Responses to MMP Blog #26: Sovereign Curreny in the Open Economy

By L. Randall Wray

Thanks for comments. I hope you all recognize that this was blog 26; half way through a year of blogs—52 of them to be exact. Half way. A Job Well-Done I hope you all will agree. We are now half-educated. Half-wits, so to speak. It is all down-hill from here. We’ve done the hard lifting, now we apply what we’ve learned. Anway, on to the Q&A for the week.

Q1: What are pros and cons of having an open capital account? If Central Bank wants to defent currency parity by hiking interest rates in an environment of free capital movements, is the supposed mechanism that interest rate hikes should cause capital account inflows because private sector starts to borrow more in foreign currency? What are limits to this strategy? Some eastern european countries have most of their private debt nominated in foreign currency, for example 90% of mortgages in some countries. What limitations this puts on domestic policy options? In the GFC they chose to defend their exchange rates, taking deflationary domestic policy decisions instead. Was it mistake to allow private sector to became indebted in foreign currencies?Does MMT recognize balance of payments accounting identity explained here: http://en.wikipedia.org/wiki/B..., that Current Account + Capital Account + Change in Reserves = 0?

A: I’m generally skeptical of anything that is advertised as “free”, including “free” trade, “free” capital flows” or “free” markets more generally. There must be a catch. There is always a catch. So I have no problem with those who argue that capital “flows” must be constrained. Of course. All “flows” need constraints. Unconstrained “flows” will lead to floods and disasters. It is elementary, Dear Watson.

The Neoclassical view is that “free” flows are fine because “prices” will adjust. In the correct direction. This is faith-based economics, and it ain’t my religion. No, prices almost always run in the wrong direction, helping to fuel booms and busts. Any sovereign government that adopts “free” trade or capital “flows” on the belief that markets will be self-adjusting is either a fool or worse, a stooge. They don’t. They won’t.

Denominating debt in a foreign currency is almost always a mistake, and is fueled by the same Theoclassical religion that promotes “free” markets and capital “flows”. On one hand, it is hard to argue against the proposition that fools ought to be allowed to lose their money; but at the same time it is easy to argue that government and institutions designed to operate in the public purpose should be restrained from parting with “taxpayer money”.  Of course, it is not taxpayer money, since every dollar came from the public sphere to begin with. Letting them fail is often the best option.

Finally, I never argue with identities. They are true. And that is an important one.

Q2: A"a nation cannot run a current account deficit unless someone wants to hold its IOUs. We can even view the current account deficit as resulting from a rest of world desire to accumulate net savings in the form of claims on the country." China, like Germany, wishes to be a net exporter.  Maybe they are crazy, but that is what they want and that is how they run their economic policy.  Is China really accumulating dollars only because they have a desire to accumulate dollars?  Or is it that if they were to sell their enormous quantities of dollars in the fx market rather than holding on to them they would drive up the value of their own currency in terms of dollars, and they fear that such an increase would affect their ability to continue running a trade surplus?  In fact, besides running a trade surplus, don't they intervene in fx markets specifically to prop up the dollar and to hold down the value of their own currency?  

I can see a strong motivation for holding dollars because they want to prevent a rising Yuan, but I have yet to hear an explanation for why they would want to hold dollars as their ultimate goal.  I think they hold dollars only to facilitate their trade policy.  Is there a point where they will no longer need to do this?  If they become the largest economy in the world, for instance, might they want to divest their depreciating dollars, driving the dollar down even faster?

A: Certainly it is hard to explain Chinese accumulation of dollar assets simply on the basis that they want dollar assets. It must also be remembered that China learned from the Asian Tiger experience: they pegged rates to remove uncertainty. But the problem is that this committed them to making payments in a foreign currency—the US dollar. Eventually mkts doubted their ability to meet those commitments so all hell broke loose. So the Chinese learned that several trillion of dollar reserve assets is a good idea. Further, they understand that export led growth is temporary; they will raise wages and reduce exports.

Q3: A ExpandIn a world without import/export restrictions and where every country had a floating currency, would there still be foreign trade "imbalances" or would exchange rates move so that the "imbalances" balance out? Why do certain countries decide to peg their currency against a foreign currency (e.g. US Dollars)? When is it beneficial to peg or not peg?

A: Answer to first question: NO! As discussed below, we’ve got a current account (deficit) that is offset by a current account surplus. It is sustainable. Exchange rates do not move to balance trade. They must also play a role in investment gooods and financial assets.

Q4:  “The reason is because those economists who had believed that exchange rates adjust to
eliminate current account surpluses and deficits had not taken into account that an “imbalance” is not necessarily out of balance. As discussed previously, a country can run a current account deficit so long as the rest of the world wants to accumulate its IOUs.”  But why does the rest of the world want to accumulate our IOUs?  Isn’t it mostly countries like China looking to accumulate foreign
reserves to defend their peg against the US?  It seems the players that matter haven’t yet adopted floating exchange rates, so I am not sure how fair it is to critique Milton’s hypothesis in this
light.  Your point is taken about the semantic usage about the words ‘trade imbalance,’ although I imagine people like Milton also use it more broadly in the sense that they believe deviations
from free trade practices result in ‘imbalances,’ or in other words, the difference in outcomes between a world with free trade and one without.

A: Uncle Milty knew almost nothing about money, banking, or international trade. He thought floating exchange rates would resolve trade “imbalances” through adjustment of exchange rates. No, they won’t. He ignores the role that currencies play in taking positions in assets. He thought money has to do with “trade” or “exchange” but in reality that is a tiny slice of the pie. Most “transactions” are financial, and are tens or hundreds of times the volume of “trade”. So, no, free trade and floating rates won’t balance trade accounts. Still macro balances do balance. It is just amazing. But not if you realize there must be an identity.

Q 5: Maybe you could say something about the different types of pegs -- i.e. crawling pegs, currency board etc.

A: Will do. Later.

Q6: Are you going to get into more detail on the topic of capital controls? I'd be interested to learn more about the policy options and their implications in that regard.

A: Sure. Sovereign countries should never submit them to the control by Wall St or London.

Q7: A 1 comment collapsed Collapse Expand"Inflation and currency depreciation are possible outcomes if government spends too much."
Here we get into the different definitions of 'inflation'. The main concern I always get when I put the 'just let the currency float' argument is that there will be a 'currency crisis'. In the UK that translates into a Sterling Crisis and is embedded in the domestic psyche much like Weimar is in Germany - due to the 1976 'crisis'. The main argument is that the price of things will shoot up, ie we will have 'inflation' in the common sense. Really a reduction in the standard of living in economic terms due to supply side inflation. What can a domestic government do to buffer the effects of a 'currency crisis'?

A: Currency crises so far as I am aware ONLY affect countries that try to peg. The UK tried that, and failed. Then they joined the floating world. No more currency crises. Now, can exchange rates flux on a floating system? You betcha. Will that be more painful for a country like Oz that exports its commodities? You betcha. Cowboy up, as we say in America. It is better than the alternative: exchange rate crises and default. Look at the EMU.

