The International Dimensions of Currency Autonomy

By Brett Fiebiger, Ph.D

Modern economies operate on fiat monetary systems with an accent on plural. Anyone who takes a look at policymaking decisions around the global economy will soon observe that there seems to be substantial differences in the ability of policymakers to determine macro policies… why? In this post I will seek to provide some answers. The gist of it is that there are differing currency regimes in the global economy and macro policy autonomy exists on a spectrum of heterogeneous experiences.

The Currency Autonomy Spectrum

The term autonomous currency issuer is defined here as the degree of independence to which national policymakers can determine macro policies and development strategies. The concept is not a binary schema where a nation either operates on a wholly “autonomous currency” or on a wholly “non-autonomous currency”; instead, it exists on a scale of heterogeneous experiences where the extent to which a nation’s currency is used as international money plays some part in proceedings. Table 1 identifies seven distinct regions on the basis of four differing aspects of currency autonomy. The key points are that international currency status matters to currency autonomy along with domestic institutional practices especially in the peculiar and illogical case of Euroland.

 

Table 1: Differing Currency Regimes

Region / Countries

Utilised as an Reserve Currency*

Overcome Domestic Original Sin

Overcome International Original Sin

Ability to Monetarise Debt

A / United States

Yes

Yes

Yes

Yes

B / Japan, UK & Switzerland

Yes/Partial

Yes

Yes

Yes

C / Other Advanced Economies

Limited

Yes

Partial

Partial

D / Developing Economies

Limited

Partial

Limited

Partial

E / Euroland

Yes/Partial

Yes

Yes

Partial/Limited

F / Dollarised Economies

No

Limited

No

Limited

* Partial usage is reported for Regions B and E because they do not supply either the key reserve currency or invoicing currency for major commodities (especially oil).

 

Historically, prior to the adoption of fiat monetary systems, the ability of national policymakers and private agents to mobilise domestic resources was constrained by the amount of ‘precious’ metals that could be dug out of the ground. John Maynard Keynes decried ‘gold as barbarous relic’ in respect to its use as an underlying monetary asset because of the impetus to deflation. If you know or happen to meet any of the “gold bugs” still agitating for a return to the gold standard please remind them of the deflationary morass that was the Great Depressions of the 1890s and 1930s.

So while all nations now have fiat money only a few select nations can use their domestic currency to make international payments. Unsuccessful attempts to defend fixed exchange rate pegs have played some part in the more serious external financial crises such as the 1997/98 East Asian crisis. There is plentiful evidence that it is difficult to defend formal or informal pegs without ‘war chests’ of reserves. However, for developing countries, the adoption of a floating currency may not expand policy space that much. This is due to the burden of “original sin” and also because global capital is so dysfunctional at present (with the global investors tending to demand macro policy austerity from developing countries experiencing balance-of-payment difficulties).

While the adoption of freely or managed floating exchange rates can offer flexibility the real issue when it comes to currency autonomy is the currency denomination of external liabilities. Both the 1980s Majority World debt crisis and the 1997/98 East Asian crisis pivoted much less on matters relating to the ‘fixed versus floating’ debate and much, much more on the currency denomination of external debts. These nations suffered immense economic and social costs because their debts were contracted in a currency that domestic policymakers could not freely print. Indeed, when a nation has a majority of its external debts and import bills payable in foreign-currencies, exchange-rate depreciation actually worsens their plight by increasing the value of external liabilities relative to the domestic currency unit. The currency denomination of external liabilities is more decisive to the subject an of autonomous currency issuer than whether the exchange rate is pegged or floating.

The “original sin” hypothesis of Hausmann and Panizza (2010) refers to two domestic situations: (1) an inability to borrow abroad in the local currency; and, (2) a relative inability to issue long-term, fixed-rate debt, even domestically. These two aspects of currency autonomy are labelled in Table 1 respectively as international and domestic. From the late 1990s there was progress on overcoming domestic original sin at least for the major emerging market economies (EMEs). Domestically-issued local currency debt could provide a more stable funding source for EMEs than debt issued externally in foreign currencies. Further, a major advantage of local currency debt is that it does not increase in value when the currency depreciates, unlike debt issued in foreign currencies. There is reason not to overstate these developments as progress on overcoming international original sin remains modest.

In 2008 just over 60% of the outstanding external debt of developing economies was denominated in US dollars, 23% in euros and another 10% in yen. A major pitfall of foreign-currency debt is that it exposes the economy to the possibility that the central bank may have insufficient reserves to settle the debt along with any import bills payable in foreign currencies. Hausmann and Panizza (2010) report that currency mismatches for developing economies declined significantly during 2000-2008 due primarily to reductions in external debt levels and growth of reserve holdings. Attenuation in international original sin accounted for one-tenth of the decrease in aggregate currency mismatches (measured in simple or weighted averages). Thus, the authors concluded that lower mismatches reflected abstinence from financial globalisation, not redemption from international original sin.

Neoliberals neglect to discuss “original sin” altogether or attribute it to ‘faulty’ domestic policies. Financial Times columnist, Martin Wolf, is an example of the latter. The international original sin burden is not only about the difficulties that governments have in issuing local-currency debt in external markets but also the private sector. The example of Australia is instructive. Australia ticks all the boxes that neoliberals like Wolf would recognise as a well-managed economy (e.g. sophisticated investor base, established record of macro stability, ‘private’ central bank and a government with a low debt-to-GDP ratio). Over 2000-2010 the share of Australia’s gross external debt contracted in foreign currencies averaged around 60%. Why did Australia not issue a majority of its external debt (let alone an overwhelming majority) in the local currency? International origin sin appears to be more a product of ‘path dependency’ than domestic policies. Advanced economies that do not issue five major international currencies (US dollar, euro, yen, pound and Swiss franc) are also subject to international origin sin though to a lesser extent than developing economies. These factors suggest that the practice of contracting external debts in only the “strong” currencies was the product of little thought with the advantages of incumbency favouring a select group of advanced economies.

