Monday, July 2, 2012
Sergio Cesaratto — The spurious victory of MMT
Ramanan gets some support. See also Sergio Cesaratto on MMT and currency sovereignty, posted here linking to Prof. Cesaratto's guest post at Ramanan's place recently. This posts generated 58 comments, including comments from Profs. Fullwiler and Cesaratto.
Read it at Naked KeynesianismThe spurious victory of MMT
by Sergio Cesaratto (Guest Blogger) | Professor of Economics at the University of Siena
(h/t Kevin Fathi via email)
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65 comments:
Funny, In a country like Somalia with no real government and no real currency, businesses can manage to keep their shelves stocked, telecom networks active, and gas stations filled. The basic functions happen. Yet somehow these guys maintain their argument that businesses in a country with a stable government and a well managed currency simply can not "keep the shelves" stocked. There are no goods, fx movements, capital investments, capital goods --- NOTHING could be done to provide a balance of payments. These countries have to use a reserve currency or gold or ? to transact otherwise they could not buy the goods they need. I'm curious which country is having a 'hard time' buying oil or cars or whatever without resorting to Dollars or Euros? Lets look at why this hypothetical country can't use their currency, why they don't have an fx market, what their capital flows look like, their real terms of trade look like. Its all fine and good to imagine a hellish scenario, show me.
Picking up on something Ryan Harris just said…
I'm confused and fascinated by the reality that poor countries with much weaker currencies are able to import oil. Why would anyone selling oil want their "worthless" money?
I'd love to read about this. Can anyone link me/us to where all of this is explained?
"I'm confused and fascinated by the reality that poor countries with much weaker currencies are able to import oil. Why would anyone selling oil want their "worthless" money?"
The U.S Dollar is the king in international transactions. Let's say a nation wants to purchase oil. It has to first get funds denominated in U.S. dollars. This can be done by exchanging domestic currency for US dollar but if foreigners are unwilling to hold the domestic currency, the balance of payments deficit has to be financed by official borrowing in US dollars.
The silly intuition - the currency just depreciates doesn't work.
Ramanan wrote: "This can be done by exchanging domestic currency for US dollar but if foreigners are unwilling to hold the domestic currency, the balance of payments deficit has to be financed by official borrowing in US dollars."
It is about price, not quantity. There is always some price that forigners are willing to sell you US dollars at. Why? because It would became extremely profitable for some forigners to import if this was not the case.
This story simply doesn't hold up. Weimar Germany was able to buy foreign currency in auctions even when the currency was in hyperinflation. This is BS IMO. No offence Ramanan.
It is not like you have to finance CAD, you don't need to have one at all.
Ramanan,
that is my point, the unemployment rate is 50%, there is corruption, pirates, violence, drought, and civil war, along with low productivity and little prospect of a better future yet they maintain a balance of payments without Shilling collapse in an illiquid fx environment. It has to be an absolute worst case scenario outside of a hellish Zimbabwe or Weimar where politicians nuked the entire economic system. Surely a modern, reasonably well managed non-convertible floating fx monetary system can only do better than that?
Hyperinflationary scenario produced as proof of defending something. C'mon.
"It is about price, not quantity."
Nopes it's not about price. For example India in 1991 had a terrible balance of payments problem and was going to face a sensational day of the reckoning until the FM (now both the FM and the PM) steered the country into a different direction. It wasn't able to finance it balance of payments even at a lower price than what it is now.
It's not about really about the price.
What policies in India led to the crisis?
On September 24, 1975, the Rupee’s ties to the Pound Sterling were broken. India conducted a managed float exchange regime with the Rupee’s effective rate placed on a controlled, floating basis and linked to a “basket of currencies” of India’s major trading partners.
In early 1990s, the above exchange rate regime came under severe pressures from the increase in trade deficit and net invisible deficit, which led the Reserve Bank of India (RBI) to undertake downward adjustment of Rupee in two stages on July 1 and July 3, 1991. This adjustment was followed by the introduction of the Liberalized Exchange Rate Management System (LERMS) in March 1992 and hence the adoption of, for the first time, a dual (official as well as market determined) exchange rate in India. However, such system was characterized by an implicit tax on exports resulting from the differential in the rates of surrender to export proceeds.