Senator McCain’s Economist Warns: If you Criticize Banksters They will Prolong Recessions

By William K. Black

Steven J. Davis, Senator McCain’s chief economics advisor during his presidential campaign, has written a political hit piece on the man that defeated his candidate.  His co-authors were Scott R. Baker and Nicholas Bloom.  For the sake of brevity I will refer to the authors as “the authors” or “Davis.”  They published the piece in Bloomberg.  The article purports to be a straight scientific piece, but it is a partisan screed relying on faux statistics created by Davis to support his views.  Davis’ statistical methodology is not simply unscientific, it is embarrassingly bad.

Davis’ argument, long discredited by actual surveys of employers, is that unemployment is so high because employers refuse to hire because of Democratic policies.  As Paul Krugman has long noted, employers, when surveyed, have consistently and emphatically refuted this claim.  Given that the employers answering the surveys are disproportionately Republicans and opponents of regulation who have strong incentives to blame the regulations for their failure to hire, their failure to do so makes the survey results particularly compelling.  Davis’ statistical index provides no evidence of why employers are not hiring.  Indeed, it is inherently incapable of providing such evidence. 

Davis is a partisan Republican.  He is a theoclassical economist and a proud representative of the one percent.  He has worked for the Hoover Institution, AEI, and Michael Milken’s foundation (the infamous fraud whose crimes destroyed Drexel Burnham Lambert).  He is a professor at U. Chicago’s business school. 

Marshall Auerback on BNN: What's Europe's Next Step?

Marshall Auerback discusses the latest in Euro woes and the possibility of it spreading beyond the Eurozone.  In the first clip Marshall stresses the need for ECB intervention to calm the onset of a debt-deflation dynamic.  In the second, he follows up on the likelihood that the crisis will spread to sovereign currency nations like the US, where he explains that insolvency is not a threat.

http://watch.bnn.ca/#clip574795

http://watch.bnn.ca/#clip574835

For those that can't make it to Kansas City for this event, we will attempt to stream it live here at New Economic Perspectives.

MMP Blog #26: Sovereign Currency and Government Policy in the Open Economy

By L. Randall Wray

Government policy and the open economy. A government deficit can contribute to a current account deficit if the budget deficit raises aggregate demand, resulting in rising imports. The government can even contribute directly to a current account deficit by purchasing foreign output. A current account deficit means the rest of the world is accumulating claims on the domestic private sector and/or the government. This is recorded as a “capital inflow”. Exchange rate pressure might arise from a continual current account deficit.

While the usual assumption is that current account deficits lead more-or-less directly to currency depreciation, the evidence for this effect is not clear-cut. Still, that is the usual fear—so let us presume that such pressure does arise.

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

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

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

In practice, many of the trade surplus nations have not freed their capital markets. By controlling capital markets and running trade surpluses, they are able to accumulate a huge “cushion” of international reserves to protect their fixed exchange rate. To some extent, this was a reaction to the exchange rate crisis suffered by the “Asian Tigers”—when foreign exchange markets lost confidence that they could maintain their pegs because their foreign currency reserves were too small. The lesson learned was that massive reserves are necessary to fend off speculators.

Do floating rates eliminate “imbalances”? In the global economy, every trade surplus must be offset by a trade deficit. The counterpart to the accumulation of foreign currency reserves is accumulation of indebtedness by the current account deficit nations. This can create what is called a deflationary bias to the global economy. Countries desiring to maintain a trade surplus will keep domestic demand in check in order to prevent rising wages and prices that could make their products less competitive in international markets.

At the same time, countries with trade deficits might cut domestic demand to push down wages and prices in order to reduce imports and increase exports. With both importers and exporters attempting to keep demand low, the result is insufficient demand globally to operate at full employment (of labor and plant and equipment). Even worse, such competitive pressure can produce trade wars—nations promoting their own exports and trying to keep out imports. This is the downside to international trade, and it is made worse to the extent that nations try to peg exchange rates.

Some economists (notably, Milton Friedman) had argued in the 1960s that floating exchange rates would eliminate trade “imbalances”—each nation’s exchange rate would adjust to move it toward a current account balance. When the Bretton Woods system of fixed exchange rates collapsed in the early 1970s, much of the developed world did move to floating rates—and yet current accounts did not move to balance (indeed, “imbalances” increased).

The reason is because those economists who had believed that exchange rates adjust to eliminate current account surpluses and deficits had not taken into account that an “imbalance” is not necessarily out of balance. As discussed previously, a country can run a current account deficit so long as the rest of the world wants to accumulate its IOUs. The country’s capital account surplus “balances” its current account deficit.

It is thus misleading to call a current account deficit an “imbalance”—by definition, it is “balanced” by the capital account flows. As discussed earlier, it “takes two to tango”: a nation cannot run a current account deficit unless someone wants to hold its IOUs. We can even view the current account deficit as resulting from a rest of world desire to accumulate net savings in the form of claims on the country.

Currency regimes and policy space: conclusion.

Let us quickly review the connection between choice of exchange rate regime and the degree of domestic policy independence accorded, from most to least:

                *Floating rate, sovereign currency à most policy space; government can “afford” anything for sale in its own currency. No default risk in its own currency. Inflation and currency depreciation are possible outcomes if government spends too much.

                *Managed float, sovereign currency à less policy space; government can “afford” anything for sale in its own currency, but must be wary of effects on its exchange rate since policy could generate pressure that would move the currency outside the desired exchange rate range.

                *Pegged exchange rate, sovereign currency à least policy space of these options; government can “afford” anything for sale in its own currency, but must maintain sufficient foreign currency reserves to maintain its peg. Depending on the circumstances, this can severely constrain domestic policy space. Loss of reserves can lead to an outright default on its commitment to convert at the fixed exchange rate.

The details of government operations discussed throughout this part of the book apply in all three regimes: government spends by crediting bank accounts, taxes by debiting them, and sells bonds to offer an interest earning alternative to reserves. Yet, ability to use these operations to achieve domestic policy goals differ by exchange rate regime.

On a pegged currency, government can spend more so long as someone is willing to sell something for the domestic currency, but it might not be willing to do so because of feared exchange rate effects (for example, due to loss of foreign currency reserves through imports).

To be sure, even a country that adopts a floating rate might constrain domestic policy to avoid currency pressures. But the government operating with a pegged exchange rate can actually be forced to default on that commitment, while the government with a floating rate or a managed float cannot be forced to default.

The constraints are thus tighter on the pegged regime because anything that triggers concern about its ability to convert at the pegged rate automatically generates fear of default (they amount to the same thing). The fear can lead to credit downgrades, raising interest rates and making it more costly to service debt. All externally-held government debt is effectively a claim on foreign currency reserves in the case of a convertible currency (where government promises to convert at a fixed exchange rate). If concern about ability to convert arises, then only 100% reserves against the debt guarantees there is no default risk. (Domestic claims on government might not have the same implication since government has some control over domestic residents—it could, for example, raise taxes and insist on payment only in the domestic currency.)

Next week: what happens if a country adopts a foreign currency? (Hint: look at the PIIGS!)

Responses to MMP Blog #25: Isn’t the Dollar so Special?