So what can be done about the burdens of domestic and international origin sin? In respect to overcoming the former the development of the financial sector is vital. The transition from a developing economy to a developed economy requires deep domestic credit markets so that economic growth can be driven ever more by domestic demand rather than export dependency.

(Most of the categorisation in Table 1 should be self-evident. One aspect that requires clarification is the ‘ability to monetarise debt’. I use the term monetarise in respect to public debt and private debt. Consider that the capability of the central bank to directly monetarise local-currency debt via outright purchases is limited for the Euroland member governments and also for economies subject to domestic and international origin sin but for different reasons. In Euroland the limitations are ‘self-imposed’ whereas the constraints on developing-country policymakers are imposed more by external factors (i.e. the threat of capital flight and comparatively high proportion of debt stocks denominated in foreign currencies). Also, unlike Euroland, countries subject to international origin sin cannot monetarise external liabilities either directly or indirectly. For these countries increases in domestic liquidity do not augment the supply, or directly alter the price, of money that can be used to meet foreign-currency external obligations. This means that even if countercyclical macro policies are able to be implemented they are likely to less expansionary in such economies by comparison).

The Special Status of the Issuer of the “Key” Currency

The circuit of international money begins when the centre country runs a balance-of-payments deficit (Costabile; 2010). This means that the USA has a special status in the global economy due to its role as the issuer of the “key” currency. It is for this reason that the USA sits atop the hierarchy of currency autonomy in Table 1. The macro policy constraints on the centre country are quite different to those on all other nations that cannot ‘benignly neglect’ the external position (Ocampo; 2007).

There is growing appreciation that the dollar’s global role and persistently large trade deficits run by the centre country are interconnected. When foreign central banks recycle dollar receipts gained from trade back into US Treasury debt this impedes exchange rate movements that would otherwise help to correct the imbalance of trade. The foreign sector is not the “source” of US dollar receipts though it can recycle these receipts back into the United States. Indeed, contrary to the concerns often reported in the mainstream media and espoused by neoliberal orthodoxy, the centre country’s external deficits do not “absorb” foreign savings that exist independently of US external demand. That foreign agents do provide considerable financing for US federal budget deficits does not ‘in and of itself’ mean dependence on foreign saving: the Fed can always buy T-bonds with new money.

A remarkable feature of the persistently large external deficits run by the United States beginning in the 1980s is the large disconnect between the flow and stock measures of US external borrowing especially during the period 2003-2007 (see Figure 1). The sum of current account balances from the beginning of 2003 through to year-end 2010 denotes, as an accounting identity, that the world’s richest nation received a net flow of foreign savings equal to $4.93 trillion (which is around one-third of US GDP in 2011). It follows then that the US net international investment position should have deteriorated by a comparable degree; yet, it deteriorated by only $0.44 trillion from -$2.41 trillion at the start 2003 to -$2.85 trillion at year-end 2010. In a puzzlingly way, the official statistics indicate that there is a large $4.49 trillion discrepancy between the flow and stock measures of the US external balance sheet. Stated differently, the US net international investment position at year-end of 2010 was 91.1% less than the amount of savings received by the USA since 2003, which points to a disquieting observation that the centre country can ‘borrow without liabilities’ on a colossal scale. This ‘borrowing without liabilities’ puzzle is sometimes called the “exorbitant privilege” and can be attributed to the following unique set of conditions enjoyed by the centre country:

1)      Receives a liquidity discount (interest rate premium) on external borrowings due to foreign nations amassing its currency (and government debt) for trade invoicing, anchor peg and reserve assets;

2)      Enjoys preferential treatment from international investors due to the ‘self-reinforcing’ perception that its government debt is the “safest” asset;

3)      Receives a ‘price subsidy’ on import purchases and foreign asset acquisition due to the ‘artificial’ inflation of its exchange rate (related to points (1) and (2));

4)      Runs balance-of-payment deficits without depleting its reserves of international money (i.e. the central country issues international money);

5)      Runs balance-of-payment deficits without necessarily experiencing a reduction in domestic liquidity due to the ‘automatic sterilisation’ of currency outflows by foreign central banks;

6)      Enjoys countercyclical wealth effects on the external balance sheet due to the currency mismatch in its foreign liabilities (denominated nearly exclusively in the domestic currency) and foreign assets (denominated mainly in foreign currencies) such that domestic currency devaluation generates net capital gains (thus shifting some of the brunt for external adjustment onto creditor nations).

7)      Is able to ‘lever up’ the external balance with high-yielding (valuation-friendly) investment categories (i.e. portfolio equity and direct investment) because it has no need to accumulate foreign currencies merely to participate in the global economy (or to safeguard against the Global Casino and the IMF) whereas other countries do (especially those subject to the burden of international ‘origin sin’).