So India's currency was not exactly free floating ramanan.
http://intl.econ.cuhk.edu.hk/exchange_rate_regime/index.php?cid=15
We're reaching toward the Final Frontier of economics. The answer, it seems to me, lies somewhere in between both camps. I think what Cesaratto is missing is that monetarily sovereign governments can fund deficits indefinitely through domestic bank balance sheet expansion, even if the foreign sector does not wish to accumulate the currency. (Something I may have read in Fullwiler?) The problem is resources, as your quote from Mitchell attests.
I side with MMT here (sorry Ramanan)-- as a country with ample physical resources to maintain FE should be able to do so if it has the will. I do agree with Cesaratto (& Mitchell) that a smaller country without the energy or food resources to do so could ultimately face problems; although it strikes me as odd that any country maintaining a FE economy with minimal inflation through deficits should have problems maintaining a current account deficit sufficient to meet its resource needs. Certainly a nation such as that would have something of value to export?
Anyway, I think the trick is that the monetarily sovereign Government must also be "Resource Independent."
One problem with these kind of debates is the tendency towards "no true Scotsman" type arguments.
Countries who experience difficulties with their BOP must lie outside the ideal case to which our analysis applies--otherwise, they wouldn't be experiencing difficulties.
So it's not necessary to think about them.
That is what I suspected, it always is a political problem that prevents the obvious arbitrage opportunities from bringing about a balance. There has to be something else preventing someone from taking the opposite position for greed and opportunism are universal.
So that is a good question for you Ramanan: Would you agree that a country which is resource independent could function with a full employment economy indefinitely if it had the political will, and even if it had large current account deficits which foreign investors may be becoming skittish about?
my thought is that even if those foreign investors turned on that country and the capital flight started returning that currency to the home country, the sovereign government could recognize this and react through money destruction to absorb those flows without excessive inflation, and then maintain full employment domestically. Your thoughts?
"that is my point, the unemployment rate is 50%, "
Well you are presenting it as if ...here's a nation which is doing well and faces no balance of payments constraint.
But it is an inaccurate way in attempting to prove that there is no external constraint because the nation is not doing well.
"So India's currency was not exactly free floating ramanan."
Only a few nations manage to float freely in the international markets and have zero official debt in foreign currency.
You can't simply float!
Vimothy,
Good points if I understand you right.
The conditions are so strict to the point of being a fantasy.
Consider the claim that "Britain cannot default on its debt"
Britain lands into a BOP problem sometime in the next 30 years and its government borrows in foreign currency and then defaults. Surely it will not disprove MMT but MMT's insight is zero in this.
"I side with MMT here (sorry Ramanan)-- as a country with ample physical resources to maintain FE should be able to do so if it has the will."
I'd gues most countries don't have all the resources they need.
and by defaulting I mean defaulting in debt in GBP as well.
"no true Scotsman"
Will surely become a title of a post in my blog on this.
Dave Gerlitz,
Fiscal policy sets the output most of the time (except in periods of occasional credit booms when its the private sector taking over).
There are two constraint on fiscal policy. The first is the capacity to produce of its citizens. (Note resource endowment doesn't explain success of nations well). The second and IMO the more important one is the balance of payments constraint.
It's possible that a nation has a lot of capacity to produce but in a world of free trade, its competitiveness in international markets is not good. In that case, it is constrained.
It isn't difficult to understand this. A current account deficit means a nation's expenditure is higher than its income and while this is not a problem always it can be financed by net borrowing from foreigners. However if it gets out of hand, we have the usual story of borrowing from the IMF, exceptional balance of payments financing such as by issuing debt in international reserve currencies etc.
Alternatively demand has to be kept in check to let the CAD remain at sustainable levels.
Or in extreme case - protectionism.
There are however some better ways of doing it such as non-selective protectionism.
So what you are sayin Ramanan is that country like India needs to live at the expence of the rest of the world. It cannot manage by itself. This is what borrowing in foreign currency is all about in the sense that we are talking about here. We are not talking about Greece here and EZ countries. The country doesn't need to have all resources. All It needs to do is pay for imports with exports. And yes, country with less resources is probably already politically more dependent on resources. Yet there are bunch of people who say the country is better off when It borrows in foreign currency. How? Then It doesn't have to pay for imorts with exports? Ramanan seems to suggest that you need to have CAD and you better think how to finance It. How about not having CAD at all? What will happen if you let the currency float?
Ramanan, can you please give me one example when a county got in trouble because It let its currency float freely. I can give you plenty of examples where some kind of fx fixing led to trouble.