By L. Randall Wray

Thanks, Marty for the vote of confidence. Yes, the accounting is essential; it used to provide the foundation for both macro theory and also for “money and banking” but unfortunately it has nearly disappeared. Today’s macro texts begin with representative agents and silly little growth models. Almost all modern macro violates accounting identities—as Wynne Godley lamented.

On to the Q&A:

Q1: Maybe you could say something about Ireland. It appears to me that, were Ireland not in the Eurozone, it would be in a prime position to have its currency accepted abroad. It has a good export base; it has strong FDI and we're particularly adept at collecting taxes. So, perhaps the best way for developing countries to have their currency accepted abroad (yes, Ireland was basically a developing country up until the 80s) is to focus policy on these variables. We in Ireland did it through education. We ensured that we had a very well educated workforce that attracted FDI.

 A: Yes, there’s got to be a reason. Typically it is because foreigners want to buy products, visit as tourists, or buy financial assets. The demand for the Oz Dollar expanded when global pension funds and other managed money decided to allocate a portion of their portfolios to Oz Dollars. Of course, the commodities boom also helped—the ROW wanted Oz’s commodities. I want to be realistic, however. Many countries in the world do not now produce goods and services the ROW wants, and their assets are deemed too risky even if interest rates were to be kept high. Unfortunately many nations then view the way to increase interest in their goods and assets is to “dollarize” (typically, pegging an exchange rate, or better yet adopting a currency board). But that won’t help. At best it adds default risk in place of currency risk (the country might not be able to keep the promise to convert to dollars, so even though the exchange rate is fixed, the country’s assets are risky). There is no easy answer to this. I would suggest that it is far better to look inward: develop one’s own capacity to produce (yes, education) and to consume its own products.

Q2: So developing countries that are using US Dollars - say Timor Leste (East Timor) - the current low, near zero interest rate (fed funds) would be a benefit for them since East Timor interest rate would be "market determined". Is that correct?

A: Of course this is related to my previous answer. Default risk. If you look at the experience of Argentina (adopted a currency board), its interest rate remained about the same as its neighbor Brazil’s rate (did not dollarize), and that was much higher than the US Dollar interest rate. Why? Eliminating exchange rate risk was completely offset by adding on default risk as markets worried Argentina could not hold the peg. (I won’t go into it in detail, but the interest rate parity theorem holds reasonably well so that a nation’s interest rate must compensate for expected exchange rate movements. So to the base interest rate we add the risk premium and also expected exchange rate movements.)

Q3: Wray said: "Thus, it is almost always a mistake for government to issue foreign currency bonds. " Q: This goes against the original sin hypothesis. Don't you believe that hypothesis?

A: I believe in original sin: from birth you owe taxes. I do not know what “free trade” is, nor what a “complete financial market” would be. These are just religious terms that bear no relation to the real world. I repeat: it is almost always a mistake for a government to issue foreign currency debt. Let the private sector indebt itself if it wants, and then let it fail in the normal way if it cannot get foreign currency to service its debts. You do not want to be an Iceland or Ireland, bailing-out banks. Recommendation: read more MMT, less orthodox theoclassical nonsense.

Q4: If a country wants to peg their currency to the $US, then it is true they could use an accumulation of $US to buy their own currency in the FX market, propping up its value. But they don't need a unilateral trade surplus with the US to do that. They could have their trade surplus overall with any other countries, and use any foreign currency to buy their own currency in the FX market. They wouldn't necessarily have to sell anything in the US, and could have a trade deficit with the US, as long as they had a surplus overall. If they needed to depress their currency in the FX markets, they can simply create some and sell it on the FX market, and hold whatever other currency they want. It does not have to be $US. Secondly, how does accumulating dollar claims help them with insufficient domestic demand? A trade surplus helps with that, but it must, again, be a surplus overall and not any particular bilateral surplus.

A: Of course, it is correct to say that a country could peg its exchange rate, and accumulate euros to do so; thus it can run a trade surplus against Germany rather than the US. Good luck with that! The problem is that Germany is a modern mercantilist state that won’t run a trade deficit so it is hard to get claims on Germany; the EMU as a whole runs essentially balanced trade. Much easier to get dollars. And yes of course a nation can run trade surpluses even if it does not trade at all with the US. My answer here is much like my answer about taxes: you do not need to impose a US Dollar tax on every one of the 6 billion people in the world to ensure a global demand for dollars. The Chinese will export to anyone, and willingly accumulates Dollars even though few Chinese need to pay Dollar taxes. And increasingly there will be net exporters who do almost all their trade with China—accumulating foreign currency reserves. Why run net exports? Because domestic demand is too low to absorb the output. Of course there are additional reasons to export—including “learning by doing”. Q: Since oil is essential for the running of a modern economy, how does this petrodollar system effect the fiscal equation for the various governments? What does MMT show us about this relationship, or is it irrelevant?

A: Certainly it is relevant—oil exporters typically have current account surpluses thus accumulate financial assets denominated in foreign currencies. Much of that is in Dollars. That leads to the incorrect belief that OPEC “finances” US borrowing (budget deficit and trade deficit). Better to look at this as US “financing” OPEC asset accumulation.

Q: What was the cause of Argentina to default? Was it debt in foreign currency that caused inflation?

A: See above: adopted a currency board, that actually reduced inflation (strong dollar). The problem was solvency: yes, essentially the debt was in a foreign currency. Go to www.cfeps.org to see papers that Pavlina Tcherneva and I wrote on the crisis.

Q: MMT and post-keynesians in general say always that banks buy treasuries to have an interest, instead of leave reserves earning nothing (without consider interest on reserves paid by the BC).but, why there are primary dealers? I know that they buy the majority of treasuries issued. this affect reserves because primary dealers have the account in depository institutions. But they buy on behalf of banks or investors, or they buy and after they sell? And so, banks buy treasuries because of the following deficit spending (so this is the deficit that is a non earning stock of reserves) or they use excess reserves (eventually having an automatic overdraft if they haven't excess reserves)?Thanks.

A: Yes the Fed and Treasury in the US adopted procedures requiring Treasury to sell bonds to private banks before it spends; so special banks buy them, credit Treasury’s deposit account, and then Treasury moves deposits to Fed to cut a check. If these special banks are short reserves, they can always borrow them. Once Treasury spends, banks have reserve credits they then use to buy the Treasuries from the special banks—or from the Fed if necessary.

Q: So if government wants lower rates on its debt, it can always use domestic monetary policy to achieve that goal. Unfortunately, this is not widely understood I don't think that is true. As far as I know that's well understood but so are the potential effects of a lower interest rate on the exchange rate. A: Well, I’ve run across lots of people including policy makers who think markets set rates!

Q: It seems to me that the current system is set up so that net exporting nations always 'win' the international trade game and they do that by sucking liquidity out of the target nation - depressing the domestic economy because the domestic government is too scared to replace the liquidity with new liabilities.

A: They “win” the accounting game and “lose” the real game. Exports are a cost! This is a matter of not understanding what an economy is for. But I agree with you.