What should one make of the ‘borrowing without liabilities’ discrepancy? It suggests that US external deficits are more sustainable than traditional approaches to external sustainability which assume symmetric returns on gross foreign assets and liabilities and, hence, that the centre country has an asymmetric capability to incur external deficits relative to other economies. (Curcuru, Dvorak and Warnock (2008) argue that the total return differential received by the centre country on its international portfolio is overstated due to the treatment of the ‘other’ valuation channel as implied capital gains when this channel is more likely to reflect statistical errors. Their position centres on the ‘other’ valuation channel which declined substantially in importance during 2003-2010. It is also the case that the US external balance sheet has become progressively more leveraged after 1980 (e.g. the rising weight of portfolio equity and direct investment relative to debt in US foreign assets) and that the prospect for a prolonged relatively low global interest rate environment will benefit the centre country given its large negative net position in the interest rate sensitive ‘debt’ category).

America’s trade deficits are a motor of global demand though they also generate internal distortions by depressing export and import-competing industries. A trade deficit represents a leakage of aggregate demand and if sustained over a prolonged period can undermine (i.e. “hollow out”) export and import-competing industries. Yes, the USA has its so-called “exorbitant privilege” from issuing the “key” currency, but the lifeblood of an economy is its productive capabilities and not consumption excesses. The persistently large trade deficits run by the United States was a factor in the ‘distorted’ expansion after the 2001 recession. As Nicholas Kaldor (1971) observed on what at the time was a burgeoning global dependency on US trade deficits: “If continued long enough it would involve transforming a nation of creative producers into a community of rentiers increasingly living on others, seeking gratification in ever more useless consumption, with all the debilitating effects of the bread and circuses of Imperial Rome [quoted in D’Arista, 2009]

The crisis suggests that the centre country is exhausted and that alternative sources of demand in the global economy are duly needed. Evidently, there is some merit to the idea that America’s external deficits sponsor growth and export-orientated industrialisation elsewhere, though it makes little sense to speak of surplus developing countries taking a “free ride” on the centre country’s external demand when: (1) the international payment system is dollar-centric (such that amassing dollar reserves is not voluntary but a prerequisite merely to participate in the global economy); (2) the global financial system is dysfunctional compelling “self-insurance / neo-mercantilist” policies in the periphery in order to regain macro policy autonomy; and, (3) there are no well-functioning collective insurance mechanisms (i.e. ‘war chests’ of reserves are needed to preclude a resort to IMF-bailouts attached to exploitative neoliberal structuring and self-defeating macro austerity).

There are also inequitable dimensions from the centre country being able to inject external demand by issuing international money ex nihilio when most other countries cannot. The centre country make ‘loans’ or pay for things by issuing international money while most other nations must instead earn or borrow money of a type they do not freely issue just to participate in the global economy. The not insignificant total return differential (i.e. the income and valuation gains on gross assets expressed as a percent of the totals outstanding minus that on gross liabilities) received by the centre country on its international portfolio went into overdrive during 2003-2010 (Figure 2).

In order for the richest country to enjoy an “exorbitant privilege” other countries (typically poorer) must be paying the bill. Consider the somewhat paradoxical instance of global capital flocking to the United States after the collapse of Lehman Brothers in 2008 when it was clear only that Wall Street was in serious trouble. For one nation to be perceived by financial markets as a global “safe haven” others must be at the receiving end enduring a self-defeating ‘flight to safety’ for reasons that bear little if any relation to the underlying economic “fundamentals”. That seems a little unfair… and the ‘borrow without liabilities’ puzzle… well that might be a reason why Washington policymakers are less-than-enthusiastic about the recommendation in the 2009 ‘Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System’ (headed by Joseph Stiglitz) to have the IMF issue Special Drawing Rights more frequently in order to provide a supplementary reserve asset (and a truly international one at that).

The Peculiar and Illogical Case of Euroland…

Developing economies do not, of course, choose the burden of international original sin. When it comes to explaining why Euroland sits near the bottom of the hierarchy of currency autonomy the most peculiar thing is that policymakers have chosen that path. When the founding fathers designed the euro system they did so in accord with the neoliberal “wisdom” that ‘big’ crises do not happen and that fiscal policy is all but irrelevant. Some of the structural problems in Euroland are: (1) the Maastricht Treaty restrictions that aim to limit budget deficits to 3% of GDP and public debt volumes to 60% of GDP; (2) the so-called “excessive deficit” procedures; and, (3) the prohibitions on the European Central Bank buying the debt of member governments in the open market.  The latter is particularly important in the ongoing Euroland tragedy where the death of economy is occurring in slow-motion and by a million cuts. Financial markets believe and have good reason to believe that the US Federal Reserve will always be there ready and willing do whatever it takes to stand behind the US Treasury when/if needed: there is no such confidence about Euroland.

Making matters worse is that Euroland policymakers are drawing the wrong conclusions that the rules tying the hands of fiscal policy are not tight enough. It is very difficult to foresee the long-term survival of the euro currency unless the European Central Bank is given a mandate to act as the government’s banker and buy public debt in the open market. There is also a need for an agreement on a collective fiscal authority/mechanism to transfer funds between surplus and deficit members (especially since a single currency entails that changes in exchange rates are not an option to facilitate internal rebalancing). One can only hope that Washington policymakers do not foolishly tie their own hands on the fiscal front: Euroland is pursuing that miserly path and it is not working.

 

 

References

 

Costabile, L., ‘The International Circuit of Key Currencies and the Global Crisis’, Workingpaper Series No. 220, Political Economy Research Institute, University of Massachusetts Amherst, March 2010.

S. Curcuru, T. Dvorak and F. Warnock, ‘Current Account Sustainability and Relative Reliability’, International Finance Discussion Papers No. 947, Board of Governors of the Federal Reserve System, 2008.