Countries have devalued their currencies many times, many times they devalued too much yet there was no catastrophic end to this.
"Ramanan, can you please give me one example when a county got in trouble because It let its currency float freely. I can give you plenty of examples where some kind of fx fixing led to trouble."
The IMF tries to pressure countries into floating but they don't manage.
Example as you wanted. In 2005 Randy Wray was writing as if nothing bad can happen to Mexico since it floated the Peso. In 2008 it borrowed heavily from the IMF.
Even Australia borrowed a lot from the Fed in 2008.
"Even Australia borrowed a lot from the Fed in 2008."
Wasn't that a swap?
"Wasn't that a swap?"
A line of credit in the form of a swap.
Wasn't Mexico given a precautionary credit line by the IMF in 2008 (with no strings attached) to bolster confidence and strengthen the peso?
(In the middle of the global financial crisis, with oil prices rising).
I thought Mexico never drew on that credit line - it was basically just 'insurance'?
When I say 'no strings attached' I mean they weren't made to change their policies.
Weren't the Fed's swap lines essentially about protecting the US finacial system from the global financial crisis?
"Weren't the Fed's swap lines essentially about protecting the US finacial system from the global financial crisis?"
It's true that the swap lines helped the US itself because it brought down LIBOR or atleast attempted to prevent it from rising. However it also helped Australia. Imagine if the Fed didn't do it - it would have led to serious troubles for Australian banks.
Federal Reserve:
"The dollar liquidity swap lines were designed to improve liquidity conditions in U.S. and foreign financial markets by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress."
"The swap arrangements were introduced to address stresses in U.S. dollar funding in overseas markets. These difficulties were adding materially to pressures in funding and credit markets in the United States and abroad."
"They are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions."
http://www.federalreserve.gov/monetarypolicy/bst_swapfaqs.htm#5619
"One problem with these kind of debates is the tendency towards "no true Scotsman" type arguments....So it's not necessary to think about them."
There isn't a lot of mystery to uncover as to why a fixed exchange rates, convertible currency, or capital controls result in failures. There are more examples than you can shake a stick at. For the last few months Ramanan has been describing edges of the policy range where MMT does not apply so I'm was interested if he found specific cases we could study to see a failure where MMT conditions existed and what caused the problems. I thought he might have something under his hat. We've yet to see a case where MMT has failed when the basic monetary system assumptions were not violated.
"I thought Mexico never drew on that credit line - it was basically just 'insurance'?"
Don't know but not relevant. The point is that it went into trouble.
" by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions."
"There isn't a lot of mystery to uncover as to why a fixed exchange rates, convertible currency, or capital controls result in failures. There are more examples than you can shake a stick at. For the last few months Ramanan has been describing edges of the policy range where MMT does not apply so I'm was interested if he found specific cases we could study to see a failure where MMT conditions existed and what caused the problems."
And what is that non-mystery?
All debtor nations have faced the balance of payments constraint. The argument fixed versus floating is not the best way to look at it. It's true float is better (maybe for some like China and Switzerland fixed is better!). It really misses the point
@ Dave Gerlitz
David, I agree in principle but there are issues in practice. I traveled pretty widely some decades ago and a lot people whom we would consider being in poverty were leading much happier and more abundant lives than people in developed countries.
It's when those countries start to develop that the issues arise. Then all kinds of institutional issues occur. A good example are the so-called primitive tribes in the Amazon that just want to be left alone to get on with life as they have done for millennia. But their ancestral lands are valuable and they don't hold any recorded titles.
Granted, they 'ran into trouble' - in 2008 (middle of the GFC) the peso dropped sharply and inflation in Mexico went up to about 6.5%. The IMF stepped in with the offer of a credit line as 'insurance'. Then the peso strengthened and inflation came down. Mexico didn't draw on the line in the end, as far as I'm aware.
" by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions."
"to minimize the risk that strains abroad could spread to U.S. markets"
Interdependent in this case.
I think the examples you've given here (Australia, Mexico) probably had more to do with the near collapse of the financial sector, rather than a balance of payments constraint as such.
Mexico was clearly experienced a sharp drop in its currency, though other countries have coped with far higher levels of inflation so I'm not sure that it was really so bad. Was it? Maybe you know more about what happened there then I do.
It does raise the issue of whether the international financial sector as it exists now does in fact pose some sort of real threat to the MMT assertion of 'sovereignty'.
