Thursday, May 31, 2012

Brett Fiebiger — The International Dimensions Of Currency Autonomy

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.
Read it at Pragmatic Capitalism
The International Dimensions Of Currency Autonomy
By Brett Fiebiger, PhD
(Cross-posted at Modern Monetary Realism)

30 comments:

STF said...

Gee, where have I heard that before? Oh, yeah, that's right . . . everyone of my colleagues has been saying that for the past 15-20 years.

FD015 said...

STF, did you actually read the article? Or are you just huffing and puffing like you always do?

He says the trade deficit is a potential danger and is using the Godley and Kaldor framework. I am pretty sure "everyone of your colleagues" has not been saying that for the past 15-20 years. In fact, they say there are no imbalances from the trade deficit.

AK said...

Very interesting article.

FD015: I struggle to see where you come to the conclusion that the article is arguing against trade deficits.

Please point out specifics.

Peter said...

Prob referring to this:

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

paul said...

this…

"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"

…is the cause of trade deficits. Trade deficits are the result, not the cause.

Matt Franko said...

"Trade deficits are the result, not the cause"

Then there is this:

"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."

An ex post accounting record CANNOT be the "reason" for anything.

"The bridge has collapsed, that is the reason why the bridge fell down"

"No matter how much I cut off the board is still too short", etc...

This is the same lack of logic that leads people to proclaim that the USD "is the reserve currency" and that affords the US some sort of privileged advantage.... a nation's currency being used as a reserve currency is a RESULT.

The reason is that much of the ROW are in effect mindless "zombies" that zealously seek the USD (and Euro) NFAs.

Anonymous said...

Robert Lucas, rational expectations, and the understanding of business cycles
by Prof. Lars Pålsson Syll
16 May, 2011 at 13:56 http://larspsyll.wordpress.com/2011/05/16/robert-lucas-rational-expectations-and-the-understanding-of-business-cycles/#comment-1004

Greg said...

Paul and Matt

I agree with your comments. There does seem to be a lot of reverse causality thinking going on out there.

Here is something I have considered as an analogy.

If I have the extra income, I can choose not to cut my own grass but instead pay someone else to do it.( I just finished paying 12,000$ to have someone put a new metal roof on my house). I am not being productive by cutting my own grass or someone elses, I am just paying out of extra income. I have accumulated a mowing deficit or roofing deficit which gives someone else a surplus in such things.

Their surplus (to me) is valuable to them as long as I pay. If i impose austerity on myself and wish to pay them less they might say no thanks but it wasnt my mowing deficit that caused me to have to impose austerity, it was a change in my disposable income that I chose to impose on myself. Going out and mowing someone elses grass for money (being more productive) doesnt really help because if I then just turn around and pay someone else to mow mine I could have just as easily mowed my own. Unless I can gouge someone for my mowing or persuade my mower to charge me less than what I got paid to mow I cant get ahead. So simply being more productive will not solve my mowing/trade deficit when I make a choice to pursue austerity unless I can in addition change the payment terms of the deal, in other words unless I either dont pay full price or I charge a premium, which of course would not be seen as fair in any economic models.

So countries with extra income, those with a strong middle class that isnt living hand to mouth will likely accumulate trade deficits, and if we do we shouldnt be ashamed of it nor actively work to reverse it. We should recognize however that as other countries citizens start becoming net consumers our terms of trade will change. The guy who has been mowing might be able to afford a few days off and may tell me no when I ask him to mow my grass. We shouldnt forget how to mow our grass and we shouldnt expect that we will always be able to find someone to do it for the price we want to pay.

Leverage said...

The trade deficit makes sense because the surplus nation thinks it will be able to make an use of these dollars in the future.

You are getting a work today because you may have something useful to offer in the future.

But under this dynamic I wonder if there is a much more evil dynamic at play: Look how much of the SP500 corporations profits are made overseas. The trade deficits are in part a transfer of rent from the american middle class via debt (credit) to american executives and capitalists who are doing business overseas.

After all, even if Chinese or Germans accumulate reserves, there still is ample excess USD going outside, some of it will come back as capital account surplus, but other will stay at the obscene accounts in tax heavens or in corporate balances overseas.

This is exactly the same dynamic we see in Europe, where debt from 'importing' nations is coming back as corporate profits to the export lobby in core nations.

paul said...

Seems to me much of the output we're seeing from the MMR group is affirmation of neo-liberal ideas.

Which is fine, but that isn't exactly a new approach to MMT without the politics.

In all fairness, neither beowulf nor Michael Sankowski have gotten involved in these neoliberal excursions. Their contributions haven't changed at all from the old days.

Anonymous said...

Off topic:

Berlusconi has said the ECB should print and buy government debt or Italy should get out of the euro (and stay in the EU) and print his own currency. Or Germany should quit if doesn't agree with the rest.

