Daniela Gabor — MMT Meets Rey’s Dilemma: A Balance Sheet View Of Capital Flight (Coming Soon To An Em Country Near You)

Recently, a colleague emailed with the following set of questions: ‘a balance sheet approach to defending currencies. Do you know literature that explains in detail the globally interlocking balance sheets between central banks, commercial banks and what happens when a national government has to defend its currency? What is the role of national and foreign reserves and how do they travel these balance sheets in the process of trying to defend a currency? I came back to this question when discussing the Swedish fight to defend the Dollar-pegged Krona in the early 90s and the promise of MMT? Most particularly we wondered to what extent national governments can just issue Krona and use them to buy foreign reserves or what sets the limits exactly to this attempt?' 

My MMT friends do have answers to these questions (and they do spend a lot of time defending MMT from critiques that it doesnt consider balance of payment constraints to monetary sovereignty). I thought I would answer these questions a la Minsky, with balance sheets, since that’s how I teach my undegrad students about exchange rate management in emerging/developing countries. I teach by setting those questions within the broader conversations about global liquidity, global financial cycles and Rey’s dilemma – independent monetary policy is only possible if countries manage capital flows (capital controls)....

Critical Macro Finance

MMT Meets Rey’s Dilemma: A Balance Sheet View Of Capital Flight (Coming Soon To An Em Country Near You)
Daniela Gabor | Professor of Economics and Macro-Finance, University of West England Bristol

Sputnik International — Putin: Russia to Keep Ruble's Floating Rate, Seeking Market Tools

Currency stability is a high priority for both Russia and China.

Sputnik International
Putin: Russia to Keep Ruble's Floating Rate, Seeking Market Tools

OANN — China should stop intervening in FX market and let yuan float: researcher

China should stop intervening in the foreign exchange market, devalue the yuan and let it float freely to restore stability, a senior researcher at a government-backed think tank said.
Xiao Lisheng, a finance expert with the Chinese Academy of Social Sciences, made the remarks in an article on Monday in the official China Securities Journal amid a growing debate among the country’s economists on whether authorities should let the closely-managed currency trade more freely.

The yuan lost 6.6 percent against the dollar last year, the biggest annual loss since 1994.
“The more the government delays the release of depreciation pressure, the greater the impact and destructive power of the release of depreciation pressure will be,” Xiao wrote.

The authorities should “let the yuan exchange rate have a one-off adjustment to realize a free float” of the currency, he said.…

Cut it loose.

One America News Network
China should stop intervening in FX market and let yuan float: researcher

Reporting by Winni Zhou and John Ruwitch; Editing by Kim Coghill

Zero Hedge — Yuan Dumps, Bitcoin Jumps As China Researchers Suggest "One-Off Devaluation" & Capital ControlsYuan Dumps, Bitcoin Jumps As China Researchers Suggest "One-Off Devaluation" & Capital Controls

Float that sucker. What are you waiting for?

Bite the bullet like Russia did and it was not the end of the world for them. The ruble stabilized relatively quickly and the Chinese economy is way larger than Russia's and not a victim of Dutch disease either.

China is very protective of national sovereignty. Currency sovereignty is a key piece in that.

Zero Hedge
Yuan Dumps, Bitcoin Jumps As China Researchers Suggest "One-Off Devaluation" & Capital Controls
Tyler Durden

Update

Chinese Interbank Lending Freezes; Government Bond Trading Halted After Massive PBOC Liquidity Drain

Constantin Gurdgiev — Russian Capital Outflows 2015: Abating, but Still High

Still reduced appetite to save in rubles now that the exchange rate is floating, but appetite is increasing.

Actually, it's mostly balance of payments involving prior foreign debt and corporate deleveraging.

True Economics
Russian Capital Outflows 2015: Abating, but Still High

Constantin Gurdgiev

Peter Cooper — Internet Marxists Who Are More Austrian than Neoclassical

In the previous post, we encountered the views of a small subset of Internet Marxists who appear to adhere to a rather hard-line, Chicago-like neoclassical understanding of the capacities of the state. There is another small subset, the Austrian Metalist Internet Marxists (or Austrian Marxists, for short), who appear to believe that a state currency not “backed” by gold must surely have zero value or, at the very least, command a level of acceptance likely to crumble at any moment. In reality, the choice between a gold standard and fiat money changes little of significance when it comes to the value of the currency or its acceptance, although it does of course affect the policy space a state leaves open to itself for as long as the currency arrangement remains in place.…

heteconomist
Internet Marxists Who Are More Austrian than Neoclassical
Peter Cooper

RT — Russia ends dollar/euro currency peg, moves to free float

Good move. Russia is now a currency sovereign with virtually no foreign debt other than commercial and almost a half a trillion in USD reserves, which cover the commercial debt.

