Link to Stephanie Kelton on the fiscal cliff here.
61 Responses
There has to be some way to highlight that Congress is the culprit. The President’s reluctance to admit that the executive is at the mercy of the legislative branch is understandable, especially since the majority party in the House is made up of people who need/want to be led, but viscerally object to being led by a Democrat.
I think what we’ve got, especially in the House, is a body of people who need to be led, but want to be perceived as powerful and in charge and have a need to be punitive to feel good. Since the recent election was just barely not a disaster, they’ll feel more inclined than ever to punish the electorate. The only growth they are after is in their own influence and power.
How to explain that? It needs to be spelled out.
@Vincent, If there is government by the people, then petty potentates are reduced to servants and parties (factions) serve no purpose. Their lack of enthusiasm for a populist agenda is to be expected.
The balanced budget is a gimmick. It was a gimmick when Gore mattered about it and is one now.
@Monica Smith,
you need to get your message to president obama. he has the podium, and he’s not furthering your agenda in the least.
Good presentation. Math is on her side, although I would disagree with her statement that we’re living below our means – sure, we have a large output gap, but we also have a huge trade deficit. In the short term she is right – we need to increase our budget deficits, but in the longer term we need to reduce our trade deficit and alter the distribution of income (much more than tax changes) so that saving desires are reduced and productive investment is increased. Of course I agree with her closing statement that it’s all about real resources.
According to my rough understanding of MMT, if there is unemployment, then we’re producing less than we could, and hence we’re living below our means. Is that wrong?
On the other hand, CDNDC, your take on the matter makes sense, too. If we aren’t producing enough and yet paying foreigners for our net imports from them, then we’re transferring financial assets to the foreigners. If the “we” here is the domestic private sector, then yes, “we” can be said to be living beyond our means on account of the fact that “we” are losing financially. But I think Kelton’s “we” comprised the domestic government and private sectors both. We’re living below our means because “our” government isn’t doing what it should: deficit spend enough to bridge the output gap, reach full employment.
Your understanding of MMT is correct. I just disagree with the “imports are a benefit” position. This position essentially ignores that we ever have to pay back the foreign sector with real output. If we make this flawed assumption then Kelton pointing to the output gap as evidence of our “living below our means” makes sense. In my opinion the net of the two – the output gap minus the trade deficit – would be the true measure of “living beyond/below our means”. If the trade deficit is larger then we are living beyond our means. (Of course I may be wrong and the net still shows that we are “living below our means”) In this argument I am interpreting “living beyond our means” as meaning a standard of living (consumption of goods) above our total potential output (the means). If I take the position of debts incurred as showing “living beyond our means” then the trade deficit shows unequivocally that we are living beyond our means.
When you purchase real output using money do you consider yourself as benefiting and the other party as incurring a cost? Of course not, the trade occurred because both parties thought the exchange was fair. The “imports are a benefit” position is making this illogical argument – that one side gains while the other incurs a cost. Of course this could make sense if we assume we are ultimately going to confiscate the stored savings (or inflate it to nothing), but this causes even bigger problems
imports are obvious real benefits. the payment of dollars is a ‘nominal benefit’ for the seller.
the distinction is real vs nominal
so in exchange for exporting to us the seller of our imports takes our tax credits.
we are under no legal obligation to ever export anything.
@CDNDC, This position essentially ignores that we ever have to pay back the foreign sector with real output.
In what sense do we have to pay them back with real goods? The real goods only leave our shores if the producers of those goods are willing sellers. The foreign sector was willing to take dollars in exchange for the real goods they exported to us. The dollars aren’t IOUs for real goods that these foreign dollar holders can redeem any time they want. All they can do is to offer them to some seller of real goods, and the sale only happens if the seller wants the dollars at the negotiated price.
our ‘means’ include our ability to attract net imports
I re-read innocent fraud #5 (I first read it just over a year ago) and I still don’t buy the argument. I basically read the argument “we are under no legal obligation to ever export anything” as rejecting the medium exchange function of money. I don’t know how we could even enforce this even if we wanted to since, as you know, foreign investments are not all in Fed accounts. Are we going to suspend all nominal transactions in our economy if they tried to spend their nominal dollars? Should we ignore all nominal liabilities on balance sheets because there is “no legal obligation” to provide anything? You are a pioneer in how you have shown that many assumptions in neoclassical economics are flawed, but I believe you are making a very bad assumption to prove a point about trade. I almost think this is as misguided as my grad school professor of international trade assuming away unemployment, or my macroeconomics professor (who was working for the Fed) whose “innovation” was a model that had money just as a transactional friction. No one would export to the US if they thought they would get nothing in return. Our “means” to attract imports is based on the US’s productivity and ability to maintain the purchasing power of nominal claims. This would disappear the instant we said “we are under no legal obligation to ever export anything”. Sure, you make a good point that there are no guarantees that they will end up with a fair exchange given that money is not a perfect store of value, but the assumption they will get nothing doesn’t make any sense to me. Who’s in a better position – Japan with a huge store of money in foreign countries that could potentially help support their aging population in the future or the US in the opposite situation? If your base case is that the US will simply renege on this exchange and precipitate war and/or a period of isolationism then you should spell this out explicitly. You should drop this fraud and use some realistic assumptions about trade. Sure, this will cause MMT to change its tune on some issues, but I believe it will get it more credibility and support as a result.
export restriction are both legal and common
To CDNDC:
Foreign investors are still forced to spend the dollars in the American economy.
What are foreigners going to do? Spend it here, export it (a.k.a. import it back to their home countries), and kill demand for domestic goods in the process? C’mon…..
” Our “means” to attract imports is based on the US’s productivity and ability to maintain the purchasing power of nominal claims.”
Is it? Or is it the desire of the exporting countries to export their unemployment rather then deal with it themselves domestically?
I see a push by exporting countries, under the instruction of the sages at the IMF. I don’t see a pull.
The foreign central bank ‘assists’ their exporters by providing ‘liquidity’ in their own currency which allows exporters to get what they really want from the export trade – their own currency.
Which is why a good deal of ‘foreign savings’ ends up locked away at foreign central banks.
The dynamic function of international trade is to drain domestic currency circulation from import deficit countries and transfer it to ‘foreign savings’ in the central banks of foreign nations.
That will not resolve itself automatically by ‘market forces’. It has to be actively countered by the government sector offsetting the net-savings desires of the non-government sector.
@WARREN MOSLER,
Difficult to see how a country can just attract imports without a real attractor for their currency to the exporter …the attractor for the USD to an exporter is not the tax credit but more likely its use in purchasing Oil and other commos denominated and paid for in $$$$$ …
the ability to attract net imports, in the case of the US, must be based on the fact that US dollars held abroad somewhat keep their purchasing power to import from the US, if you follow the MMT logic that US dollars are just a US tax credit.
so there is a contradiction is saying that you must optimize your terms of exchange but there is no guarantee attached to the purchasing power of your currency. (not to mention – again – that most countries cannot finance their trade deficit in their own currencies)
if the rest of world wants to ‘save’ our dollars for any reason they ‘must’ net export to us to get them, right?