Q: why do "developing countries" have less demand for their currencies from foreigners? i feel like that is the central question that's being avoided. what determines the demand for a currency? is it because expected (risk adjusted) profits are lower there then elsewhere? what could increase expected profits? what effect do local cost structures (of the sort Michael Hudson discusses here:http://michael-hudson.com/2011... have on foreigner's currency demand?

A: There are lots of risks, most of them probably are not economic. Obviously, political risk matters. In some cases, corruption. But I want to be clear: there is more corruption on Wall Street and in Washington than in the entire developing world taken together!

"Greedy Bastards": A Review of Dylan Ratigan's Views on the Financial Crisis

By William K. Black
(Cross-posted from Benzinga)

Dylan Ratigan, MSNBC’s financial expert, has written a book about how markets have become perverse.  It is an interesting example of how strange “competition” has become.  One oddity presented itself on the cover of the package in which the book arrived.  The cover proclaimed “Simon & Schuster: A CBS Company.”  The author works for NBC.  Only in America!

I was concerned by the title (“Greedy Bastards”).  I think that greed is unlikely to have changed greatly over the last quarter century in which the U.S. has suffered three recurrent, intensifying financial crises.  I don’t call people bastards, even the self-made ones, because my mother reacted poorly to Speaker Wright referring to me as the “red-headed SOB.”  Ratigan’s view on these points turns out to be similar to mine.  He argues that the issue is not greed, but perverse incentives.  When CEOs have incentives adverse to the public and their customers they tend to act on those incentives and harm the public and their customers.  This observation is one of those obvious but essential points so often overlooked.  A CEOs’ principal function is creating, monitoring, and adjusting the corporation’s incentive structures.  There is a massive business literature on this function and CEOs uniformly believe that incentive structures for officers and employees are critical in shaping their behavior.

The Real Deception in Advertising: What the New York Times Doesn't Say about the Economics of Training Elite Lawyers

By June Carbone 

In an article on the front page of the New York Times, David Segal writes that, surprise, surprise, law school faculties do not systematically train students for practice. The article is one of a series Segal has written about supposed law school excesses. Some describe genuinely questionable practices; this describes a complaint at least a century old. I’m sure Mr. Segal thinks of himself as a muckracker. What the article doesn’t acknowledge is that it also advances the agenda of the 1%.

Let me explain. The complaint about law school for over a century has been that they do not train students for practice. The only thing that is new today is that the most elite corporate clients are attempting to cut their legal bills by shifting the costs of the training to law schools – and ultimately therefore to the students. It is one thing to argue that the law schools of the future will need to pay more attention to practical training in order to compete with each other; this is almost certainly true. It is another thing to suggest that this is somehow a matter of consumer protection.

An Open Letter to the Winter Patriot

By Mitch Green

The following letter reflects my view on the subject of civil disobedience and does not necessarily mirror the general opinion of New Economic Perspectives.  I offer my opinion as an Army veteran, student of the economy, and critic of an ongoing effort to wage economic war on the vast majority the population.  If these words move you, I urge you to consider honestly the consequences if you decide to act.  

As the occupy movement continues to grow in defiance of the heavy-handed police action determined to squelch it, a natural question emerges: What point will the military be summoned to contain the cascade of popular dissent?  And if our nation’s finest are brought into this struggle to stand between the vested authority of the state and the ranks of those who petition them for a redress of grievance, what may we expect the outcome to be?

If history is our guide then we know that story all too well.  Behind a thin veil of red, white and blue stands a nation that has used its military might to respond forcefully to any public contempt for the very institutions which bind us in exclusion from the liberty those colors evoke.  Just as a training collar keeps a dog in check, a highly militarized police force responds mercilessly, sharply, and without hesitation with an array of chemical warfare and thuggish brutality.  And where they fail, divisions of soldiers stand ready to deliver a serious and painful lesson to all who demonstrate their unwillingness to wait for democracy.

This has been the history of democracy in America.  The ink on the pages that chronicle the use of state violence towards an unruly citizenry is dry.  We cannot rewrite them.  We read them in lament.  But for each new day history waits; at the dawn of each morning we are presented with the gift of creation.  The prevailing thought woven into the fabric of our society today, threaded through both patterns of conservative and liberal ideology, remains the recognition that something is very wrong with the world.  Naturally, we form the question:  Can we do things differently?  Once we animate that thought and present it to society as a question demanding an answer, we begin to sketch out our draft of the world in the pages of history.

I call upon my brothers and sisters in the armed forces to ink their pens and help us write these next few, and most important pages in the history of our social life.  Soon, it is quite likely that you will be mobilized to aid the police in their effort to contain or disperse what their bosses see as an imminent threat to the sanctity of their authority.  As that day draws near, I remind you of these familiar words:

I, (NAME), do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; and that I will obey the orders of the President of the United States and the orders of the officers appointed over me, according to regulations and the Uniform Code of Military Justice. So help me God.

Those that take this oath seriously are faced with a terrible conflict.  You must battle internally between the affirmation that you will place your body between the social contract embedded in the Constitution and those that seek its destruction, while maintaining your loyalty to the government you serve and the orders issued by its officers.  Sadly, society has placed a twin tax upon you by asking that you sacrifice both your body and your morality.  This tax has been levied solely upon you overseas, and soon they’ll come to collect domestically.  Your government in its expression of corporate interests relies upon your tenacity to endure, and your relentless willingness to sacrifice.  And so you do. 

Now, more than ever we need your sacrifice.  But, I’m asking you to soldier in a different way.  If called upon to deny the people of their first amendment right to peaceably assemble and petition their government for a redress of grievance, disregard the order.  Abstain from service.  Or if you are so bold, join us. Make no mistake: The consequences for such decisions are severe.  You will be prosecuted under the full extent of the law.  But sacrifice is your watch word. 

Thomas Paine wrote in 1776:

These are the times that try men's souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph.

Today we are faced with a new revolution.  This time we are fighting to preserve our democracy, rather than to establish a new one.  And just as a grateful nation relied upon the Winter Soldier to deliver us from the colonial yoke of oppression, we ask that you aid us in our struggle to be free from the bonds of debt peonage and false representation.  In return we will stand in your defense as the elite, who have gained so much from your service, attempt to strip you of your hard won honor.  

Germany puts the EU through the Wood Chipper – and Theocrats Cheer

By William K. Black

Those of you who have seen the film Fargo have the wood chipper scene indelibly seared into your memory.  (If you have not seen Fargo please remedy this deficiency promptly.)  I return to the scene at the end of this piece. 

Walter Russell Mead, a recovering liberal, has crafted a crude ode to purported German national character and insult to purported French national character.  The defective purported national character of the French is leavened with equally crude stereotypes of the purported superior religious character of Huguenots and Jews.  It is all set within a broader, cruder attack on purported ethnic “Latin” character.  Mead’s piece ran in opinion pages of the Wall Street Journal, which embraces these prejudices and considers them the height of intellect.  