D’Arista, J., ‘The evolving international monetary system’, Cambridge Journal of Economics, vol. 33, 2009, 633-52.

Hausmann, R., and Panizza, U., ‘Redemption or Abstinence?’, CID Working Paper No. 194, Harvard University, February 2010.

Ocampo, J., ‘The Instability and Inequities of the Global Reserve System’, United Nations DESA Working Paper No. 59, November 2007.

United Nations, ‘Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System’, Final Report, United Nations, New York,  September 2009.

Wolf, M., Fixing Global Finance, John Hopkins University Press, Baltimore, 2008.


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61 Comments on "The International Dimensions of Currency Autonomy"

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FDO15
4 years 11 months ago

By the way Dr. Fiebiger, thanks for the enjoyable read. Are you working with the MMRists? If so, I hope to read more like this. Thanks.

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BF
4 years 11 months ago

FDO15 I have had some conversations of late with MMRists and would add that I found JKH’s recent post particularly illuminating.
http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/

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BF
4 years 11 months ago
My 2:14am was meant for JKH. I am replying to both comments here FDO15. I think drop the tone a little bit though I am mot sure why Scott felt the need to comment on the above post. Surely one is allowed to discuss a subject without relaying what everyone else has said on it. Nor am I sure that Scott’s colleagues have been saying some of the things expressed in my short post. As one example Wray (2006, p. 21) writes: “Those who argue that there is no ROW demand for peso-denominated assets are mistaken, as a current account deficit is proof that there is an offsetting capital account surplus—taking the form of foreign holdings of financial and real peso-valued assets.” He seems unaware that external deficits can be financed by incurring foreign-currency debts. Wray (2006, p. 21) also tells us that: “The USA dollar has value outside the USA because USA taxpayers need the currency.” I think foreign central banks hold onto vast amounts of US T-bonds because the cross-border payment system is dollar-centric and because many commodities (especially oil) are priced in dollars. http://www.cfeps.org/pubs/wp-pdf/WP51-Wray.pdf In another paper Wray (2004, p. 13) argues in respect to the international sphere that “seigniorage income” is sometimes equated to the total quantity of net imports”. I have never heard anyone else say that except him and cannot make any sense of it given that the term seigniorage refers to the (complex) benefits a money-issuer gets when others utilise that money. In both of the referenced papers a case is made that the USA is not special due to “dollar hegemony” (Wray uses the term without defining or explaining it) so make of that what you will. If Scott wants to infer that everything he and his colleagues have written is on… Read more »
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FDO15
4 years 11 months ago

Here’s Fullwiler huffing and puffing. It’s obvious he didn’t even read the full post. I am pretty sure this post didn’t even mention MMT did it? What’s this guy’s problem? Does he not care about his public reputation at all? He must not have kids because he constantly insists on acting like one.

http://mikenormaneconomics.blogspot.co.uk/2012/05/brett-fiebiger-international-dimensions.html

Guest
4 years 11 months ago

Chill FDO15, chill.

Nonetheless, I agree with you – he is definitely changing his position realizing now that they have held extreme positions (not even extremes, outright wrong). Once at Billy Blog, Bill called my position on the balance-of-payments constraint “exotic to say the least”.

Admin
4 years 11 months ago

If their positions on the BOP have changed then that’s news to me. http://www.levyinstitute.org/pubs/wp_704.pdf

But someone please tell me what MMT has to do with any of this? Honestly, this isn’t a debate about why MMT’s positions are wrong or right. The post is an excellent one. Let’s discuss the post rather than the continual diversion to MMT that seems to happen any time someone mentions anything remotely conflicting with an MMT view….It’s getting tiresome.

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Tom Hickey
4 years 11 months ago

Cullen: “But someone please tell me what MMT has to do with any of this? Honestly, this isn’t a debate about why MMT’s positions are wrong or right.”

As you say, this is not personal. Debates are about two things essentially, empirical claims and manners of expression. Both are important of often influence each other.

There is a healthy debate going on between MMR and MMT, now pretty much localized at MMR and MNE, since I post MMR posts at MNE I consider relevant to the debate. There are similar debates that MMT is involved in, e..g, with Circuitists. Warren and Scott occasionally comment at MNE.

In academia, there is also a matter of temporal priority of contribution. Who said what first is also contested. That’s just part of the game.

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BF
4 years 11 months ago

Tom Hickey 11:03am: “In academia, there is also a matter of temporal priority of contribution. Who said what first is also contested.”

My views on this subject are shaped by the work of Jane D’Arista. One 1999 paper ‘Reforming the Privatized International Monetary and Financial Architecture’ (it used to be available from the Financial Markets Centre though I do not think it is so now) was particularly helpful. I have learnt much from D’Arista, Stiglitz, Ocampo, Costabile and Panizza: these are my sources properly attributed.

I have read neo-Chartal views on the subject and disagree on many aspects: I did not want to discuss those objections as that would be a paper in itself. I think talking about international and domestic “original sin” add insights and recognising that the unique conditions favoured on the centre country is of fundamental importance.

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Tom Hickey
4 years 11 months ago

Scott just in at MNE with a three section comment addressed to JKH about his analysis here. Sounds like a debate to me.

Admin
4 years 11 months ago

Having talked to JKH personally, I can confirm that he has zero desire to change your minds or debate any of you on these matters. If he chooses to engage you all then that’s good. I hope he has time to spare because you guys will not flinch even an inch. Which is fine, but don’t call that a debate. It’s called talking to a wall.