“WARREN MOSLER Reply:
November 15th, 2012 at 8:05 am
export restriction are both legal and common”
So your base case is confiscation of foreign savings and the resulting war or isolationism. There are a number of problems with this – first, this would imply the US must be self-sufficient (since we would be cut-off from trade with this policy) which we are currently not and will not become so using MMT proposals. Second, the idea that we can enforce this export restriction is highly questionable – it’s not as if we can simply put officials at our ports stopping shipments to Japan since exports include services which can transported digitally (e.g. medical diagnostics, IT services, etc.). Further, why does this money need to be spent on goods & services that flow to the foreign country when they could be spent domestically by the foreigners (e.g. vacations to Disney, summer homes in Florida, medical tourism, etc.)? The point here is that there are many ways the foreign parties can obtain utility from these dollars (and which represent a real cost to the US).
I have simplified the reasons for foreign savings in US dollars, but I still contend that the main reasons are productivity (the US is the world’s largest economy not because it has the biggest population) and because the dollar is stable and best suited for official foreign currency reserves (other reasons I have excluded would be history or military power (ensuring stability)).
Yes, foreign countries like China are maintaining domestic employment using exports, but are we now going to assume that this will continue indefinitely? Look at trade flows over the last 50 years and tell me if this looks stable. The US used to have a trade surplus. Japan and China have demographic time bombs which are likely to change things.
Lastly, the arguments supporting “imports are a benefit” position is even more illogical when applied to countries other than the US. MMT needs to drop this position so that it’s other (valid) points are taken seriously.
my base case is to let foreigners accumulate all the dollar financial assets their hearts desire.
“my base case is to let foreigners accumulate all the dollar financial assets their hearts desire.”
I’ll interpret – Warren with his hands over his ears shouting the same point over and over again
This behavior reminds me of neoclassical economists when confronted with MMT ideas about monetary operations.
To reiterate, and as I’m sure you know, trade deficits are part of the current account which have a mirror image in the capital account. The capital flows represented in the capital account do not just accumulate in accounts at the Federal Reserve, but also flow into real asset claims in the US. This means that your short sighted response to trade deficits is even inaccurate – foreigners are not just accumulating financial assets due to the trade deficit but they are accumulating real assets as well. As Ramanan points out in the following link the US net indebtedness to foreigners is above $5 trillion, over 30% of GDP.
If all policy makers took your stance on foreign trade and simply accommodated the foreign sector drain on aggregate demand by boosting government deficit spending we could in theory, and given enough time, find that a significant portion of our real assets in our own country are owned by foreigners. Sure, in this world we could still be very productive, but the issue would be that a large percentage of this output would flow to foreigners. And all this assumes that the government is smart enough to accommodate the AD drain, which is clearly not the case at present.
Now of course our current situation is nowhere close to this outcome, but your lackadaisical attitude about trade suggests that you have no problem heading in this direction, or again that you assume this can always be changed via confiscation of foreign owned assets. I argue that we are in fact burdening our children with debts to foreigners. It’s short term benefit for longer term cost.
You sometimes lament about how 401k savings accounts encourage savings and that this as a result requires higher deficit spending to offset. Why not have the same attitude about the other AD drain reflected in the trade deficit?
Actually, while I’m on the 401k issue – I actually disagree with you here as well. I believe there is a benefit with 401k accounts in that the savings are pre-tax and thus will be taxed at the income tax rate in affect at the time of their ultimate use. This aspect ensures that spending from this source of funds is impacted to the same degree as income earned in that future period. Thus this type of savings is different from post tax savings that, assuming we stay with our current income tax focused tax regime, yield inequalities. To clarify this further – say you earn your post tax savings under a 15% income tax regime and ultimately spend it when there is a 30% income tax regime (which was required due to AD levels at that time, per MMT recommendations). How is it fair that you get to keep 85% of your output while future period workers only get to keep 70%?
what’s the problem with non residents purchasing and owning real assets?
if the output flows to foreigners as you state, you are simply stating the trade balance has reversed.
‘heading in this direction’ is at worst heading towards balanced trade.
and i agree, exports are real costs.
and yes, if net exports are ever deemed a problem there are a variety of policy tools readily and legally available to act accordingly.
I don’t ‘lament’ about demand leakages. I always state they mean taxes can be that much lower.
And 100% of the real output always goes to those who are alive at the time.
“[…] trade deficits are part of the current account which have a mirror image in the capital account. The capital flows represented in the capital account do not just accumulate in accounts at the Federal Reserve, but also flow into real asset claims in the US.”
CDNDC, is this foreigners’ acquiring real assets happening because of their running trade surpluses against the US? Or, is it happening because foreigners are not in general barred from such acquisitions? Anything specific to foreign traders that specifically enables them to make such acquisitions? Other than their getting richer and better able to afford it, of course…
Correction – foreign direct investment is not an AD drain since it represents a spending flow in the US. So the entire magnitude of the capital account does not represent an AD drain. It does however represent increased foreign ownership of US assets.
Nihat – Similiar to MMT’s argument about taxes funding spending there is no direct connection between specific inflows and specific outflows. If foreign direct investment increased with everything else being constant the US$ would appreciate and bring the capital and current account back into balance. I would expect foreign investment in the US to increase with rising wealth in other countries. I will defer to others on this point since I am no expert in international economics.
“Similiar to MMT’s argument about taxes funding spending there is no direct connection between specific inflows and specific outflows.”
Please disregard. I was trying to get to the point that both sides (capital/current) are moving somewhat independently with the exchange rate equating things. Specific trade flow receipts in US$ of course go somewhere. Foreign direct investment could be stemming from income from assets in the US (the other part of the current account)
“WARREN MOSLER Reply:
November 16th, 2012 at 9:31 pm”
Thanks for your thoughtful reply. A few comments are below:
“what’s the problem with non residents purchasing and owning real assets?”
The problem with non-residents owning US based real assets is that they (not US residents) receive the future benefits. In addition, the yield on real assets is usually higher than the yield on government securities which therefore amplifies the current account deficit (and which could potentially “fund” trade surpluses with foreign countries).
“if the output flows to foreigners as you state, you are simply stating the trade balance has reversed.”
Correct – I contend that this is what is going to happen unless, as you state, we decide to expropriate foreign assets (and of course legally in the US since we control the laws here – but what about international law/agreements (like the WTO) and potential for retailation?)
“‘heading in this direction’ is at worst heading towards balanced trade.”
No, “heading in this direction” was referring to you not caring (and even cheerleading) that an imbalance is being developed which when reversed will impose costs. At worst is not balanced trade but massive trade surpluses.
“I don’t ‘lament’ about demand leakages. I always state they mean taxes can be that much lower.”
Sorry, my mistake then. However, do you concur with the benefit I outlined with 401k’s (and in fact any pre-tax investment vehicle)?
“And 100% of the real output always goes to those who are alive at the time.”
Agreed, although I fear that current trade deficits will force some of this real future output to go foreigners.
I know my efforts to argue these points are probably a waste of time, but I feel that whatever very small chance I have to influence things is worth the effort. You have a number of very important points to convince people, other economists and policy makers about (e.g. monetary realities), yet I think the baggage of the “imports are a benefit” position is making it less likely you will be successful. The benefit of showing the public, for example, that bond vigilantes can never hold a currency issuer hostage is huge (nice article today BTW), yet I struggle to see any benefit from trying to convince people that “imports are a benefit”. If there is a benefit please elucidate it for me.
Thanks again for spending the time reading/responding to my posts and for doing so in such a polite and professional manner. Many bloggers are not so kind when challenged. I apologize if you don’t feel I was as respectfull.
Best I can determine there is no such thing as a nation being forced to run a trade surplus. Any examples short of war reparations or something of that sort? And to my knowledge the WTO spends its efforts to get nations to reduce import restrictions. And nations that have historically had balance of trade ‘problems’ have not, to my knowledge, ever been physically forced to run surpluses?