MMP Blog #25: Currency Solvency and the Special Case of the US Dollar

By L. Randall Wray

In recent blogs we’ve been looking at sovereign government issues of bonds. We have argued that this is not really a “borrowing” operation but rather bond issues offer a (higher) interest-earning alternative than do reserve deposits at the central bank. We also have argued that it makes little practical difference whether the government bonds are held domestically or by foreigners.

However, it is true that in a floating currency regime, it is conceivable that foreigners who hold reserves or government bonds could decide to “run” out of them, impacting the exchange rate. By the same token, countries that want to run net exports with, say, the US, are interested in accumulating Dollar claims—often because their domestic demand is too low to absorb potential output and often because they want to peg their currencies to the Dollar. For that reason, a “run” is unlikely.

This then leads to the objection that the US is surely a special case. Yes, it can run budget deficits that help to fuel current account deficits without worry about government or national insolvency precisely because the rest of the world wants Dollars. But surely that cannot be true of any other nation. Today, the US Dollar is the international reserve currency—making the US special. Let us examine this argument.

Isn’t the US special? Yes and no. Accounting identities are identities; they are true for all nations. If a nation runs a current account deficit, by identity there must be a demand for its assets (real or financial) by someone with foreign currency. (A foreigner could either demand the nation’s currency for “direct investment” that includes buying property or plant and equipment, or the foreigner could demand financial assets denominated in that currency.) If that demand for assets declines, then the current account deficit must also decline. 

 

There is little doubt that US dollar-denominated assets are highly desirable around the globe; to a lesser degree, the financial assets denominated in UK Pounds, Japanese Yen, European Euros, and Canadian and Australian dollars are also highly desired. This makes it easier for these nations to run current account deficits by issuing domestic-currency-denominated liabilities. They are thus “special”. 

 

Many developing nations will not find a foreign demand for their domestic currency liabilities. Indeed, some nations could be so constrained that they must issue liabilities denominated in one of these more highly desired currencies in order to import. This can lead to many problems and constraints—for example, once such a nation has issued debt denominated in a foreign currency, it must earn or borrow foreign currency to service that debt. These problems are important and not easily resolved.

If there is no foreign demand for IOUs (government currency or bonds, as well as private financial assets) issued in the currency of a developing nation, then its foreign trade becomes something close to barter: it can obtain foreign produce only to the extent that it can sell something abroad. This could include domestic real assets (real capital or real estate) or, more likely, produced goods and services (perhaps commodities, for example). It could either run a balanced current account (in which case revenues from its exports are available to finance its imports) or its current account deficit could be matched by foreign direct investment. 

 

Alternatively, it can issue foreign currency denominated debt to finance a current account deficit. The problem with that option is that the nation must then generate revenues in the foreign currency in order to service that debt. This is possible if today’s imports allow the country to increase its productive capacity to the point that it can export more in the future—servicing the debt out of foreign currency earned on net exports. However, if such a nation runs a continuous current account deficit without enhancing its ability to export, it will almost certainly run into debt service problems. 

 

The US, of course, does run a persistent trade deficit. This is somewhat offset by a positive flow of net profits and interest (US investments abroad earn more than foreign investments in the US). But the two main reasons why the US can run persistent current account deficits are: a) virtually all its foreign-held debt is in Dollars; and b) external demand for Dollar-denominated assets is high—for a variety of reasons. 

 

The first of these implies that servicing the debt is done in Dollars—easier for indebted American households, firms, and governments to obtain. The second implies that foreigners are willing to export to the US to obtain Dollar-denominated assets, meaning that a trade deficit is sustainable so long as the rest of the world wants Dollar assets.

What about government that “borrows” in foreign currency? What about nations that issue foreign currency denominated assets? Returning to a nation that does issue debt denominated in a foreign currency, what happens if the debtors cannot obtain the foreign currency they need to service the debt? 

 

We have thus far left to the side questions about who is typically issuing foreign currency denominated debt. If it is a firm or household, then failure to earn the foreign currency needed to service the debt can lead to default and bankruptcy. This would be handled in the courts (typically, when debt is issued it is subject to the jurisdiction of a particular court) and by itself poses no insurmountable problem. If the debt is too large, bankruptcy results and the debt must be written-off. 

 

Sometimes, however, governments intervene to protect domestic debtors by taking over the debts. (Ireland is a good example.) Alternatively, governments sometimes issue foreign currency debt directly. In either case, default by government on foreign currency debt is usually more difficult—both because bankruptcy by sovereign government is a legally problematic issue and because sovereign default is a politically charged issue. 

 

In practice, sovereign default (especially on foreign currency debt) is not uncommon, often chosen as the lower cost alternative to continuing to service debt. Sovereign governments typically choose when to default—they almost always could have continued to service debt (for example, by imposing austerity to increase exports, or by turning to international lenders). Apparently, they decide that the benefits of default outweigh the costs. However, this can lead to political repercussions. Still, history is littered with government defaults on foreign currency debt.

Governments sometimes issue foreign currency debt on the belief that this will lower borrowing costs—since interest rates in, say, the US Dollar, are lower than those in the domestic currency. However, foreign currency debt carries default risk—and if markets price that into interest rates, there may be no advantage. Still, it is not uncommon for governments to try to play the interest differentials, issuing debt in a foreign currency that has a lower interest rate. Unfortunately, this can be a mirage—markets recognise the higher default risk in foreign currency, eliminating any advantage.

Further, as discussed in earlier blogs, for a sovereign government, the domestic interest rate (at least the short term interest rate in the domestic money of account) is a policy variable. If the government is spending domestically in its own currency, it can choose to leave reserves in the banking system or it can offer bonds. In other words, it does not have to pay high domestic interest rates if it does not want to, for it can instead let banks hold low (or zero) interest rate reserves. This option is available to any currency issuing government—so long as its spending is domestic. 

 

As discussed earlier, government will be limited to purchasing what is for sale in its currency—and if it is constrained in its ability to impose and collect taxes then the domestic demand for its currency will be similarly limited. So we do not want to imply that government spending is not constrained—even in a sovereign country that issues its own currency.

But if a national government issues foreign currency denominated IOUs, the interest rate it pays is “market determined” in the sense that markets will take the base interest rate in the foreign currency and add a mark-up to take care of the risk of default on the foreign currency obligations. It is likely that the borrowing costs in foreign currency will turn out to be higher than what government would pay in its own currency to get domestic (and foreign) holders to accept the government’s IOUs. 

 

This is usually not understood because the domestic currency interest rate on government debt is a policy variable—usually set by the central bank—but policy makers believe they must raise domestic rising interest rates when the budget deficit rises. This is done to fight inflation pressures or downward pressure on exchange rates that policy-makers believe to follow on from budget deficits. In truth—as discussed above—if a country tries to peg its exchange rate, then a budget deficit could put pressure on the exchange rate. So there is some justification for attempting to counteract budget deficits with tighter monetary policy (higher domestic interest rates). 

 

But the point is that government sets the domestic interest rate on overnight funds, which then closely governs the interest rate on short-term government bonds. So if government wants lower rates on its debt, it can always use domestic monetary policy to achieve that goal. Unfortunately, this is not widely understood—hence—governments issue foreign currency denominated debt and then take on risk of default because they actually must get hold of foreign currency to service the debt. Thus, it is almost always a mistake for government to issue foreign currency bonds. 