RT
Russia ends dollar/euro currency peg, moves to free float

Neil Wilson — Scottish Independence Myths - How to buy imports?

I've been amazed at how poor the understanding is on how cross border trade actually work in a modern financialised world. It's almost like they've never spent any time at the sharp end of a firm's invoicing and payment operation, and exposed to the constant stream of marketing from banks.

The introduction of an independent free-floating Scottish currency is no barrier at all to cross border trade - because the banks are already setup to support it and make money doing so. It's very straightforward.…

3spoken
Scottish Independence Myths - How to buy imports?
Neil Wilson
Neil also sends up to, The euro has failed to boost trade between the countries that adopted it, By Allister Heath at The Telegraph.

Neil: "an interesting post here about how the introduction of the Euro has not changed the amount of trade one jot - which of course means that an independent currency can therefore be no barrier to trade."

George Soros must be senile or coming down with Alzheimer's because he forgot how he broke the Bank of England

Soros must be getting senile or he has Alzhemer's or something because he's clearly forgotten how he nearly "broke the Bank of England."

He is commenting here on how, if Scotland were to break away from Britain, it would be a bad idea to have its own currency because the currency would be vulnerable to attack.

Too bad the total opposite is true.

A free-floating, non-convertible Scottish currency might be vulnerable to speculative attack, but it wouldn't get very far because it would have ZERO power to destabilize Scotland's economy. The country's monetary and fiscal policy would be totally unaffected by changes in the exchange rate and therefore, speculators could push and push and push, but they'd be pushing against who? Against themselves, that's who. That's becaue the central bank or Treasury would not be forced to take the other side of that trade in order to defend some arbitrary exchange rate. So the spec attack could hardly last very long.

Believe me, I know. I spent years as a floor trader. When us guys (speculators) on the floor wanted to push the  market around it was always far more effective if we knew there were outsiders who were on the other side of that trade and vulnerable to margin calls or stops or whatever. If we just sold (or bought) against each other, the move would go nowhere fast.

Soros made a billion dollars by betting that England would pull out of the ERM in 1992. Why? Because the Bank of England was taking the other side of his and other speculators' sales. Eventually, the BOE could not defend the exchange rate anymore and it pulled out causing a HUGE readjustment in the pound. Soros covered his shorts when that happened and the rest is history.

He seems to have forgotten all this.

Seriously, does he not see the pitfalls of borrowing in someone else's currency? George...look at the countries in the Eurozone...hello??? Now look at Japan or the U.S. or Britain. See any difference?

George is lost, but the media and probably Scottish proponents of independence will follow his advice for sure. That's bad news for the Scots.

Garth Brazelton — Crowding Out And Its Relation To Bullshit

A topic I've been hearing from some of my conservative friends is a refrain often found in mainstream macroeconomic textbooks - crowding out. Crowding out is the theoretical idea that there is a fixed pot of gold from which to finance investment, so if the government all of a sudden wants to draw from that pool, it must mean it has to take funds from the private sector (because there's only so much gold to go around).

More on loanable funds versus endogenous money.

Reviving Economics
Crowding Out And Its Relation To Bullshit
Garth Brazelton

Goldman via Zero Hedge — Visualizing 193 Years Of Currency Regimes & Crises

Zero Hedge
Visualizing 193 Years Of Currency Regimes & Crises
Goldman Sachs

Senexx — Have We Forgotten the Trilemma?

This is lifted from the Modern Money Primer blog by Randall Wray and is now available as a book from Amazon.

"According to the well-known trilemma,government can choose only two out of the following three: independent domestic policy (usually described as an interest rate peg), fixed exchange rate, and free capital flows. A country that floats its exchange rate can enjoy domestic policy independence and free capital flows. A country that pegs its exchange rate must choose to regulate capital flows or must abandon domestic policy independence. If a country wants to be able to use domestic policy to achieve full employment (through, for example, interest rate policy and by running budget deficits), and if this results in a current account deficit, then itmust either control capital flows or it must drop its exchange rate peg.

"Floating the exchange rate thus gives more policy space. Capital controls offer an alternative method of protecting an exchange rate while pursuing domestic policy independence.

"Obviously,such policies must be left up to the political process—but policy-makers should recognize accounting identities and trilemmas. Most countries will not be able to simultaneously pursue domestic full employment, a fixed exchange rate, and free capital flows. The exception is a country that maintains a sustained current account surplus—such as several Asian nations. Because they have a steady inflow of foreign currency reserves, they are able to maintain an exchange rate peg even while pursuing domestic policy independence and (if they desire) free capital flows.

Modern Money Mechanics — MMT simplified
Have We Forgotten the Trilemma?
Senexx

Paul Volcker — Is Global Financial Reform Possible?

Addresses floating rates and recommends more international coordination.

Read it at Project Syndicate

Is Global Financial Reform Possible?

by Paul Volcker