The real benefit to one person spending less than his income accrues to those spending more than their incomes. Real terms of trade, again.
And all ears with regard to someday being somehow ‘forced’ to net export, thanks.
“that an imbalance is being developed which when reversed will impose costs”
There is no imbalance. Exporters supplied goods and got the tokens they wanted in return. That’s perfectly balanced.
You are treating the external sector like an Old Testament God – able to impose its will without consequence to itself.
It doesn’t work like that.
The economies in the external sector are able to export to the US because those economies are taking dollars and providing their own currency – which is what exporters really want so they can exist in their own currency area. That happens via various liquidity provision mechanisms.
So for there to be a ‘reverse’ the exporters have to stop wanting to export – completely. And that doesn’t happen overnight. It takes a fair while to switch to domestic consumption.
So the external sector can’t use the dollars without destroying themselves.
Which they’re not going to do.
The fear here is the same one that worries about nuclear war and then campaigns for unilateral nuclear disarmament.
Neil Wilson – The sterilization operation that you discuss is not news to me. I have been reading about it for a long time but never with the assumption that the resulting foreign currency reserves are not an asset of the foreign government and will not be spent at some point. Do you perhaps have some inside information? I guess you disagree with the possibility that countries are accumulating foreign currency reserves to protect their pegs (a lesson from the Asian Financial crisis)? I guess you also believe that public statements from foreign governments expressing a desire to go to SDRs as being lies as they have no desire to ever obtain value from their foreign currency reserves?
Even if you believe all these things there is another problem in your argument – the facts don’t support it. Look at the IEP report in the link I posted from Ramanan. Official foreign currency reserves, where the sterilization processes you discuss would remain if it was as you say, are a small fraction of foreign owned financial assets.
Lastly, your argument is essentially arguing that foreign countries (who are not dumb) have decided to do a job guarantee type program with the intent of showering output on other countries instead of benefiting their own populations. China would be much better off politically if they gave their exports to their own people. The only logical reason they do not is because they see a bigger benefit from holding these foreign currency reserves. China and Japan both need foreign owned natural resources and have rapidly aging populations. Both of these issues can be assisted via foreign currency reserves. And yes, I’m not thinking that the trade balance will shift anytime soon but instead fear it will happen in the life of my children.
yes, they get some psychic value from fx reserves. more power to them…
😉
To clarify my sterilization point – I probably should have used “foreign currency intervention” instead of “sterilization” since the later does not always occur and is just the money supply controlling step regardless. From wikipedia:
“Over the first few years of the 21st century, China was able to make a good yearly profit on its sterilization operations, estimated at close to $60 billion a year. By about 2008, however, the country began to make a loss, estimated at about $40 billion by 2010. Other countries also found sterilization more costly after 2008, relating to expansionary monetary policies adopted by advanced economies hit by the financial crisis, most especially the United States. which meant relatively low interest rates were available for their foreign assets.[7] The increased losses from classic open market operations since 2008 have seen China increasingly use an alternative method for preventing monetary expansion – the raising of the Reserve requirement for its larger banks.[8][9]
In contrast to interventions against currency depreciation, there is no inherent limit on interventions aimed at preventing appreciation. If a central bank runs out of domestic currency to buy foreign reserves, it can always print more. There can be political pressure from other nations if they feel a country is giving its exporters too much of an advantage, at the extreme this can escalate to currency war. There can also be political pressure domestically if commentators feel too big a loss is being made by the sterilisation operations.”
“And nations that have historically had balance of trade ‘problems’ have not, to my knowledge, ever been physically forced to run surpluses”
Warren, apparently, has never heard of IMF. But this is a lost case, CDNDC. Do not waste your time.
Right, every time a nation with a trade deficit experiences any inflation the IMF invades demanding restitution for holders of the currency who lost purchasing power.
But you know that. Thought you were going to another website, thanks.
“Official foreign currency reserves, where the sterilization processes you discuss would remain if it was as you say, are a small fraction of foreign owned financial assets.”
The current system is to swap reserves for bonds. Are you suggesting they don’t actually hold any of these?
Sergei_new – Thank you. You would be the third blogger with similiar advice.
Neil Wilson – I was referring to foreign currency reserves, not reserves at the Fed – another example of a term with multiple meanings. You actually made my point. If foreign parties didn’t care about the proceeds from their trade surpluses they would likely hold all of their funds from trade surpluses in accounts at the Federal reserve (in savings or checking accounts as Warren would say). Look again at the IEP report – just over $5 billion of $25 billion in total assets are at the Fed as official foreign currency reserves (and like you said the vast majority in higher yielding treasuries). Most foreign assets are not official assets but “non-official” (“private”) assets. It is simply silly to state that there is no imbalance and that foreign parties have simply written off their proceeds from trade surpluses. Have you heard of state owned Chinese companies buying up natural resource based firms around the world? How do they pay for these firms?
It’s crazy to me that MMT would welcome the importing of unemployment (trade surpluses), especially knowing that the government will likely not offset it fully with deficits.
That last line is trolling
Take it somewhere else thanks
WARREN MOSLER Reply:
November 18th, 2012 at 1:38 pm
“That last line is trolling
Take it somewhere else thanks”
Understood (although I disagree). I will not make any further comments.
in the short term we need to keep our budget deficits at full employment levels,
and we also need to optimize our real terms of trade. see the 7dif on this website
@WARREN MOSLER, But the people who matter are wedded to the household analogy. They have barricaded themselves behind closed minds and refuse to come out or to allow any intrusion. If we could get you or Dr Kelton into the WH there might be a small chance for someone to wake up and at least say “Huh?”.
I’ve read through your trade deficit chapter in the 7DIF and I’m thoroughly confused as to what reason any country would have for exporting anything to the US, or to any country in general that it runs a big trade surplus with.. there has to be some economic gain there.
I assume at the micro level most Chinese companies, for example, would exchange the dollars they get from their exports for yuan and just spend that domestically, and so the government just ends up with all the FX reserves? Maybe some major contracts the government have can be settled in dollars, etc.
@jerry, The economic gain for say China is two fold – it does use US dollars – just not all of them. It uses those dollars to buy oil, and other items it needs. Serving the US market allows it to upgrade its technology, which it can then also use to serve its own population. Without that export market, it would not have had access to that technology.
The only downside for the US when it relies too much on imports, is if did not retain the capability to shift back to domestic manufacturing. That can be a real risk as people with skills retire, or die without passing those skills to someone else.
Thanks for the reply. Your second paragraph there was also one of my concerns. It seems that as the world becomes more and more globalized, and large countries like China continue to grow, they will have cheaper labor pricing more and more of our industries and jobs out of competition. Fine if you’re a highly educated, specialized worker here in the US, but not so much for “Joe Six-pack”. Seems like we’ll end up with a lot of people on the MMT jobs guarantee program if that trend continues.
for a given size govt the trick is to keep taxes low enough so the transition job pool is kept at a minimum
@jerry, Assume that humans like to accumulate, transform matter and produce useful artifacts, much as birds like to build nests and beavers build dams. In other words, assume that it is in the nature of man to create more than he can use himself. Then, if the surplus isn’t useful to and used by another human, it will go to “waste” –be consumed by rodents or rot. So, trading or giving away one’s surplus is actually a waste-avoidance mechanism.