We should bear in mind, on this point, that MMT policies do include a radical overhaul of the banking and financial sectors.
Mosler's proposals include not permitting US fed member banks to make loans in fx, for example.
"Then the peso strengthened and inflation came down. Mexico didn't draw on the line in the end, as far as I'm aware."
But they did go into trouble. C'mon!
The fact that there is a backing by the IMF means it may not have needed to use the line of credit but I would assume the central bank was involved in sale of reserve assets.
Any any rate the IMF doesn't lend in the debtor's terms. Also the result of such experience is that nations worry more about having a future balance of payments crisis - meaning fiscal policy is biased toward tightening
"I think the examples you've given here (Australia, Mexico) probably had more to do with the near collapse of the financial sector, rather than a balance of payments constraint as such."
Well that's like saying oh such crisis occur once in 30 years so why worry. The point is that if a nation is a large debtor it will have a lot of liabilities to foreigners as a proportion of gdp (the debt being incurred as a result of CADs) and more likely to have trouble in case of a worldwide crisis.
@ Ramanan
"I'd guess most countries don't have the resources they need."
So does that mean you agree?
Feelings about MMT aside, I'm simply trying to get to the crux of the issue, which seemed to rotate around resources. What I'm getting is that it isn't the US special place as reserve currency, or whether or not a country runs a CA deficit or surplus (as Cesaratto argues), but whether or not they are resource independent which allows them to act "monetarily sovereign" if they have the knowledge and will.
btw "y",
You first have to understand that there are only a few debtor nations with pure float - most nations have official sector debt in foreign currency. The external positions of these nations were okay at the beginning of 2000 (except maybe Australia - have to check). So if there is any proof which can be provided it is 2008.
Combine this with the fact that it is also difficult for nations to purely float. Sooner or later they have balance of payments financing problems and pick up official sector debt in foreign currency.
Agree or disagree, you will see what I mean if you look at it as a story.
'Consider the claim that "Britain cannot default on its debt"'
Since no one I know of in the MMT camp has ever made that claim, why should we consider it?
Of course Britain can default on it's debt any time it likes. No one to my knowledge has claimed otherwise.
The claim as I understand it is rather, that "Britain can never be forced to default on a debt denominated in it's own currency, so long as it remains sovereign over that currency". Which seems to be true by definition.
Of course you can "prove" or "disprove" anything if you feel free to misrepresent the opponent's argument.
Dave,
""I'd guess most countries don't have the resources they need."
So does that mean you agree? "
I didn't say that.
This resource thing was something Nicholas Kaldor argued against when he formulated the balance of payments constraint. Resource Endowment doesn't explain the success of nations. The success of nations depends highly on how competitive their producers are in international markets.
A nation may build good reputation because of this and as a result have its currency acceptable in international markets.
Btw, for me "sovereign currency" is a junk concept. Sovereignty is a good concept.
"Since no one I know of in the MMT camp has ever made that claim, why should we consider it?"
Bill Mitchell says it regularly
"The claim as I understand it is rather, that "Britain can never be forced to default on a debt denominated in it's own currency, so long as it remains sovereign over that currency". Which seems to be true by definition."
Well yeah so long as it remains soverereign - frequently avoided. The definition of sovereign currency is also not the same as what you imply in your comment.
Britain borrows in foreign currency and Britain defaults in GBP!
However Mitchell regularly claims without qualification. And that qualification can become true in the next 30 years - at least a possibility, so why does he mock rating agencies?
Ramanan,
"The point is that if a nation is a large debtor it will have a lot of liabilities to foreigners as a proportion of gdp (the debt being incurred as a result of CADs) and more likely to have trouble in case of a worldwide crisis."
I don't disagree with you on that point. I just think you may be pushing it further than you need to. Wray, Mosler etc acknowledge that countries can have real problems. In the case of Mexico, in 2008 the currency fell sharply and inflation went to 6.5%. Unemployment went up in 2009 to just under 6%. Wray and Mosler would probably argue that despite the currency drop Mexico could still have maintained 'full employment' and done what was needed to carry on.
But trust me I'm listening to your arguments.
"You first have to understand that there are only a few debtor nations with pure float"
I get that. And the MMT economists make the point that their theories apply to currencies that do float. I'm not sure they think everyone could just decide to float tomorrow if they wanted to. Wray mentioned in one of his MMP blogs that developing countries were more likely to be on fixed exchange rates.. So I don't know.
