?" lamented Tim Ash, head of emerging markets research at Standard Bank, as the ruble fell past the psychologically important RUB50/$ mark. Surely the central bank would not let the ruble fall further? It did.

Currency traders are waking up to the fact that when the central bank said the ruble was free floating it meant it. The lesson of 2008-09 when the CBR burnt through $200bn of reserves managing the ruble lower has been learnt: there is no point defending the indefensible. With oil prices in free fall there is no point trying to maintain the "old" exchange rate, especially when it remains unclear how low the oil price will fall. Better to preserve the country's hard currency reserves to bolster banks and help corporates pay off their international debt once the dust settles, than defend some arbitrary exchange rate.…

Goes on to explain how the CBR is managing devaluation and Russians are taking it in stride.

Eurasian Development Bank — Business News Europe
Ruble is now truly floating

Randy Wray — MMT And External Constraints

Randy agrees with Brian and Neil.

Economonitor — Great Leap Forward
MMT And External Constraints
L. Randall Wray | Professor of Economics, University of Missouri at Kansas City

Neil Wilson — It's the Exporters Stupid

As usual Neil sums it up pithily.

However, in the EZ the exporting countries apparently haven't clued into this obvious fact yet and are killing the geese that lay the gold eggs for their economies by forcing austerity on the periphery and reducing their own exports as the periphery cannot afford them and also seeks to increase its own exports. Yes, Germany, we're talking about you in particular.

3spoken
It's the Exporters Stupid.
Neil Wilson

Brian Romanchuk — Why Rich Countries Should Float Their Currencies

This article provides more depth to some comments I made in"MMT and Constraints". I explain why developed countries should allow their currencies to float, which is the policy stance advocated by Modern Monetary Theory (MMT). It is probably a good idea for developing countries to float their currencies as well, but they face inherently difficult policy problems that I do not know enough about to comment on. The implication of advocating a free-floating currency is that I do not see the "external constraint" as being a serious issue, or at least an issue that policy makers can hope to do anything useful about.

In that previous article, I made some quick comments in response to an assertion by Thomas Palley that the "foreign exchange market constraint" is very important for countries other than the United States. Since he did not explain that assertion, I was unable to offer a very detailed criticism. My response was too short, and drew some comments. I expand my explanation here.

I will first explain why I do not think that there is a significant external behavioural constraint on policy makers; but an accounting constraint obviously exists.

I will also note that what I am writing is my opinion, and does not necessarily reflect the views of the economists who developed MMT. I think that poorer countries face some difficulties with free-floating currencies, a view with which they may not agree.

Bond Economics
Why Rich Countries Should Float Their Currencies
Brian Romanchuk

Brian Romanchuk — Currency Regimes Matter If Policymakers Understand Them

In this article, Antonia Fatas argues that exchange rate regimes (like the euro) have limited power to explain differences of economic outcomes. It is based on an article by Andrew K. Rose, which looks at the currency regimes of smaller (mainly developing) economies during the global financial crisis.

Paul Krugman responded here, noting that bond yields only rose due debt concerns in the euro countries. From the point of view of the bond markets, that is a crucial point: a country that does not control the currency of its debt emissions is just another credit market borrower, and can end up facing prohibitive default risk premia.

Since his article illustrates that point well, I will discuss here the non-interest rate aspects of this debate. The currency regime is a critical component of Modern Monetary Theory (MMT), and so this debate is very important for understanding MMT.

Bond Economics
Currency Regimes Matter If Policymakers Understand Them
Brian Romanchuk

Ramanan — James Tobin Already Knew The Answer

John Maynard Keynes’ biggest disservice to the economics profession is to not start with an open economy. In a world of free trade and free movement of capital, a nation’s biggest constraint on raising output is the “balance-of-payments constraint”. It is sad that in spite of the crisis the economic profession has not even started debating on the constraints imposed on nations due to free trade (and the whole world as a consequence).

Intuitively I agree with Ramanan on this although I do not have the expertise in the subject to make a deeply informed judgment. But my sense is that until economists and especially political economists aka macroeconomists start with the global economy as a closed system, we are going to keep looking for solutions in the wrong direction. A lasting solution has to be social and political as well as economic, and the notion that nations get it right by each pursuing maximum utility in the form of "national interest" will be about as effective as individuals pursuing their own interest in achieving general equilibrium through markets. It's nonsense.

Historically, economics really begins with trade. Even communal tribes that operated on the gift economy internally traded with neighboring tribes and over time, trade encompassed most of the world, providing the first contact and later communication among different people, resulting in shared knowledge and cultural and institutional influence. So it is quite amazing to me as an outsider looking in at economics to find what seems obvious being relegated pretty much to an afterthought.

The world will not work and humanity will not see peace until the world works for everyone. What's good for humanity is good for the world economy rather than vice versa, as neoliberalism assumes.

The Case of Concerted Action
James Tobin Already Knew The Answer
Ramanan

Matias Vernengo — The dollar has NOT depreciated since the 1970s?

Mike Norman had an intriguing graph a while ago ... showing that if one uses the broad, rather than the major currencies, index for the US trade weighted exchange rate, then the dollar did not depreciate.... I decided to explore the issue....

... the real indexes are quite similar, and by all measures the dollar has depreciated in real terms from the early 1970s, with two big swings associated to the Reagan and Clinton (asset bubble driven) booms. The point is that in countries with higher inflation than the US depreciated their currencies in nominal terms significantly (in part that explains their higher inflation rates), and in nominal terms the US currency appreciated, but once inflation is taken into consideration the index looks very much like the major currencies one, with an overall depreciation of about 20% or so in real terms.

Naked Keynesianism
The dollar has NOT depreciated since the 1970s?
Matias Vernengo

Mohamed A. El-Erian — Beggar Thy Currency Or Thy Self?

Not many countries nowadays seek a strong exchange rate; a few, including systemically important ones, are already actively weakening their currencies. Yet, because an exchange rate is a relative price, all currencies cannot weaken simultaneously. How the world resolves this basic inconsistency over the next few years will have a major impact on prospects for growth, employment, income distribution, and the functioning of the global economy.

Project Syndicate
Beggar Thy Currency Or Thy Self?
Mohamed A. El-Erian | CEO and co-Chief Investment Officer of PIMCO