He has said his idea is that bank of Italy should start to print euros. He said: "explore this idea"!

Tom Hickey said...

"There does seem to be a lot of reverse causality thinking going on out there."

This is the basis of disagreement in many areas of economics, demand side v. supply side, monetarism v. fiscalism, etc.

Accounting identities are tautologies. They are necessarily true syntactically but they assert nothing semantically. It is impossible to get causation, which is empirical, out of a tautology without interpreting the tautology semantically. That is not always obvious and there is vast disagreement about it in economics.

MMT as a macro theory can be understood in terms of its attribution of causality, which is opposite the mainstream view in many matters. In terms of stock-flow, it is the direction the flow and an explanation of why.

For example, monetarism expects a flow from the monetary base to credit extension through the money multiplier, causing a expansion of the money supply ex ante. MMT shows how the flow runs the other way, from demand for credit, to an increase in money supply (loans create deposits, to an increase in reserves due to cb accommodation of the need for liquidity in the payment system based on the cb acting as LLR (deposits draw reserves). Thus, the money multiplier turns out to be an ex post accounting residual rather than an ex ante cause in this causal mechanism.

Regarding trade deficits, the way I understand it is that the flow begins with a desire to save in the currency of the importing country. If that is not the case, then a trade deficit is not possible without external borrowing, which means that the importing nation must be willing and able to finance its trade deficit in another currency, or else either forego trade or run balanced trade.

Obviously, exporters will only be willing to save in strong currencies, which arise from the strength of the importer's economy), so that gives prosperous countries with strong currencies an advantage that countries with weaker economies hence weaker currencies don't have.

However, some people don't seem to like the notion of "desire to save in the currency of the importer," or else dispute the claim that this is the starting point of the flow.

paul said...

"…some people don't seem to like the notion of "desire to save in the currency of the importer…"

Some people don't like the limitations imposed by gravity either but man is not likely to ever be able to fly unassisted.

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.

paul said...

"Accounting identities are tautologies. They are necessarily true syntactically but they assert nothing semantically. It is impossible to get causation, which is empirical, out of a tautology without interpreting the tautology semantically.…"

So, from…

(G-T) = (S - I)

…one could conclude that it is possible for the private sector to create net money so that the government could accumulate a surplus.

Obviously, the causation is quite the opposite.

Are you saying that this conclusion comes from semantic interpretation, rather than logic?

Logically not semanticly.

Tom Hickey said...

Logical (necessary) truth (tautology) and logical contradiction (impossibility) can say nothing about how things stand. They are the limits of language. Scientific truth and falsity lie between logical necessity and impossibility along the range of probability extending from approaching zero to approaching 1. There cannot be a mathematical model of the universe known to be empirically true apriori. Testing hypotheses against evidence is required.

Therefore the consistency of formal models predicts nothing about the world. Models have to interpreted semantically, with reference to the world (how things stand), to be causally predictive.

Causality is asserts something specific about how things stand. Generally speaking in science, a causal transmission mechanism has to be provided by the theory as any explanation of why things happen in the world as they do.

paul said...

Tom,

So where does logic fit in?

Matt Franko said...

Paul,

The term "sematics" is itself a bit slippery:

http://en.wikipedia.org/wiki/Semantics

"The word semantics itself denotes a range of ideas, from the popular to the highly technical. It is often used in ordinary language to denote a problem of understanding that comes down to word selection or connotation. This problem of understanding has been the subject of many formal inquiries, over a long period of time, most notably in the field of formal semantics."

I have been thinking of it in terms of the bold sentence above.

Tom's expertise in this area is at a very high level (PhD in Philosophy from Georgetown which has to be if not the best school..) and often exceeds my immediate understanding.

Resp,

Matt Franko said...

I think MMT explains the causality much better than any mainstream Theory....

Resp,

Tom Hickey said...

"So where does logic fit in?"

There are rules for sign use. That's logic in the broad sense. Those rules apply only to the use of signs. In a formal system, this is explicit and fixed, and in informal systems like ordinary language implicit and shifting.

Science prefers formal systems of expression in model creation. The first step is logical/mathematical, making sure the rules have been followed rigorously. Secondly, the logical system is semantically interpreted as a a putative map (theory) of some section of the universe, generally in terms of change (flow).

Hypotheses for testing against evidence are then carefully formulated, and experiments designed to test a hypothesis against evidence in a rigorous way.

To the degree this procedure is not followed, it's not "science." This generally is only possible for the hard sciences. So other science is "soft" in comparison.

The goal of orthodox economics is to make economics hard science, but that is not possible due to the nature of the subject matter, which is not limited to change measurable quantitatively in terms of space-time-mass-energy.