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Tom Hickey
4 years 11 months ago

I should add that JKH is responding to a question of JKH, so it is not a one-sided debate either.

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BF
4 years 11 months ago
Tom Hickey 12:46pm: You seem like a reasonable person to debate with (do not take as agreement on the content of the disputed matters). But and I think Lavoie underscored this point: some people are tentative about offering a critique because they have reason to believe that they will get demonised and derided in the blogosphere. It is okay for you guys have a different view and it is equally okay for other people to disagree with that view. From my perspective those few willing to be critics do not get fair hearing… why bother then? I have not seen any discussion of the critical papers by Rochon and Gnos, Rochon and Vernengo or Lavoie written in the early 2000s and in the spirit of what an academic debate should be. So people who engage with the literature and write qualified objections are dismissed pithily on the basis that ‘we really meant something else’ and are ‘basically always right’. It is a shoddy excuse to argue that the work of critics is based on a misunderstanding where positions presented as factual are now retrospectively meant to be taken as counterfactual. I do not think a few paragraphs in the blogosphere can settle these issues. My opinion is that there is a case that MMTers have forwarded incompatible positions but that is my opinion. I have written a paper explaining my reasons and I advise readers to read or re-read it along with the all sources cited to see what they deem to be consistent. I may choose not to debate you (or other MMTer) because the forum is not appropriate. I think it is misleading and somewhat self-serving to keep inventing new excuses to pardon old (and new) mistakes. If you do not think that objections should be made in… Read more »
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BF
4 years 11 months ago

I also think that discussion about JKH’s post should be on his post.

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Tom Hickey
4 years 11 months ago

“You guys clearly didn’t even take the time to understand JKH’s magnificent post because you aren’t open minded enough to consider that your position might be wrong. I’ve sent it to some brilliant people I know and they all universally agree – it’s a fantastic piece of work that could be published in just about any economic journal. But you all shrug it off like it’s a 9100 word piece of nonsense.”

I think you are magnifying this. Some people who comment at MNE that are not MMT economists may have said somethings that were over the top. But as I recall Scott was in agreement with it, and some MMT economics who read it liked it, too, although I believe that was said in a private exchange.

Admin
4 years 11 months ago

Ah, so when one of the leading MMT thinkers writes:

“Seems to me this is apples vs. oranges. You can’t compare the most specific possible account of Tsy/CB vs. the most general MMT narrative. Obviously the latter is intended to simplify. Why not compare the former to my institutionalist-based work instead? Then we’ll see if someone thinks there have been oversimplifications. Different publications and posts have different intents and thus different levels of detail, necessarily. I have yet to see anyone seriously acknowledge this fact when writing a critique of us.

….Thank heavens Paul and Tom know what science is and thus what it means to create a school of thought. Too bad it’s so far over the heads of so many others that even Paul/Tom can’t get through to anyone–though it seems that many of the former have come to have a personal stake in not even trying to understand such things. So I’m not even going to try.”

we’re supposed to think that MMTers actually appreciated the post and attempted to understand it? The level of detail and understanding in JKH’s post is astounding. It’s not apples and organces. It’s precise to a tee. Almost excessively precise. There was no apples and oranges, only clarity unlike the MMT writing which has now devolved into redefining past errors in order to cover mistakes made in past writings. Nor was there even a mention of MMT. But as is always the case, you guys spent 100 odd comments getting defensive about something you didn’t even bother to try to understand. And here I am again wasting my time trying to convince you that you’re not being open minded. What’s the point?

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Tom Hickey
4 years 11 months ago

“we’re supposed to think that MMTers actually appreciated the post and attempted to understand it?”

STF said…
Forgot to say that the above notwithstanding, I didn’t see any details in your [JKH] piece that I disagree with. In fact, your CTRB is similar to our “general theory,” and arrived at much the same way as Mosler and the rest of us arrived at our consolidated view–going out and looking (and note how different this process is from the neoclassical economics view of theory being entirely deductive). 


Best,

Scott

Admin
4 years 11 months ago

If Scott truly agrees with JKH’s post then he doesn’t agree with MMT. I don’t know if Scott is changing his position on some of this stuff, but I do know Brett Fiebiger’s and Marc Lavoie’s critiques of MMT substantially influenced the thinking that went into JKH’s post so to agree with JKH is to also agree with BF and ML’s critiques. Something I doubt MMTers will admit to….

Quite frankly, it appears to me as though MMT has created two worlds. One where things actually happen. And another where things could happen. And they’ve totally confused the two in an attempt to fuse them together in order to rationalize their alternate world conclusions. MMT should just stick to the idea that it’s “inherently progressive” and does not explain our world exactly as it is. Instead, MMT explains a world they want. It kind of reminds me of Austrians who want the gold standard, except MMTers essentially try to pull a quick one on people claiming that we actually live in the world they want. It makes zero sense and causes extraordinary confusion. You guys are a progressive policy agenda. Own it. Or you’ll just continue to get critiqued for being inconsistent resulting in what appears like a very dishonest way of presenting your views to the world.

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Tom Hickey
4 years 11 months ago

“MMT has tried to play both sides of the coin by claiming to be purely descriptive while also claiming to offer comprehensive prescriptive answers to FE and PS. And in doing so they’ve been inconsistent. And it’s okay to alter your argument over time. But you should admit it, explain clearly why the argument is changing and run with the argument that you want to express.”

Cullen, I have explained to you on several previous occasions why I regard this as a misunderstanding of MMT so I won’t repeat the argument other than to say that MMT have made it clear that MMT is more than a description of monetary operations. It has theoretical aspect involving causality, and it also offer policy options based on the descriptive and theoretical aspects.

