Bill Mitchell — Trade and finance mysteries – Part 2

I was running late yesterday and the blog post was already rather long so I left some matters concerning central banks for today. The question we address briefly today is what is the role of central banks in all these trade transactions. Does an export surplus country face an ever increasing money supply as central banks provide the counterparty service to traders who sell in a foreign currency but want their own currency (such as a manufacturer who incurs costs in say Yen but sales revenue in $AUD – as per our example yesterday)? There appears to be confusion on that front as well. So while I am not typically going to write a detailed blog post on a Wednesday, in the interests of continuity, here is Part 2 of the series on trade and currencies.

Parts 1 & 2 are must-reads. Also see the comments of Neil Wilson and Alan Longbon.

Foreign exchange, trade, and their relationship are areas of MMT that are somewhat complicated, and it takes some study to get it straight.  These posts will rank with Bill's posts on fiscal deficits in significance with respect to understanding the basic MMT POV.

Bill Mitchell – billy blog
Trade and finance mysteries – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

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

Neil Wilson — Why economists fail at foreign

Here's the post that Neil has been promising.

As usual, false assumptions and wrong model.

3spoken
Why economists fail at foreign

Neil Wilson

Ecns.cn China opens up interbank forex market

China has opened its interbank foreign exchange (FX) market to foreign central banks and similar institutions, the People's Bank of China (PBOC) announced on Wednesday.
Foreign central banks and other monetary authorities, international financial institutions, and sovereign wealth funds are now allowed to trade all FX products directly -- including spots, forwards, swaps and options -- in China's interbank market without any quota restrictions.

They can enter the market through three channels: entrusting the PBOC as their agent, using interbank FX market members as their agent(s), or becoming a foreign member.

Ecns.cn
China opens up interbank forex market

Michael Pettis — Do markets determine the value of the RMB?

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
Do markets determine the value of the RMB?
Michael Pettis | Professor of Finance at Peking University’s Guanghua School of Management