But that can’t be because economic theory avoids waste like the plague. Economic behavior is driven by demand because that’s what the theorists felt in their gut when the teat was denied.
I actually like the household as the microcosm of economic behavior absent the use of money. But, getting a household hooked on using money is not what makes it an economic unit. Trade and exchange over time, inter-generationally, is what does it. And it’s exactly this temporal aspect which our economists still seem incapable of modeling.
“The dynamic function of international trade is to drain domestic currency circulation from import deficit countries and transfer it to ‘foreign savings’ in the central banks of foreign nations.”
Well said. This would seem to answer some of the “why’s?” being raised here. Certain people benefit from running trade surpluses.
“That will not resolve itself automatically by ‘market forces’. It has to be actively countered by the government sector offsetting the net-savings desires of the non-government sector.”
Nice…but there are risks to this, no? I’m thinking simmering unrest and anxiety in China, for example. At some point, their domestic consumers and wage earners will demand to share in the gains of others, as seems to be happening.
“Look again at the IEP report – just over $5 billion of $25 billion in total assets are at the Fed as official foreign currency reserves (and like you said the vast majority in higher yielding treasuries).”
You haven’t understood the MMT position then. I suggest more reading.
All MMT is saying is that the *government sector* should not reward holdings of *government sector* financial assets, and that it shouldn’t be policy to worry about them per se.
There are more important things to worry about – like making sure there are enough domestic jobs.
Foreign holdings of *private* financial assets are not a concern because the bankruptcy process can eliminate those savings. They don’t really factor into the analysis.
You have to be very careful not to confuse the gross figures with the “net savings’ position with the *government sector*” MMT is analysing.
‘ It is simply silly to state that there is no imbalance and that foreign parties have simply written off their proceeds from trade surpluses.’
Never said anything about writing off proceeds. You dreamt that up.
And there is no imbalance because the books balance. That is an accounting fact.
” Have you heard of state owned Chinese companies buying up natural resource based firms around the world?”
Once more. That is a gross individual position. MMT is talking about the net aggregate position. There is a bunch of work to get from one to the other.
Follow the transaction chain through to its logical extinction – which is that sellers need ultimately local currency to pay wages and taxes.
Local currency exchanges don’t happen by magic and in an export led economy you would quickly run out of circulation, which would cause export sales to cease.
The aggregate tendency in an export led economy is for the local central bank to support their local exporters by taking sound foreign financial assets and providing local currency to satisfy demand. That is after all the function of a ‘lender of last resort’.
“All MMT is saying is that the *government sector* should not reward holdings of *government sector* financial assets, and that it shouldn’t be policy to worry about them per se.”
I understand this position, but it was not what I was talking about. I was just addressing your argument that foreigners were just accumulating funds at the Fed via official intervention by the central banks.
“Foreign holdings of *private* financial assets are not a concern because the bankruptcy process can eliminate those savings. They don’t really factor into the analysis.”
What? Are you arguing that Chinese state owned firms are going to go bankrupt? Or perhaps this is a method to confiscate their assets?
“Never said anything about writing off proceeds. You dreamt that up”
You said – “There is no imbalance. Exporters supplied goods and got the tokens they wanted in return. That’s perfectly balanced.”
The only way there’s no imbalance in this scenario is if the foreign central bank writes-off or ignores their official currency reserve holdings. I have argued that they will not.
Regarding the rest of your reply – I have not argued that some foreign central banks do not sometimes intervene in the F/X market by puchasing foreign currency and providing domestic currency to their exporters. My argument is 1) that the foreign central banks use, or will use, the resulting official foreign currency reserves (for many reasons, a few of which I outlined) and 2) that most of the US$ funds received from trade surpluses are not publically owned but instead owned by the exporting private firms (or semi private state owned firms) who will one day use the US$ funds.
If the status quo (US trade deficits of ~$500 billion) remains in place what do you think the IEP report will look like in 10 years?
“There are more important things to worry about – like making sure there are enough domestic jobs.”
Do you still not understand my point that the “imports are a benefit” position encourages the destruction of US jobs in the short term and imposes costs in the longer term?
First, I understand that the accounting always balances. So yes, it is not an imbalance in this sense.
However, MMT often talks about how private sector indebtedness can not increase forever, and in this sense there is an imbalance – something needs to change. This is the sense that I’m saying there is an imbalance. Not because foreign governments have financial constraints like households, but because there will be demographic and other changes that cause the change. One reason why there will be a change is the other part of the current account – income from foreign holdings of US$ assets will increase as the holdings increase.
I guess I should have used the term equilibrium instead of balance. I’m sorry if this caused confusion.
It’s not an imbalance because the (floating) prices etc. represent indifference/equilibrium at the point of exchange.
Private sector credit expansion can continue indefinitely if supported by policy
It was the then institutional structure that limited private sector credit expansion.
And understood you are defining an’unsustainable’ process as an imbalance.
Things always change over time as part of the cycle, but the system will adjust on the timescales that will happen.
Switching from export led to domestic consumption will not happen within one business cycle and probably not over several. It’s a much longer term thing and it can be absorbed.
“encourages the destruction of US jobs in the short term and imposes costs in the longer term?”
No, because it doesn’t need to and it doesn’t.
It is perfectly possible to have the domestic sector fully engaged and enjoying the benefits of imports from export led economies.
You are struggling with the concept that the tokens lock themselves out. Trying to use them too much rebounds on your own system and weakens it – particularly if your target is using offsetting mechanisms.
It would need a dynamic model to show that if you can’t (or don’t want to) see the feedback loop that is clearly there.
@Neil Wilson, I liked the last paragraph you wrote there.. do you have any recommendations for good reading on trade deficits/surpluses and importing vs exporting countries? A lot of the MMT articles I have seen are focused on the domestic government vs non-government sector, and I’m not sure that my level of economic understanding is sufficient to really synthesize the back and forth snippets on this thread into a coherent idea of whats going on at a global level.
– You agree a real transaction moving from seller to buyer.
– You agree a nominal transaction moving from buyer to seller.
Now normally the nominal transaction isn’t that complicated. You have dollars and the seller wants dollars. However when you have a foreign transaction then you have dollars and the seller wants Pounds. Therefore you have to get a third party involved to get that exchange sorted. And that is complicated.
Only when all parties and all the intermediaries in the way get what they want will the transaction complete.
And that means either matching with another transaction going in the other direction (the buyer has Pounds and the seller wants dollars), or finding somebody who wants to save dollars in exchange for Pounds. (Or some transitive sequence with intermediate currencies that achieves the same goal: dollars in, Pounds out).
There has to be some way to highlight that Congress is the culprit. The President’s reluctance to admit that the executive is at the mercy of the legislative branch is understandable, especially since the majority party in the House is made up of people who need/want to be led, but viscerally object to being led by a Democrat.
I think what we’ve got, especially in the House, is a body of people who need to be led, but want to be perceived as powerful and in charge and have a need to be punitive to feel good. Since the recent election was just barely not a disaster, they’ll feel more inclined than ever to punish the electorate. The only growth they are after is in their own influence and power.
How to explain that? It needs to be spelled out.
@Monica Smith,
The american people, in their infinite overall wisdom, desire a divided government. Obama a leader?? Maybe to a balanced budget.
@Vincent, If there is government by the people, then petty potentates are reduced to servants and parties (factions) serve no purpose. Their lack of enthusiasm for a populist agenda is to be expected.
The balanced budget is a gimmick. It was a gimmick when Gore mattered about it and is one now.