Admin
4 years 11 months ago

Your comment could be rewritten with the standard MMT line: “you just don’t understand”. Yes, I am too dense to understand the complexities of MMT. It’s obviously only accessibly to the minds of a select few residents of Kansas.

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Tom Hickey
4 years 11 months ago

“If Scott truly agrees with JKH’s post then he doesn’t agree with MMT.”

Or Scott doesn’t get what JKH is actually intending, or someone else doesn’t get what MMT is intending.

That’s why there are debates.

Guest
Tom Hickey
4 years 11 months ago

That’s a rant.

Admin
4 years 11 months ago

Yes, I fully expect you guys to see everything negative that is said about MMT to be either wrong, a rant, off base or something that is an unfair critique. You’re entirely incapable of accepting any sort of constructive criticism or considering the very potential that MMT could have made a mistake or two along the way. And it’s precisely why MMT will go nowhere in the coming decades. Your inflexibility and inability to see faults is crippling a school of thought that has great potential.

There’s a reason why I said from the start, that this conversation was totally pointless and you’ve just confirmed that.

Guest
Tom Hickey
4 years 11 months ago

That way I would put it is that there is agreement on some things and disagreement on others. Sometime agreement can be reached through dialogue and debate and sometime not, since some “facts” are non-neutral (Paul Volcker).

Admin
4 years 11 months ago
The way I would put it is that the contours of the MMT argument are shifting with time to make up for past errors. This whole idea of a “general” and “specific” case is a blatant attempt to blur the lines between reality and the MMT alternate reality. The maths in one world are always true while the maths in this alternate reality are always false. MMT has tried to play both sides of the coin by claiming to be purely descriptive while also claiming to offer comprehensive prescriptive answers to FE and PS. And in doing so they’ve been inconsistent. And it’s okay to alter your argument over time. But you should admit it, explain clearly why the argument is changing and run with the argument that you want to express. No one in this world will fault people for being wrong and clearly explaining why you think something else is right. Economics is an evolution of ideas. MMTers didn’t wake up with the whole puzzle solved in 1990. Their ideas should evolve. Don’t conflate it and say that we never disagreed with that. I could pull dozens of different quotes now showing blatant and egregious inconsistencies across the presentation of MMT. It’s clear that in the case of MMT, that the agenda is getting to FE and PS through the JG. That’s great. So explain how the world can look and why it should work that way. But don’t take our world as it is and pretend that you’re just explaining operational realities when it’s clear that you’re not. You guys have a policy agenda that is largely framed around the idea that the current world is totally messed up. MMT provides the answers to fixing that. But what MMT does not do is describe the machine for… Read more »
Admin
4 years 11 months ago
I’ll add. You guys could learn a thing or two from Austrians. Here’s what Austrians do. They present their view of why the world is messed up (mostly too much govt). And then they present their view of how the world could be fixed (gold standard or policies revolving around less govt). But they don’t try to claim that their gold standard position is perfectly consistent with today’s world. No, they know it’s a totally different reality. That’s what they want. They want to shift the operational realities to hamstring the govt. That’s the whole point! Why are their followers so loyal? Because their argument is clearly defined and consistent. MMT, on the other hand, says banks mess up our world, but that banks are “public/private partnerships serving public purpose” and that we need to crush the banks so we can align their interests with that of the world we want. And they create the public/private obscurity to satisfy the alternative reality of a money monopoly. It’s totally inconsistent. You can’t say you hate banks and they need to be crushed, but that they’re also designed as is, as serving public purpose. This is such a blatant contradiction that it blows the mind. You guys need to present it consistently. “The world is messed up because of this. And we have the solution. BUT, it will require a big change” (I don’t think you guys know it or want to admit it, but one vertical component is your gold standard equivalent in the Austrian case). Not surprisingly, consistent with “left of communism” politics, your views of the world vs Austrian econ are polar opposites. Nothing wrong with that. I think Austrians are wrong about a lot. But at least they’re consistent in their presentation. You guys have an answer to… Read more »
Admin
4 years 11 months ago

Well, it’s obvious that Scott is misunderstanding because BF referred to JKH’s post as “the authoritative piece of writing on the subject.” This is the same critic who called STF’s approach (on the same matter) “alternative-world maths.” STF spent quite a bit of time refuting the Fiebiger work so I highly doubt he’s suddenly agreeing with the MMR view of the world.

If you guys really agree with the JKH post then you’re clearly not understanding the point (which, like the S=I debates, appears clear in the MNE comments where not one of you actually made an effort to fully digest what was written). That, or you’re massively changing your position to marginalize the differences between JKH’s “real world” description and MMT’s “alternative world”.

Admin
4 years 11 months ago
There is no debate. There is never “debate” with MMTers. You guys are inflexible on every single position you take. You literally think you’ve solved the entire economic machine and all the facets that go into it. Your responses to practically everything is either “we’re right and you’re wrong” or “you just don’t understand our position”. That’s fine, but there’s a reason why no one picks fights with you guys or even tries to engage with MMTers. It’s utterly pointless. And we’re certainly not doing all of this just to piss off a bunch of economists at some University in the middle of Kansas. Some of you think this is personal which is utter nonsense. We’re doing this because we think it’s right (and it might be wrong, we admit that!). You guys clearly didn’t even take the time to understand JKH’s magnificent post because you aren’t open minded enough to consider that your position might be wrong. I’ve sent it to some brilliant people I know and they all universally agree – it’s a fantastic piece of work that could be published in just about any economic journal. But you all shrug it off like it’s a 9100 word piece of nonsense. Sorry, but that’s absurd. You guys want to create ideas of money that involve real-world truths mixed with alternative reality theories that somehow all add up to some real-world theory. You claim to understand money using a state theory of money whose main component is a policy tool, but you claim to not have a theory of the state or a political bias involved in your theory (except some of you have stated explicitly otherwise – just one of your many contradictions). That’s fine. But it’s not right no matter how many times you keep repeating “you… Read more »
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Tom Hickey
4 years 11 months ago

That sounds like at extreme position to me.