 

Conclusion on US exceptionality. So, yes, the US (and other developed nations to varying degrees) is special, but all is not hopeless for the nations that are “less special”. To the extent that the domestic population must pay taxes in the government’s currency, the government will be able to spend its own currency into circulation. And where the foreign demand for domestic currency assets is limited, there still is the possibility of nongovernment borrowing in foreign currency to promote economic development that will increase the ability to export. 

 

There is also the possibility of international aid in the form of foreign currency. Many developing nations also receive foreign currency through remittances (workers in foreign countries sending foreign currency home). And, finally, foreign direct investment provides an additional source of foreign currency.

Next week we will turn to impacts of government policy in an open economy: trade deficits and exchange rate effects.

Marshall Auerback: ECB Must Act as Lender of Last Resort

Some Modest Proposals for Reforming the U.S. Financial and Tax System

By Michael Hudson

On November 3, 2011, Alan Minsky interviewed me on KPFK’s program, “Building a Powerful Movement in the United States” in preparation for an Occupy L.A. teach-in. To clarify my points I have edited and expanded my answers from the interview transcript.

Alan Minsky: I am joined now by Michael Hudson. He is a distinguished research professor of economics at the University of Missouri-Kansas City, and also is president of the Institute for the Study of Long Term Economic Trends. Welcome to the show, Michael.

Michael Hudson: Thank you very much.

Alan Minsky: Michael Hudson is scheduled to address Occupy L.A. as part of a teach-in that includes William Black and Robert Scheer, who will be moderating the panel that Michael will be on this weekend. Michael, I’m familiar with your work and I know that you are a big-picture economic thinker. This is definitely a movement that is asking the big questions about how the global economy and the national economy should be re-organized. What would you say to the movement at large about how best to organize a high-tech modern industrial economy in a way that would produce more social and economic justice?

America is being radicalized by coming to realize how radical Wall Street’s power grab is

Michael Hudson: The Occupy Wall Street movement has many similarities with what used to be called the Great Awakening periods in America. Such periods always begin by realizing how serious the problem is. So diagnosis is the most important tactic. Diagnosing the problem mobilizes power for a solution. Otherwise, solutions will seem to come out of thin air and people won’t understand why they are needed, or even the problems that solutions are intended to cure.

The basic problem today is that nearly everyone is in debt. This is the problem in Europe too. There are Occupy Berlin meetings, the Greek and Icelandic protest, Spain’s “Indignant” demonstrations and similar ones throughout the world.

When debts reach today’s proportions, a basic economic principle is at work: Debts that can’t be paid; won’t be. The question is, just how are they not going to be paid? People with student loans are not permitted to declare bankruptcy to get a fresh start. The government or collection agencies dock their salaries and go after whatever property they have. Many people’s revenue over and above basic needs is earmarked to pay the bankers. Typical American wage earners pay about 40 percent of their wages on housing whose price is bid up by easy mortgage credit, and another 10 to 15 percent for credit cards and other debt service. FICA takes over 13 percent, and federal, local and sales taxes another 15 percent or so. All this leaves only about a quarter of many peoples’ paychecks available for spending on goods and services. This is what is causing today’s debt deflation. And Wall Street is supporting it, because it extracts income from the bottom 99% to pay the top 1%.

What the eurozone needs is functional finance

By Fadhel Kaboub.
(Also featured in the Financial Times)

Sir, The eurozone’s obsession with “sound finance” is the root cause of today’s sovereign debt crisis. Austerity measures are not only incapable of solving the sovereign debt problem, but also a major obstacle to increasing aggregate demand in the eurozone. The Maastricht treaty’s “no bail-out, no exit, no default” clauses essentially amount to a joint economic suicide pact for the eurozone countries.

The eurozone needs a functional finance approach to economic policy, which requires that the European Central Bank, as the monopoly issuer of the currency, acts as a lender of last resort to allow the expansion of aggregate demand through government spending. The ECB’s refusal to use its firepower is what is driving eurozone bond yields to unsustainable levels. The ECB can easily purchase Italian debt to lower yields, but such action would constitute a violation of Article 123 of the European Union treaty. Unfortunately, the likelihood of a swift political solution to amend the EU treaty is highly improbable. Therefore, the most likely and least painful scenario for Italy (Greece, Portugal, Spain etc) is an exit from the eurozone combined with partial default and devaluation of a new national currency. It has been fascinating to watch the entire world turned upside down during the past few weeks over the eurozone’s self-inflicted economic pain – the same pain that so many developing countries have suffered under the Washington consensus austerity measures and sound finance principles.

The takeaway lesson is that financial sovereignty and adequate policy co-ordination between fiscal and monetary authorities are the prerequisites for economic prosperity. In the end, what matters is not the level of the deficit or the national debt, but rather their effects on employment, price stability and economic growth.

Dr. Fadhel Kaboub, Assistant Professor of Economics, Denison University, Granville, OH, US

Response to MMP Blog #24: Foreign Holdings of Government Blogs

Thanks for comments. I’ll return to posting the questions and my responses this week.

Q1: What about the Chinese or others buying US assets with the dollars they have credited to their accounts.  They could have control of US corporations which wouldn't sit well with the US electorate.

A: I recall the exact same “yellow peril” arguments in the 1980s when the Japanese were “buying up” Hawaii and NYC. Look, once they buy US assets they are subject to US laws. If we don’t like what they are doing with “their” property, we change the laws. In truth, is it worse to be subject to the whims of a convicted criminal like Michael Milken engaged in LBOs that enable him to downsize workers and strip off assets; or to a Japanese or Chinese firm that has a long-term interest in producing autos in Georgia? I guess it is a toss-up. In any case, most of the Chinese “dollars” are safely locked up at the Fed, either in the form of reserves or US Treasuries. They get no obvious advantage from that ownership except whatever advantages Treasury Secretary Geithner wants to give to them.

Q2: What do you make of the idea that a weaker dollar would be good for our economy because it'd make it less attractive to export American jobs and possibly bring some back? Would the positive effects of this offset the negative effects of more expensive oil and imports?

A: Estimates of trade benefits of dollar depreciation are almost certainly overstated. First, many of our trading partners “peg” to the dollar—depreciation has no effect at all on them. Second, those that don’t peg are willing to take lower profits (hold dollar prices steady) to keep market share (this has been the Japanese strategy). Third, exports are a cost, imports a benefit so trying to maximize a trade surplus is a net cost maximizing strategy; ergo: just plain dumb. Fourth, forget those old, 19^th century factory jobs. They ain’t coming back, and good riddance. Today low wage workers in developing nations will take them; tomorrow they’ll all be done by robots who don’t mind hard work for zip wages. Alternative: create good paying jobs in good working conditions right here in the good ol’ US of A.