@Monica Smith,
you need to get your message to president obama. he has the podium, and he’s not furthering your agenda in the least.
Good presentation. Math is on her side, although I would disagree with her statement that we’re living below our means – sure, we have a large output gap, but we also have a huge trade deficit. In the short term she is right – we need to increase our budget deficits, but in the longer term we need to reduce our trade deficit and alter the distribution of income (much more than tax changes) so that saving desires are reduced and productive investment is increased. Of course I agree with her closing statement that it’s all about real resources.
According to my rough understanding of MMT, if there is unemployment, then we’re producing less than we could, and hence we’re living below our means. Is that wrong?
On the other hand, CDNDC, your take on the matter makes sense, too. If we aren’t producing enough and yet paying foreigners for our net imports from them, then we’re transferring financial assets to the foreigners. If the “we” here is the domestic private sector, then yes, “we” can be said to be living beyond our means on account of the fact that “we” are losing financially. But I think Kelton’s “we” comprised the domestic government and private sectors both. We’re living below our means because “our” government isn’t doing what it should: deficit spend enough to bridge the output gap, reach full employment.
@Nihat,
Your understanding of MMT is correct. I just disagree with the “imports are a benefit” position. This position essentially ignores that we ever have to pay back the foreign sector with real output. If we make this flawed assumption then Kelton pointing to the output gap as evidence of our “living below our means” makes sense. In my opinion the net of the two – the output gap minus the trade deficit – would be the true measure of “living beyond/below our means”. If the trade deficit is larger then we are living beyond our means. (Of course I may be wrong and the net still shows that we are “living below our means”) In this argument I am interpreting “living beyond our means” as meaning a standard of living (consumption of goods) above our total potential output (the means). If I take the position of debts incurred as showing “living beyond our means” then the trade deficit shows unequivocally that we are living beyond our means.
When you purchase real output using money do you consider yourself as benefiting and the other party as incurring a cost? Of course not, the trade occurred because both parties thought the exchange was fair. The “imports are a benefit” position is making this illogical argument – that one side gains while the other incurs a cost. Of course this could make sense if we assume we are ultimately going to confiscate the stored savings (or inflate it to nothing), but this causes even bigger problems
imports are obvious real benefits. the payment of dollars is a ‘nominal benefit’ for the seller.
the distinction is real vs nominal
so in exchange for exporting to us the seller of our imports takes our tax credits.
we are under no legal obligation to ever export anything.
@CDNDC, This position essentially ignores that we ever have to pay back the foreign sector with real output.
In what sense do we have to pay them back with real goods? The real goods only leave our shores if the producers of those goods are willing sellers. The foreign sector was willing to take dollars in exchange for the real goods they exported to us. The dollars aren’t IOUs for real goods that these foreign dollar holders can redeem any time they want. All they can do is to offer them to some seller of real goods, and the sale only happens if the seller wants the dollars at the negotiated price.
our ‘means’ include our ability to attract net imports
@WARREN MOSLER,
I re-read innocent fraud #5 (I first read it just over a year ago) and I still don’t buy the argument. I basically read the argument “we are under no legal obligation to ever export anything” as rejecting the medium exchange function of money. I don’t know how we could even enforce this even if we wanted to since, as you know, foreign investments are not all in Fed accounts. Are we going to suspend all nominal transactions in our economy if they tried to spend their nominal dollars? Should we ignore all nominal liabilities on balance sheets because there is “no legal obligation” to provide anything? You are a pioneer in how you have shown that many assumptions in neoclassical economics are flawed, but I believe you are making a very bad assumption to prove a point about trade. I almost think this is as misguided as my grad school professor of international trade assuming away unemployment, or my macroeconomics professor (who was working for the Fed) whose “innovation” was a model that had money just as a transactional friction. No one would export to the US if they thought they would get nothing in return. Our “means” to attract imports is based on the US’s productivity and ability to maintain the purchasing power of nominal claims. This would disappear the instant we said “we are under no legal obligation to ever export anything”. Sure, you make a good point that there are no guarantees that they will end up with a fair exchange given that money is not a perfect store of value, but the assumption they will get nothing doesn’t make any sense to me. Who’s in a better position – Japan with a huge store of money in foreign countries that could potentially help support their aging population in the future or the US in the opposite situation? If your base case is that the US will simply renege on this exchange and precipitate war and/or a period of isolationism then you should spell this out explicitly. You should drop this fraud and use some realistic assumptions about trade. Sure, this will cause MMT to change its tune on some issues, but I believe it will get it more credibility and support as a result.
export restriction are both legal and common
To CDNDC:
Foreign investors are still forced to spend the dollars in the American economy.
What are foreigners going to do? Spend it here, export it (a.k.a. import it back to their home countries), and kill demand for domestic goods in the process? C’mon…..
@WARREN MOSLER,
” Our “means” to attract imports is based on the US’s productivity and ability to maintain the purchasing power of nominal claims.”
Is it? Or is it the desire of the exporting countries to export their unemployment rather then deal with it themselves domestically?
I see a push by exporting countries, under the instruction of the sages at the IMF. I don’t see a pull.
The foreign central bank ‘assists’ their exporters by providing ‘liquidity’ in their own currency which allows exporters to get what they really want from the export trade – their own currency.
Which is why a good deal of ‘foreign savings’ ends up locked away at foreign central banks.
The dynamic function of international trade is to drain domestic currency circulation from import deficit countries and transfer it to ‘foreign savings’ in the central banks of foreign nations.
That will not resolve itself automatically by ‘market forces’. It has to be actively countered by the government sector offsetting the net-savings desires of the non-government sector.
@WARREN MOSLER,
Difficult to see how a country can just attract imports without a real attractor for their currency to the exporter …the attractor for the USD to an exporter is not the tax credit but more likely its use in purchasing Oil and other commos denominated and paid for in $$$$$ …
you can buy oil in any currency you want.
@WARREN MOSLER,
the ability to attract net imports, in the case of the US, must be based on the fact that US dollars held abroad somewhat keep their purchasing power to import from the US, if you follow the MMT logic that US dollars are just a US tax credit.
so there is a contradiction is saying that you must optimize your terms of exchange but there is no guarantee attached to the purchasing power of your currency. (not to mention – again – that most countries cannot finance their trade deficit in their own currencies)
if the rest of world wants to ‘save’ our dollars for any reason they ‘must’ net export to us to get them, right?
and worse case we have ‘balanced trade’ right?
so what’s the big deal?
@WARREN MOSLER,
“WARREN MOSLER Reply:
November 15th, 2012 at 8:05 am
export restriction are both legal and common”
So your base case is confiscation of foreign savings and the resulting war or isolationism. There are a number of problems with this – first, this would imply the US must be self-sufficient (since we would be cut-off from trade with this policy) which we are currently not and will not become so using MMT proposals. Second, the idea that we can enforce this export restriction is highly questionable – it’s not as if we can simply put officials at our ports stopping shipments to Japan since exports include services which can transported digitally (e.g. medical diagnostics, IT services, etc.). Further, why does this money need to be spent on goods & services that flow to the foreign country when they could be spent domestically by the foreigners (e.g. vacations to Disney, summer homes in Florida, medical tourism, etc.)? The point here is that there are many ways the foreign parties can obtain utility from these dollars (and which represent a real cost to the US).
I have simplified the reasons for foreign savings in US dollars, but I still contend that the main reasons are productivity (the US is the world’s largest economy not because it has the biggest population) and because the dollar is stable and best suited for official foreign currency reserves (other reasons I have excluded would be history or military power (ensuring stability)).