STF said…
My comment was of course in reference to the quote Tom provided, not the entire paper.



Having read it now, though, like others here, I don’t see how the final paragraph necessarily follows from the rest. Prior to that, it’s well written while also the sort of thing we’ve been saying for years.



And right on cue, FDO. Pretty rich stuff coming from the person whose own people are embarrassed to have commenting on their behalf.
June 1, 2012 11:49 AM 

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BF
4 years 11 months ago

Tom Hickey 12:12pm: “STF said…”

My piece was posted incorrectly to begin with: a third of it was cut out. So I do not know if the final paragraph refers to the Kaldor quote or discussion of the euro currency system. The Kaldor quote refers to how the use of the dollar as international money reinforces trade deficits. That ‘borrowing without liabilities’ puzzle points to the “community of rentiers”: read the referenced paper by D’Arista to find out a little more. (By the way no one comments on my behalf: I do that).

Admin
4 years 11 months ago

Honestly, I don’t even know what STF is saying there because Wray has clearly disagreed with BF’s points:

“The persistently large trade deficits run by the United States was a factor in the ‘distorted’ expansion after the 2001 recession.” (BF)

“The problem is not one of financial imbalance, but rather one of an imbalance of power.” (Wray)

I know the MMT position is that it’s all about demand for dollars, but even Godley understood that persistent CAB’s required ever more deficit spending to fill the demand leakage. Unless MMT is changing their stance on this (adopting a Godley/MMR view) then I don’t see how these comments aren’t contradictory (nor do I need an answer because I know the MMT position is to squirm out of any inaccurate position with obscure language).

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JK
4 years 11 months ago

“…even Godley understood that persistent CAB’s required ever more deficit spending to fill the demand leakage.”

Yes. This is a point that confuses me. At what point, or what indicators do we look for, that signal that the CAB is becoming dangerous.

Any thoughts?

Admin
4 years 11 months ago

Are there not already signs of cracks around the edges? The entire global economy is suffering through one big persistent recession in unison. This isn’t only due to money manager capitalism and banks as Wray claims. It’s obviously much deeper and more systematic than that. If it was just the USA then I’d say that the world of developed market banking is poisonous, but it’s so much broader than that and hurting undeveloped countries that I think it’s entirely incomplete to blame banking. Not that it didn’t play a role, but it seems that the global currency system is flawed….This goes all the way back to Keynes. Even Buffett has ideas on this.

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JK
4 years 11 months ago

Is there anything a country like the U.S. can (or should) do in it’s relationship with China? By fixing it’s currency, it’s seems like China forces the U.S. into a trade deficit. What options are available to the U.S. if it were to choose to try to push the terms of trade back toward balance? (import tariffs? etc)

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JK
4 years 11 months ago

Thanks for the thoughts. Yea… I”m the one that brought up MMT. I see that you are getting tired of the comparisons, and getting tired of MMT people repeating the same things to you, but some of us (like me) are still trying to understand the fundamental differences betweeen MMR and MMT. It helps to compare and contrast. But that always runs the risk of the discussion turning into an argument.

Admin
4 years 11 months ago

Check out the mandatory readings page. I describe some of the differences there.

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JK
4 years 11 months ago

Very interesting. Thanks. I more clearly now see your take on the CA and I think there definitely is merit to what you are saying. I know Mosler often suggests that imports are a ‘net-good-thing’, but something seems missing from that. It seems to skirt over these structural issues/trends that you’re talking about. Has Mosler, or any of MMT, responded to the content this critcism?

What do you think of Bill Black’s accusations of massive control-fraud in the buildup of the housing bubble? I see your point that it takes two to tango. But do you think the blame should be even? Or do you tend to agree with Black that the incentive structure led to a robo-signing esque fraud on home buyers that should never have been allowed to purchase a home?
(btw, I’ve think I remember you saying that a required 20% down payment could have prevented all of this. Do you think that should be a law?)

Admin
4 years 11 months ago
Yeah, the MMT line is “exports are a real cost, imports are a real benefit”. There’s no logic in that. The implication is that China is not getting anything “real” through their trade with the USA. And that’s true if you ignore the real infrastructure, the real jobs, the real wages, the real job training, etc. Meanwhile, Americans get “real” pieces of plastic that end up in some landfill in 5 years. Who’s winning this trade in reality? You can decide…. The thing is, MMT has to support this view on the CAD, otherwise, their views become inconsistent. It’s a real flaw in MMT and when one begins to understand the CAD argument you begin to see the cracks in the MMT facade. The Mitchell post on “do current accounts matter” is quite telling. He basically says the world should seek to become a bunch of beach bums giving surf lessons for the rest of eternity while making nothing of real substance (so long as we can import it). I am exaggerating his views to some degree, but it’s not actually that far off. It’s actually a frightening view of the world. This idea that we should just become service oriented societies that don’t really make anything real. These guys should read Volney’s Ruins of Empires to understand the essence of man’s productive needs and the the very fact that the MMT views conflict with the essence of our very being. I’ve rambled. This isn’t and never should have been about MMT so I don’t know why it’s taken this diversion. It’s about a more coherent and factual understanding of modern money. I think MMR is making great inroads in this regard and I totally agree with BF’s comments about Jeff’s recent piece. It’s a masterpiece that will become a… Read more »
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JK
4 years 11 months ago

Well, that’s what I’m asking! 🙂

Is there something “about” a current account balance, or is there some “level or degree” of a current account deficit, that signals trouble? It does nothing to help me understand if you just say ‘CABs are a problem, look around at the world economy!’ What’s the relationship?