Q3: When foreign central banks purchase U.S. dollars, how does the accounting go from their perspective? Do they mark up U.S. dollars on the asset side of their balance sheets and issued money on the liability side? Does this lead to increase of reserves in the domestic banking system, and they have to issue equivalent amount of bonds to accomodate this? So export led growth, with undervalued exchange rate would still lead to increase in public debt even when government's budget was balanced? And if foreign central banks hold foreign money on the asset side of their balance sheets and domestic currency on their liability, aren't they exposed to huge losses if exchange rates change?

A: Not sure I got all of this, but let’s give it a go. Typical case: a country (say, China) exports goods to the US. Its exporters earn dollars but need RMB (to pay workers, buy raw materials, service debt). Their bank credits their deposit account with RMB, central bank of China credits the bank’s reserves in RMB. So the dollar reserves end up at Bank of China (asset of Bank of China, liability of Fed). Bank of China says “hey, these suckers earn zero interest; I want Treasuries” so Fed debits their reserves and credits Bank of China with Treasuries. Impact in the US: some US bank’s reserves are debited, Bank of China’s reserves credited. No change of total reserves until Bank of China buys Treasuries. At that point the reserves disappear, Fed’s liability to China reduced, Treasury’s liability to China increased. No necessary impact on the dollar/RMB exchange rate since the exports sold and imports bought were voluntary, and China only exported because she wanted dollars (reserves, then Treasuries). The next question always is: but what if China decides to run out of the dollar and dumps Treasuries? Ok, if that happened there could be depreciation pressure on the dollar; in which case China loses since its dollar assets decline in value relative to RMB. Fortunately, China is not as dumb as those posing the scenario. It will not run out of dollars in part because it does not want dollar depreciation.

Q4: This discussion gets to the heart of another question I have regarding the MMT proposition that tax liability is the main reason users value a fiat currency. As there are considerably more dollars held abroad as a hedge against currency runs and also as banking reserves to underpin intl trade, it would seem that foreigners value the dollar and yet have no tax liability to the US government. How does this square with the MMT claim? This also brings to mind another nagging suspicion that MMT focuses too much on nominal values and not on the real value of the supply of goods and services that underpin the currency. My guess is that Chinese sovereign funds will seek diversification out of dollar reserves by exchanging them for dollar-denominated real assets.  Barron's had an article this week that suggests the Chinese govt. will also promote intl trading in yuan to compete with the dollar.  I could see how exchange markets with competing currency bloc issuers could provide the constraints on policy abuse of fiat currency values - a collapsing exchange rate is a highly visible market indicator.

A: Ok: 1. At the extreme, if we impose a $2 trillion tax only on Bill Gates, you can be sure that others will take dollars because poor Bill will work hard for us to pay his tax in dollars. This is a red herring. We do not need to tax all 6 billion people in the world to ensure a global demand for dollars. Tax about 300 million relatively wealthy Americans and you can be sure dollars will be demanded outside the US. Because Americans want them to pay taxes. Ever hear of the “margin”? Here is one place it works. Tax on the margin and you drive a currency. 2. MMT focuses too much on nominal? Hey, MMT is “modern money theory”. Money. So yes, it is focusing on money. Nominal. We could focus instead on the aesthetic value of nose jobs. Then we would call it modern nose jobs theory: MNJT. In any case, like it or not, we live in a monetary economy. Monetary production economy. Capitalist economy. Choose your terms. Money matters. 3. Barron’s? Give me a break. That is your source of analysis? Read more MMP, less Barron’s. More seriously: China will become the biggest economy in the world within 5 years. Its currency will likely replace the dollar in 50. Maybe sooner. Don’t hold your breath.

Q5: To what extent do foreign countries other than China hold US dollars as a way to protect their own currencies? Even if not directly pegged to the dollar, don't many hold dollars to support their currencies in fx markets? If China suddenly desired to hold fewer dollars and started to dump their US bonds, wouldn't the weakening of the dollar that might result cause all those other countries to buy more dollars to build back adequate reserves? And wouldn't that demand tend to support the dollar's value? In effect won't every country that uses dollars to protect its own currency automatically act to protect the value of the dollar as well? If the dollar were to be suddenly devalued for whatever reason, is their any other stable currency that could plausibly be used instead by countries that now use US dollars to protect their own? I can't imagine Euros or Yuan being very attractive ...

A: So many questions, so little time. However, much of this answered above. Yes, many hold dollars to enable them to manage or peg their currencies. Holdings increased after the Asian Tigers’ crisis, when nations came to realize you need an unassailable reserve if you are going to peg. China learned it well. Does it increase demand for dollars. As Sarah would say, “you betcha”. Does devaluation lead to capital losses? Yep. Is there any alternative now? Nope. You can’t get safe euro debts in sufficient quantity. Oh, sure you can buy the debts of PIIGS. Go ahead, they need your help. Germany is a net exporter and the model of fiscal rectitude, so you can’t get their euro debt. So euro is a no-go. RMB? No way. Ditto. It is a better Germany than Germany is. Japanese Yen? Exporter. As an exporter it creates sufficient domestic saving to absorb its large government debt. TINA: there is no alternative to the dollar. Today.

Q6: Okay, I've been waiting for these posts for some time. I don't know how much of the below question you will deal with in next weeks post, so maybe its best if you ignore the parts of the questions that will be dealt with. (1) You mention Japanese domestic saving. Can we just confirm once and for all that the high rates of domestic saving in Japan are the result of large government deficits and little of this 'leaking' abroad due to their running current account surpluses? And can we surmise from this that Japanese savings rates are largely determined BY the government deficits? -- hence, it's the deficits that 'cause' the savings and not the savings that 'allow' the deficits. Sorry, I know I've been pressing this point for  while on here. But I'd like it 'in stone', as it were. (2) In what way does what you say above tie into the Hudson/Varoufakis 'dollar hegemony' argument? I.e. the argument that the US occupies a 'special position' due to its post-war status that allows it to have its currency accepted by others to an extent that no other sovereign can? The kicker here would be that, if there is truth to this argument the US might not like the prospect of currency devaluations not just from the perspective of Wall Street, but also for geopolitical and military (read: imperial) reasons.

A: Thanks for the patience! Japanese gov’t deficits + current account surpluses = large domestic savings. By identity. Yes. Yen for Yen. Causation goes from spending to income to saving; or from injections to leakages, in the normal Keynesian way. Some in US would like dollar depreciation (exporters); some would like appreciation (tourists, and yours truly). The US is special. It has more nukes than anyone else and has shown the world it is willing to use military might. That was not post-war, it was war. That’s real hegemony, not merely dollar hegemony. Nuclear hegemony will trump currency hegemony, I think.

Q6a: Question (1a) -- well stated! Let me try to summarize -- and add a third alternative: Which view is "best"? * Conventional view -- loanable funds: "private savings allow government deficits" * Philip's suggestion: "government deficits 'cause' private saving", or alternatively "private saving is determined by government deficits" * Keynes/Godley view (heh.. as understood by Hugo): Increased private saving constitutes a demand leakage, since private spending decreases. Private saving decisions thereby 'lead' the government into deficit. Because if the government does not go into deficit (to accomodate for the private saving intentions) the economy will slow down (due to the decreased private spending). So: "private saving behaviour 'leads' government deficits" or alternatively "government deficits 'allow' private saving" Philip, is that a reasonable way to formulate your question (1a)? (Question (1b) would then be the question on why so few foreigners hold Japanese bonds -- is it due to Japanese current account surpluses?)