Yes, foreign countries like China are maintaining domestic employment using exports, but are we now going to assume that this will continue indefinitely? Look at trade flows over the last 50 years and tell me if this looks stable. The US used to have a trade surplus. Japan and China have demographic time bombs which are likely to change things.
Lastly, the arguments supporting “imports are a benefit” position is even more illogical when applied to countries other than the US. MMT needs to drop this position so that it’s other (valid) points are taken seriously.
my base case is to let foreigners accumulate all the dollar financial assets their hearts desire.
@WARREN MOSLER,
“my base case is to let foreigners accumulate all the dollar financial assets their hearts desire.”
I’ll interpret – Warren with his hands over his ears shouting the same point over and over again
This behavior reminds me of neoclassical economists when confronted with MMT ideas about monetary operations.
To reiterate, and as I’m sure you know, trade deficits are part of the current account which have a mirror image in the capital account. The capital flows represented in the capital account do not just accumulate in accounts at the Federal Reserve, but also flow into real asset claims in the US. This means that your short sighted response to trade deficits is even inaccurate – foreigners are not just accumulating financial assets due to the trade deficit but they are accumulating real assets as well. As Ramanan points out in the following link the US net indebtedness to foreigners is above $5 trillion, over 30% of GDP.
http://www.concertedaction.com/2012/06/27/u-s-net-indebtedness-above-5t-now/
If all policy makers took your stance on foreign trade and simply accommodated the foreign sector drain on aggregate demand by boosting government deficit spending we could in theory, and given enough time, find that a significant portion of our real assets in our own country are owned by foreigners. Sure, in this world we could still be very productive, but the issue would be that a large percentage of this output would flow to foreigners. And all this assumes that the government is smart enough to accommodate the AD drain, which is clearly not the case at present.
Now of course our current situation is nowhere close to this outcome, but your lackadaisical attitude about trade suggests that you have no problem heading in this direction, or again that you assume this can always be changed via confiscation of foreign owned assets. I argue that we are in fact burdening our children with debts to foreigners. It’s short term benefit for longer term cost.
You sometimes lament about how 401k savings accounts encourage savings and that this as a result requires higher deficit spending to offset. Why not have the same attitude about the other AD drain reflected in the trade deficit?
Actually, while I’m on the 401k issue – I actually disagree with you here as well. I believe there is a benefit with 401k accounts in that the savings are pre-tax and thus will be taxed at the income tax rate in affect at the time of their ultimate use. This aspect ensures that spending from this source of funds is impacted to the same degree as income earned in that future period. Thus this type of savings is different from post tax savings that, assuming we stay with our current income tax focused tax regime, yield inequalities. To clarify this further – say you earn your post tax savings under a 15% income tax regime and ultimately spend it when there is a 30% income tax regime (which was required due to AD levels at that time, per MMT recommendations). How is it fair that you get to keep 85% of your output while future period workers only get to keep 70%?
what’s the problem with non residents purchasing and owning real assets?
if the output flows to foreigners as you state, you are simply stating the trade balance has reversed.
‘heading in this direction’ is at worst heading towards balanced trade.
and i agree, exports are real costs.
and yes, if net exports are ever deemed a problem there are a variety of policy tools readily and legally available to act accordingly.
I don’t ‘lament’ about demand leakages. I always state they mean taxes can be that much lower.
And 100% of the real output always goes to those who are alive at the time.
“[…] trade deficits are part of the current account which have a mirror image in the capital account. The capital flows represented in the capital account do not just accumulate in accounts at the Federal Reserve, but also flow into real asset claims in the US.”
CDNDC, is this foreigners’ acquiring real assets happening because of their running trade surpluses against the US? Or, is it happening because foreigners are not in general barred from such acquisitions? Anything specific to foreign traders that specifically enables them to make such acquisitions? Other than their getting richer and better able to afford it, of course…
@WARREN MOSLER,
Correction – foreign direct investment is not an AD drain since it represents a spending flow in the US. So the entire magnitude of the capital account does not represent an AD drain. It does however represent increased foreign ownership of US assets.
Nihat – Similiar to MMT’s argument about taxes funding spending there is no direct connection between specific inflows and specific outflows. If foreign direct investment increased with everything else being constant the US$ would appreciate and bring the capital and current account back into balance. I would expect foreign investment in the US to increase with rising wealth in other countries. I will defer to others on this point since I am no expert in international economics.
@WARREN MOSLER,
“Similiar to MMT’s argument about taxes funding spending there is no direct connection between specific inflows and specific outflows.”
Please disregard. I was trying to get to the point that both sides (capital/current) are moving somewhat independently with the exchange rate equating things. Specific trade flow receipts in US$ of course go somewhere. Foreign direct investment could be stemming from income from assets in the US (the other part of the current account)
@WARREN MOSLER,
“WARREN MOSLER Reply:
November 16th, 2012 at 9:31 pm”
Thanks for your thoughtful reply. A few comments are below:
“what’s the problem with non residents purchasing and owning real assets?”
The problem with non-residents owning US based real assets is that they (not US residents) receive the future benefits. In addition, the yield on real assets is usually higher than the yield on government securities which therefore amplifies the current account deficit (and which could potentially “fund” trade surpluses with foreign countries).
“if the output flows to foreigners as you state, you are simply stating the trade balance has reversed.”
Correct – I contend that this is what is going to happen unless, as you state, we decide to expropriate foreign assets (and of course legally in the US since we control the laws here – but what about international law/agreements (like the WTO) and potential for retailation?)
“‘heading in this direction’ is at worst heading towards balanced trade.”
No, “heading in this direction” was referring to you not caring (and even cheerleading) that an imbalance is being developed which when reversed will impose costs. At worst is not balanced trade but massive trade surpluses.
“I don’t ‘lament’ about demand leakages. I always state they mean taxes can be that much lower.”
Sorry, my mistake then. However, do you concur with the benefit I outlined with 401k’s (and in fact any pre-tax investment vehicle)?
“And 100% of the real output always goes to those who are alive at the time.”
Agreed, although I fear that current trade deficits will force some of this real future output to go foreigners.
I know my efforts to argue these points are probably a waste of time, but I feel that whatever very small chance I have to influence things is worth the effort. You have a number of very important points to convince people, other economists and policy makers about (e.g. monetary realities), yet I think the baggage of the “imports are a benefit” position is making it less likely you will be successful. The benefit of showing the public, for example, that bond vigilantes can never hold a currency issuer hostage is huge (nice article today BTW), yet I struggle to see any benefit from trying to convince people that “imports are a benefit”. If there is a benefit please elucidate it for me.
Thanks again for spending the time reading/responding to my posts and for doing so in such a polite and professional manner. Many bloggers are not so kind when challenged. I apologize if you don’t feel I was as respectfull.
Best I can determine there is no such thing as a nation being forced to run a trade surplus. Any examples short of war reparations or something of that sort? And to my knowledge the WTO spends its efforts to get nations to reduce import restrictions. And nations that have historically had balance of trade ‘problems’ have not, to my knowledge, ever been physically forced to run surpluses?
The real benefit to one person spending less than his income accrues to those spending more than their incomes. Real terms of trade, again.
And all ears with regard to someday being somehow ‘forced’ to net export, thanks.
“that an imbalance is being developed which when reversed will impose costs”
There is no imbalance. Exporters supplied goods and got the tokens they wanted in return. That’s perfectly balanced.