Letsgetitdone said...

I've got some comments on persistent trade deficits in this recent piece: http://www.correntewire.com/the_fiscal_summit_counter_narrative_part_4_the_deficit_the_debt_the_debt_to_gdp_ratio_the_grandchild

I think mine is a balanced perspective, emphasizing long run economic and societal sustainability though not supportive of a balanced trade policy.

Greg said...

"For example, monetarism expects a flow from the monetary base to credit extension through the money multiplier, causing a expansion of the money supply ex ante. MMT shows how the flow runs the other way, from demand for credit, to an increase in money supply (loans create deposits, to an increase in reserves due to cb accommodation of the need for liquidity in the payment system based on the cb acting as LLR (deposits draw reserves). Thus, the money multiplier turns out to be an ex post accounting residual rather than an ex ante cause in this causal mechanism.

Regarding trade deficits, the way I understand it is that the flow begins with a desire to save in the currency of the importing country. If that is not the case, then a trade deficit is not possible without external borrowing, which means that the importing nation must be willing and able to finance its trade deficit in another currency, or else either forego trade or run balanced trade.

Obviously, exporters will only be willing to save in strong currencies, which arise from the strength of the importer's economy), so that gives prosperous countries with strong currencies an advantage that countries with weaker economies hence weaker currencies don't have.

However, some people don't seem to like the notion of "desire to save in the currency of the importer," or else dispute the claim that this is the starting point of the flow"


Excellent comment here Tom

Getting back to my lawn mowing analogy, obviously the guy who is willing to mow my lawn for money wants MY money. If he wanted something else he'd ask for a trade. So as he accumulates my money week after week for mowing my lawn a "trade deficit" is building up but as long as he wants my money its sustainable. But.... it is his desire to have my money which is driving it, it seems obvious to me. I have little control over it. All I have is the desire to not mow my lawn and for someone else to do it. That in itself is nothing but a desire which can only be satisfied if I have a currency a lawn mower wants.

Matt Franko said...

"But.... it is his desire to have my money which is driving it, "

Right Greg it has to be. Otherwise, you would have to believe that the exporting nation would want to work for the importing nation "for free".

Resp

paul said...
This comment has been removed by the author.
paul said...

Tom, Matt

Thanks. I'm trying to "get it".

Youre painting an abstract picture and I can kind of see a shape but don't recognize it yet.

I will have to keep on probing.

Curses I need an edit function. Delete Comment is the only edit choice.

Tom Hickey said...

There are three categories of sign use in semiotics, syntactical, semantic and pragmatic. Syntactics deals with the rules for using sign in a system, i.e., formation and transformation rules. Semantics deals with interpreting signs as symbols used descriptively, i.e., as having denotation. Pragmatics deals with the purposeful use of language in social context, which includes uses such as prescription, injunction, etc.

http://en.wikipedia.org/wiki/Semiotics

geerussell said...

the flow begins with a desire to save in the currency of the importing country. If that is not the case, then a trade deficit is not possible without external borrowing, which means that the importing nation must be willing and able to finance its trade deficit in another currency, or else either forego trade or run balanced trade.

This goes straight to the point about "original sin" and what it means for a nation, especially a developing nation, to live within its means. Seems to me that external borrowing in foreign currency to finance a trade deficit is the very definition of living beyond your means. A failure of policy that seems to be encouraged in equal part by predatory foreign lenders and inept or corrupt leadership in the developing nation.

There will be instances where a nation must import things like capital equipment or energy as building blocks for growth but if it's doing that in excess of what it can finance via exports the situation needs to be reassessed. Maybe it's overreaching for faster growth and needs to slow down. Or if it's truly so barren that it can't muster enough surplus production to fund even modest growth, the international response should shade towards grants, not loans. (Or creative financial innovation of the Impact Investment variety)

It seems like the status quo is a lot more biased towards keeping developing nations where they are than nurturing them towards developed status.

Greg said...

"It seems like the status quo is a lot more biased towards keeping developing nations where they are than nurturing them towards developed status"


Yep. Those thats gots, keeps. The original sin is trying to get your share

Trixie said...

Brief PSA interruption:

UMKC is located in Missouri and not "some University in the middle of Kansas". For those that are still confused, see here:

http://www.kansascityisinmissouri.com/

And now back to your regularly scheduled programming...

Tom Hickey said...

Right. The folks on the coasts consider the rest of the country "fly over territory" and the folks in Manhattan, and DC, consider the rest of the country "the provinces." The South is, of course, "backward" and Texas "crazy." Oh, and far as the rest of the country is concerned, California is for dopers, the certifiably insane who can still cope outside, and other people who can't take reality, while Manhattan and DC are "bubbles" filled with people who are completely out of touch. :o