As for my banking comment, I (kind of) understand the relationship. It’s fairly simple to understand that a private sector that is over leveraged with debt, that begins to deleverage, will cause all sorts of “macro” problems if there isn’t sufficient spending from an another source. i.e. there is a relationship.

So I’m asking how the current account is directly related to the problems the workd is seeing?

Admin
4 years 11 months ago
A current account deficit is generally consistent with an economy that is experiencing reduced competitiveness. Greece, Spain, USA, etc. A current account surplus is generally consistent with countries experiencing increased competitiveness. Germany, China, Switzerland, etc. These imbalances are also generally a sign of the quality of underlying goods and services and the demand for these goods and services. The USA is increasingly consuming things that we don’t make. It’s not dissimilar to what happened in Spain and Greece where they made nothing, consumed everything and borrowed to consume more. Obviously, the USA has a different problem because we’re not going to “run out of money” like Greece is, but we have a similar underlying structural trend based on a growing consumption based economy resulting in an imbalance. But the concern is that we’ll become increasingly dependent on budget deficits to fill this demand leakage. I noticed some MMTers at MNE saying : “An ex post accounting record CANNOT be the “reason” for anything.” These MMTers who hold Wynne Godley in such high regard clearly did not read his work. He’d be rolling in his grave as he knew that a CAD became self reinforcing as the demand leakage required greater budget deficits reinforcing the consumption cycle. The risk this runs, if it’s truly structural, is that we don’t ever generate the domestic production or the rebalancing necessary to fill the demand leakage resulting in a perpetually consumption based economy whose base of production becomes increasingly fragile leading to a stagnant economy that produces little and consumes much (Godley had other ideas on resolving this and we’ve noted a few also so there’s more than a few ways to skin this cat, though resolving a structural problem takes time and big changes). As Godley and Kaldor both noted, the Circuses of… Read more »
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JK
4 years 11 months ago

I guess what I’m wondering is more specific.

You said: “The entire global economy is suffering through one big persistent recession in unison”

Specifically how is this related to CABs?

I have no facts to back this up but my suspicion is the reason the world (in general) is in so much trouble has more to do with banks/lendng than it does with current accounts and deficit spending. That is, if this has truely been a Balance Sheet Recession, then by definition that has to do with private-sector debt levels, right?

Admin
4 years 11 months ago

By that reasoning, since most of the money in circulation, is bank money, we can blame just about every problem in the world on banks….CAB’s are often associated with a lack of domestic competitiveness. Domestic structural problems in the economy….Obviously, this can be related to banking as well, but is not purely a banking problem….

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BF
4 years 11 months ago

My 2:17am was a response to FDO15’s link which I think I was entitled to make given the inference. Nonethless I do hope that the dicussion will be on the content of the post and perhaps some of the references given that my own views are shaped to varying extents by those author’s work.

Admin
4 years 11 months ago

1. This post doesn’t even mention MMT so there’s no reason for MMTers or anyone else to even assume that it’s about them or in reference to them or anything of the sort. If they want to complain about what we’re doing on other sites then let them do it. No need to bring everything back to some petty internet argument though.

2. I’ve warned you a few times about getting personal here and at Pragcap. There’s simply no need for it. None of this is personal. It’s about getting things right. And if you or anyone else thinks it’s personal then you’re taking the wrong approach and you need to rant elsewhere.

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BF
4 years 11 months ago

I should have written “Stated differently, the change in the…” nonetheless the hedge fund metaphor is apt. The label ‘venture capitalist’ is also sometimes bandied around to describe the centre country.

Guest
4 years 11 months ago

Yeah I guess the phrase “Venture Capitalist” was popularized by Gourinchas and Rey

http://www.nber.org/chapters/c0121.pdf

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BF
4 years 11 months ago

Thanks Ramanan: should have referenced Gourinchas and Rey.

Guest
4 years 11 months ago

Minor point BF. Forgot to mention nice post – didn’t know you’d be commenting and just realized “BF” is Brett Fiebiger!

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JKH
4 years 11 months ago

“Stated differently, the US net international investment position at year-end of 2010 was 91.1% less than the amount of savings received by the USA since 2003, which points to a disquieting observation that the centre country can ‘borrow without liabilities’ on a colossal scale. This ‘borrowing without liabilities’ puzzle is sometimes called the “exorbitant privilege” and can be attributed to the following unique set of conditions enjoyed by the centre country.”

I like to say that the US gross international investment position is like a multi-trillion dollar hedge fund that makes money, despite running with negative book equity.

Now, that’s effective leverage.

And it puts the cumulative US current account deficit in the role of Sisyphus. It never seems to be quite able to drive net international income negative.

(At least it wasn’t negative the last time I checked)

Guest
4 years 11 months ago

yeah not negative and increasing positive! .. although there exists a sort of a tipping point (liabilities versus assets) where it turns negative.

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