You are treating the external sector like an Old Testament God – able to impose its will without consequence to itself.
It doesn’t work like that.
The economies in the external sector are able to export to the US because those economies are taking dollars and providing their own currency – which is what exporters really want so they can exist in their own currency area. That happens via various liquidity provision mechanisms.
So for there to be a ‘reverse’ the exporters have to stop wanting to export – completely. And that doesn’t happen overnight. It takes a fair while to switch to domestic consumption.
So the external sector can’t use the dollars without destroying themselves.
Which they’re not going to do.
The fear here is the same one that worries about nuclear war and then campaigns for unilateral nuclear disarmament.
@WARREN MOSLER,
Neil Wilson – The sterilization operation that you discuss is not news to me. I have been reading about it for a long time but never with the assumption that the resulting foreign currency reserves are not an asset of the foreign government and will not be spent at some point. Do you perhaps have some inside information? I guess you disagree with the possibility that countries are accumulating foreign currency reserves to protect their pegs (a lesson from the Asian Financial crisis)? I guess you also believe that public statements from foreign governments expressing a desire to go to SDRs as being lies as they have no desire to ever obtain value from their foreign currency reserves?
Even if you believe all these things there is another problem in your argument – the facts don’t support it. Look at the IEP report in the link I posted from Ramanan. Official foreign currency reserves, where the sterilization processes you discuss would remain if it was as you say, are a small fraction of foreign owned financial assets.
Lastly, your argument is essentially arguing that foreign countries (who are not dumb) have decided to do a job guarantee type program with the intent of showering output on other countries instead of benefiting their own populations. China would be much better off politically if they gave their exports to their own people. The only logical reason they do not is because they see a bigger benefit from holding these foreign currency reserves. China and Japan both need foreign owned natural resources and have rapidly aging populations. Both of these issues can be assisted via foreign currency reserves. And yes, I’m not thinking that the trade balance will shift anytime soon but instead fear it will happen in the life of my children.
yes, they get some psychic value from fx reserves. more power to them…
😉
@WARREN MOSLER,
To clarify my sterilization point – I probably should have used “foreign currency intervention” instead of “sterilization” since the later does not always occur and is just the money supply controlling step regardless. From wikipedia:
“Over the first few years of the 21st century, China was able to make a good yearly profit on its sterilization operations, estimated at close to $60 billion a year. By about 2008, however, the country began to make a loss, estimated at about $40 billion by 2010. Other countries also found sterilization more costly after 2008, relating to expansionary monetary policies adopted by advanced economies hit by the financial crisis, most especially the United States. which meant relatively low interest rates were available for their foreign assets.[7] The increased losses from classic open market operations since 2008 have seen China increasingly use an alternative method for preventing monetary expansion – the raising of the Reserve requirement for its larger banks.[8][9]
In contrast to interventions against currency depreciation, there is no inherent limit on interventions aimed at preventing appreciation. If a central bank runs out of domestic currency to buy foreign reserves, it can always print more. There can be political pressure from other nations if they feel a country is giving its exporters too much of an advantage, at the extreme this can escalate to currency war. There can also be political pressure domestically if commentators feel too big a loss is being made by the sterilisation operations.”
http://en.wikipedia.org/wiki/Sterilization_(economics)
@WARREN MOSLER,
“And nations that have historically had balance of trade ‘problems’ have not, to my knowledge, ever been physically forced to run surpluses?”
So if I find an example you’ll change your tune regarding “imports are a benefit”? I’ll start researching then. Thanks
@WARREN MOSLER,
“And nations that have historically had balance of trade ‘problems’ have not, to my knowledge, ever been physically forced to run surpluses”
Warren, apparently, has never heard of IMF. But this is a lost case, CDNDC. Do not waste your time.
Right, every time a nation with a trade deficit experiences any inflation the IMF invades demanding restitution for holders of the currency who lost purchasing power.
But you know that. Thought you were going to another website, thanks.
“Official foreign currency reserves, where the sterilization processes you discuss would remain if it was as you say, are a small fraction of foreign owned financial assets.”
The current system is to swap reserves for bonds. Are you suggesting they don’t actually hold any of these?
And if you are what are you worrying about?
@WARREN MOSLER,
Sergei_new – Thank you. You would be the third blogger with similiar advice.
Neil Wilson – I was referring to foreign currency reserves, not reserves at the Fed – another example of a term with multiple meanings. You actually made my point. If foreign parties didn’t care about the proceeds from their trade surpluses they would likely hold all of their funds from trade surpluses in accounts at the Federal reserve (in savings or checking accounts as Warren would say). Look again at the IEP report – just over $5 billion of $25 billion in total assets are at the Fed as official foreign currency reserves (and like you said the vast majority in higher yielding treasuries). Most foreign assets are not official assets but “non-official” (“private”) assets. It is simply silly to state that there is no imbalance and that foreign parties have simply written off their proceeds from trade surpluses. Have you heard of state owned Chinese companies buying up natural resource based firms around the world? How do they pay for these firms?
It’s crazy to me that MMT would welcome the importing of unemployment (trade surpluses), especially knowing that the government will likely not offset it fully with deficits.
That last line is trolling
Take it somewhere else thanks
@WARREN MOSLER,
WARREN MOSLER Reply:
November 18th, 2012 at 1:38 pm
“That last line is trolling
Take it somewhere else thanks”
Understood (although I disagree). I will not make any further comments.
in the short term we need to keep our budget deficits at full employment levels,
and we also need to optimize our real terms of trade. see the 7dif on this website
@WARREN MOSLER, But the people who matter are wedded to the household analogy. They have barricaded themselves behind closed minds and refuse to come out or to allow any intrusion. If we could get you or Dr Kelton into the WH there might be a small chance for someone to wake up and at least say “Huh?”.
I’ve read through your trade deficit chapter in the 7DIF and I’m thoroughly confused as to what reason any country would have for exporting anything to the US, or to any country in general that it runs a big trade surplus with.. there has to be some economic gain there.
I assume at the micro level most Chinese companies, for example, would exchange the dollars they get from their exports for yuan and just spend that domestically, and so the government just ends up with all the FX reserves? Maybe some major contracts the government have can be settled in dollars, etc.
@jerry, The economic gain for say China is two fold – it does use US dollars – just not all of them. It uses those dollars to buy oil, and other items it needs. Serving the US market allows it to upgrade its technology, which it can then also use to serve its own population. Without that export market, it would not have had access to that technology.
The only downside for the US when it relies too much on imports, is if did not retain the capability to shift back to domestic manufacturing. That can be a real risk as people with skills retire, or die without passing those skills to someone else.
yes, china uses some of its export revenues for imports, and it saves the rest which accounts for the net exports
@Clonal Antibody,
Thanks for the reply. Your second paragraph there was also one of my concerns. It seems that as the world becomes more and more globalized, and large countries like China continue to grow, they will have cheaper labor pricing more and more of our industries and jobs out of competition. Fine if you’re a highly educated, specialized worker here in the US, but not so much for “Joe Six-pack”. Seems like we’ll end up with a lot of people on the MMT jobs guarantee program if that trend continues.
for a given size govt the trick is to keep taxes low enough so the transition job pool is kept at a minimum
@jerry, Assume that humans like to accumulate, transform matter and produce useful artifacts, much as birds like to build nests and beavers build dams. In other words, assume that it is in the nature of man to create more than he can use himself. Then, if the surplus isn’t useful to and used by another human, it will go to “waste” –be consumed by rodents or rot. So, trading or giving away one’s surplus is actually a waste-avoidance mechanism.