A: Always takes two to tango. By construction, modern government budgetary outcome is accommodative—taxes fall and spending rises in downturn. The downturn, in turn, can be thought of as resulting from inadequate aggregate demand which leads to a reluctance to spend. That in turn results from a preference for saving and especially in liquid form. Ergo: private sector wants to net save in government IOUs, so won’t spend, so a deficit results to satisfy the saving desire. To be sure, causation is always complex but that is a rough and ready explanation.

 Q7: Pretty much. Randy has said many times before that government spending = private saving dollar for dollar. I just want to know if he thinks the case of Japan is a concrete example of this. Its just a very concrete argument to make against the 'Japan is because of high savings' types. "No," you'd respond, "Their savings are DUE TO high deficits coupled with trade surpluses! The government bonds just mop this up. Hence the perpetually low interest rates."

A: Both. Japan has an inadequate safety net in conjunction with 2 decades of recession. Perfectly rational to save. That generates low growth and hence budget deficit. However, since the saving cannot occur unless the budget deficit occurs (and trade surplus) it makes sense to say the deficits allow the desired saving to be realized.

Q8: Could the government be compelled to raise taxes, after issuing so much bonds, paying so much interest, that bond holders become nervous and suddenly rush to buy actual stuff (mines power plants, whatever) before inflation and currency depreciation occur ? As the US dollar shift away from international reserve currency status, isn't a harsh inflation to be expected ? How to deal with it? When governments lended to banks in 2008, were they compelled to do so because the massive losses demanded reserves to pay right away (or go bankrupt) to an amount exceeding what central banks had in their balance sheet ? Have we figures saying just that ? Otherwise why would governments act as Lender of Last Resort and humiliating central banks who pretended to be the ultimate guarantee of the monetary system ? (Yep I was the guy sending an e-mail entitled Lender of Penultimate Resort, I hope I''m not too pressing :D )

A: In a sovereign country, taxes create a demand for the currency and they drain income and thus reduce demand, which can be useful if there is inflation pressure. Obviously that is not the problem in recent years. So, no, there is no reason to raise taxes after the bail-out. The US dollar is not shifting away from international reserve status. Have you been watching Euroland? There will be a huge euro bond sell-off and a run into US Treasuries. Buy them now before Europe gets all of them. Why did the Fed bail-out Wall Street? Because Bob and Hank and Timmy came from Wall Street to save Government Sachs. Not sure it is humiliating, but it certainly is a scandal. Worst in human history.

Q9: As far as exchange rates go, context matters. Switzerland is actually rather unhappy about the fact that the CHF rose so much relative to EUR in the recent crisis, to the point where their central bank decided to put a limit on how high the CHF can go. They want to protect their tourism and export industries. Similarly, it seems to me that a depreciation of the USD wouldn't necessarily be bad for the US. At least, I often read US commentators complain about the perceived de-industrialization of the US compared to the rest of the world. A falling USD could certainly help make production in the US more attractive again, couldn't it?

A: Again, depends on which American you are. Estimates of positive trade effects are almost certainly overstated for the US. For a country like Italy, depreciation could have a nontrivial effect within Europe. Of course, it cannot do that until it leaves the euro and returns to the Lira. No one is going to peg to an Italian Lira. So depreciation does increase exports. Given that most countries constrain demand, exporting is a lot like paying people to dig holes. It provides jobs devoted to waste. Exports mean you produce things you don’t get to consume. Pure waste—might as well just dig the holes, unless workers prefer making Fiats they don’t get to drive. The US would be far better off if it exported nothing, imported loads of stuff, and operated at full employment. Not digging holes but rather doing useful and fun stuff.

Beyond Zuccotti Park

By Mitch Green

Yesterday, under the cover of darkness, Bloomberg ordered the eviction of Occupy Wall Street from their encampment at Zuccotti Park.  Despite an injunction to block the action, the city went forward with its plans to clear the space of occupiers.  The legal showdown between OWS and Bloomberg's New York culminated in Judge Michael Stallman's ruling that tents will no longer be permitted in the park overnight, effectively ending the ongoing occupation at this location.

While many view the eviction as emblematic of the modern police state and its imperative to suppress dissent, others see the city and Brookfield Properties as relatively tolerant.  Apparently NYC landlords have little patience for those that challenge the sanctity of their property, making John Zuccotti and Brookfield seem quite charitable.

But, what if the move to displace OWS is bigger than one privately owned public space?  Perhaps the decision to expel those protesters reflects a growing fear among the elite, that this movement will result in the emergence of widespread class consciousness.  If the movement continues its extension beyond Zuccotti Park, will Occupy Wall Street become Occupy Economics, or Occupy Politics? Source:  Reuters as of 2010.  Key:  Beige - Sysco, Green - Wellpoint, Red-Blue-Purple- P&G, Purple - ADM, Red - Citi, Pink - IBM, Turquoise - AMEX, Blue - Boeing.
The graphic above shows John Zuccotti's connections within the network of corporate governance among the largest corporations in America (top 100 on Fortune list).  Taken to three degrees of separation, Zuccotti is situated within a class of individuals that direct the following corporations:  Sysco, Wellpoint, Proctor and Gamble, Archer Daniels Midland, Citigroup, IBM, American Express, and Boeing.  Zuccotti sits on the board of Wellpoint, which is directly connected to both Sysco and P & G.  Most immediately, a question emerges:  What interests do these three companies have in common?  Might there be a relationship between health insurance, food processing, and pharmaceuticals sufficient to necessitate mutual board oversight?

European Debt Crisis

Roundtable Discussion

and

Special Post-Program Workshop for Teachers:
Teaching Applications for the Secondary Classroom
 

Roundtable Panelists
John Keating
Associate Professor, Department of Economics, KU

Stephanie Kelton
Associate Professor, Department of Economics, University of Missouri-Kansas City

Robert Rohrschneider
Sir Robert Worcester Distinguished Professor in Public Opinion and Survey Research, Department of Political Science, KU
Moderator
Victor Bailey
Charles W. Battey Distinguished Professor of Modern British History, Department of History, and Director, Hall Center for the Humanities, KU

Roundtable Discussion

Thursday, Nov. 17, 3:30-4:30
Alderson Auditorium, Kansas Union

 

----------------------

Teacher Workshop

 

4:30-5:30, Curry Room, Kansas Union

 Participate in a discussion of the Roundtable and receive
free teaching materials and refreshments.
Sponsored by the KU Center for Economic Education

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Both sessions are free.Roundtable does not require reservations.


To attend the Teacher Workshop, contactNadia Kardash nadia@ku.edu to reserve a space.Register early; limited seating and materials available.


 

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Eurpean Debt Crisis Roundtable
Sponsored by: 
European Studies Program
Center for Global & International Studies
Hall Center for the Humanities
Departments of Classics, French & Italian, Germanic Languages

& Literatures, Slavic Languages & Literatures, and Spanish & Portuguese