But that can’t be because economic theory avoids waste like the plague. Economic behavior is driven by demand because that’s what the theorists felt in their gut when the teat was denied.
I actually like the household as the microcosm of economic behavior absent the use of money. But, getting a household hooked on using money is not what makes it an economic unit. Trade and exchange over time, inter-generationally, is what does it. And it’s exactly this temporal aspect which our economists still seem incapable of modeling.
they are trying to drive exports
@WARREN MOSLER,
To put it another way, they are importing foreign demand for their domestic output, which lowers their output gap/unemployment.
and lowers real terms of trade
😉
@PJ Pierre,
That too.
@ Neil Wilson in comment thread 2:
“The dynamic function of international trade is to drain domestic currency circulation from import deficit countries and transfer it to ‘foreign savings’ in the central banks of foreign nations.”
Well said. This would seem to answer some of the “why’s?” being raised here. Certain people benefit from running trade surpluses.
“That will not resolve itself automatically by ‘market forces’. It has to be actively countered by the government sector offsetting the net-savings desires of the non-government sector.”
Nice…but there are risks to this, no? I’m thinking simmering unrest and anxiety in China, for example. At some point, their domestic consumers and wage earners will demand to share in the gains of others, as seems to be happening.
@Art Patten,
Agreed.
very well stated Neil.
CNBC coverage of the presentation:
http://www.cnbc.com/id/49858136
@CDNDC,
“Look again at the IEP report – just over $5 billion of $25 billion in total assets are at the Fed as official foreign currency reserves (and like you said the vast majority in higher yielding treasuries).”
You haven’t understood the MMT position then. I suggest more reading.
All MMT is saying is that the *government sector* should not reward holdings of *government sector* financial assets, and that it shouldn’t be policy to worry about them per se.
There are more important things to worry about – like making sure there are enough domestic jobs.
Foreign holdings of *private* financial assets are not a concern because the bankruptcy process can eliminate those savings. They don’t really factor into the analysis.
You have to be very careful not to confuse the gross figures with the “net savings’ position with the *government sector*” MMT is analysing.
‘ It is simply silly to state that there is no imbalance and that foreign parties have simply written off their proceeds from trade surpluses.’
Never said anything about writing off proceeds. You dreamt that up.
And there is no imbalance because the books balance. That is an accounting fact.
” Have you heard of state owned Chinese companies buying up natural resource based firms around the world?”
Once more. That is a gross individual position. MMT is talking about the net aggregate position. There is a bunch of work to get from one to the other.
Follow the transaction chain through to its logical extinction – which is that sellers need ultimately local currency to pay wages and taxes.
Local currency exchanges don’t happen by magic and in an export led economy you would quickly run out of circulation, which would cause export sales to cease.
The aggregate tendency in an export led economy is for the local central bank to support their local exporters by taking sound foreign financial assets and providing local currency to satisfy demand. That is after all the function of a ‘lender of last resort’.
@Neil Wilson,
“All MMT is saying is that the *government sector* should not reward holdings of *government sector* financial assets, and that it shouldn’t be policy to worry about them per se.”
I understand this position, but it was not what I was talking about. I was just addressing your argument that foreigners were just accumulating funds at the Fed via official intervention by the central banks.
“Foreign holdings of *private* financial assets are not a concern because the bankruptcy process can eliminate those savings. They don’t really factor into the analysis.”
What? Are you arguing that Chinese state owned firms are going to go bankrupt? Or perhaps this is a method to confiscate their assets?
“Never said anything about writing off proceeds. You dreamt that up”
You said – “There is no imbalance. Exporters supplied goods and got the tokens they wanted in return. That’s perfectly balanced.”
The only way there’s no imbalance in this scenario is if the foreign central bank writes-off or ignores their official currency reserve holdings. I have argued that they will not.
Regarding the rest of your reply – I have not argued that some foreign central banks do not sometimes intervene in the F/X market by puchasing foreign currency and providing domestic currency to their exporters. My argument is 1) that the foreign central banks use, or will use, the resulting official foreign currency reserves (for many reasons, a few of which I outlined) and 2) that most of the US$ funds received from trade surpluses are not publically owned but instead owned by the exporting private firms (or semi private state owned firms) who will one day use the US$ funds.
If the status quo (US trade deficits of ~$500 billion) remains in place what do you think the IEP report will look like in 10 years?
Look at the first document linked here:
http://www.census.gov/foreign-trade/statistics/historical/
“There are more important things to worry about – like making sure there are enough domestic jobs.”
Do you still not understand my point that the “imports are a benefit” position encourages the destruction of US jobs in the short term and imposes costs in the longer term?
An imbalance is at a point in time, which I’m sure you know.
@WARREN MOSLER,
First, I understand that the accounting always balances. So yes, it is not an imbalance in this sense.
However, MMT often talks about how private sector indebtedness can not increase forever, and in this sense there is an imbalance – something needs to change. This is the sense that I’m saying there is an imbalance. Not because foreign governments have financial constraints like households, but because there will be demographic and other changes that cause the change. One reason why there will be a change is the other part of the current account – income from foreign holdings of US$ assets will increase as the holdings increase.
I guess I should have used the term equilibrium instead of balance. I’m sorry if this caused confusion.
It’s not an imbalance because the (floating) prices etc. represent indifference/equilibrium at the point of exchange.
Private sector credit expansion can continue indefinitely if supported by policy
It was the then institutional structure that limited private sector credit expansion.
And understood you are defining an’unsustainable’ process as an imbalance.
Things always change over time as part of the cycle, but the system will adjust on the timescales that will happen.
Switching from export led to domestic consumption will not happen within one business cycle and probably not over several. It’s a much longer term thing and it can be absorbed.
“encourages the destruction of US jobs in the short term and imposes costs in the longer term?”
No, because it doesn’t need to and it doesn’t.
It is perfectly possible to have the domestic sector fully engaged and enjoying the benefits of imports from export led economies.
You are struggling with the concept that the tokens lock themselves out. Trying to use them too much rebounds on your own system and weakens it – particularly if your target is using offsetting mechanisms.
It would need a dynamic model to show that if you can’t (or don’t want to) see the feedback loop that is clearly there.
@Neil Wilson, I liked the last paragraph you wrote there.. do you have any recommendations for good reading on trade deficits/surpluses and importing vs exporting countries? A lot of the MMT articles I have seen are focused on the domestic government vs non-government sector, and I’m not sure that my level of economic understanding is sufficient to really synthesize the back and forth snippets on this thread into a coherent idea of whats going on at a global level.
@jerry,
I think the whole thing needs a lot more work.
But the basic transaction works like this:
When you want to buy goods and services:
– You agree a real transaction moving from seller to buyer.
– You agree a nominal transaction moving from buyer to seller.
Now normally the nominal transaction isn’t that complicated. You have dollars and the seller wants dollars. However when you have a foreign transaction then you have dollars and the seller wants Pounds. Therefore you have to get a third party involved to get that exchange sorted. And that is complicated.
Only when all parties and all the intermediaries in the way get what they want will the transaction complete.
And that means either matching with another transaction going in the other direction (the buyer has Pounds and the seller wants dollars), or finding somebody who wants to save dollars in exchange for Pounds. (Or some transitive sequence with intermediate currencies that achieves the same goal: dollars in, Pounds out).