"Sooner or later they have balance of payments financing problems and pick up official sector debt in foreign currency."
That's the bit I'm unsure about. Why do you say 'financing'? Isn't the problem more likely to be high inflation?
You talked before about a rapid fall in the currency leading to banking collapses, but as far as I could tell that was inconclusive.
Lavoie doesn't seem to think MMT has got it as wrong as you seem to think:
"In a closed economy, the existing stock-flow consistent models show that public debt to GDP ratios are likely to stabilize endogenously, even though governments are pursuing full employment policies and let government expenditures and government deficits rise to pursue this objective, provided real after-tax interest rates are not too high. So, this would be in accord with what neo-chartalist (MMT) economists are saying: let us take care of the employment problem first, and the deficit problem will eventually take care of itself, either through growth or through the rise in interest payments by the government, which will generate higher consumption and hence more aggregate demand...
In an open economy, with a flexible exchange rate, where the government borrows in its own currency, Wynne and I would argue that this result still roughly holds. If the government borrows in a foreign currency however, as is the case of most countries, then this in itself is likely to create all sorts of problems."
Marc Lavoie (Philip Pilkington interview)
"Ramanan, can you please give me one example when a county got in trouble because It let its currency float freely. I can give you plenty of examples where some kind of fx fixing led to trouble."
The IMF tries to pressure countries into floating but they don't manage.
Example as you wanted. In 2005 Randy Wray was writing as if nothing bad can happen to Mexico since it floated the Peso. In 2008 it borrowed heavily from the IMF.
Even Australia borrowed a lot from the Fed in 2008.
That really doesn't answer my question. Are you suggesting that peso would have collapsed if the mexican gonernment would not have borrowed from IMF.
The government action doesn't prove anything. You could say by the same token that US was in trouble last summer. If the US government could just issue money, they would not have had this debt stand off. So the fact that Mexican government borrowed from IMF doesn't prove or disprove your claim. So do a lot of governments, even US could do It and probably would if Mankiw ran things. :)
Think of India as having four times the US population, and 1/3 the land area of the US - thus roughly 12 times the population density. India is heavily dependent on imported energy. There has been a thrust on part of India to develop thorium which is abundant in India as a fuel for breeder reactors - something that it seems on the edge of doing. Until that time, India will have a balance of trade problem. Energy needs to be inexpensive for the domestic market for any kind of meaningful economic development. Energy has been at the root of the Indian financial problems.
I would just point out also that many look to the recent example of Iceland as a "success story" due to the fact that they have their own Kroner, and things have turned around over there...
But Iceland did take over $5B from the IMF and others external.
http://reykjavik.academia.edu/FridrikMBaldursson/Papers/1096850/Icelands_Program_with_the_IMF_2008-2011
Iceland has about 300,000 people, and so does the county I live in.
I can tell you if the US govt provided a low interest $5B loan to my county, we would have one hell of an infrastructure here now (all the schools could look like Williamsburg, VA and the baseball fields could look like an MLB park...)
that said, I'd have still wanted to see them "go it alone"...
rsp
Clonal,
"more power to them"... perhaps if they figure it out they can share the tech with us...
rsp,
Where does the disagreement lie here?
It should certainly be possible to define conditions under which it would be impossible for a government to be forced to default on its debt. Then we can rewrite the question and ask to what extent and where do those conditions apply.
Since politics is the art of compromise, it’s not easy to see why these conditions should be satisfied in practice, even if it was possible in principle for the government to satisfy them. And when is that be true?
So there must be a continuum, with harder currencies and less foreign currency denominated debt on one side, and softer currencies and more foreign currency debt on the other.
Clonal: "Think of India as having four times the US population, and 1/3 the land area of the US - thus roughly 12 times the population density. India is heavily dependent on imported energy. There has been a thrust on part of India to develop thorium which is abundant in India as a fuel for breeder reactors - something that it seems on the edge of doing. Until that time, India will have a balance of trade problem. Energy needs to be inexpensive for the domestic market for any kind of meaningful economic development. Energy has been at the root of the Indian financial problems."
BoP problems occur when countries attempt to run ahead of available of real resources, which is possible through both domestic policy that can lead to price instability or to fx issues. This possibility is amplified under neoliberal international policy when emerging countries try to play catch up too quickly and also when due to open access to their economies.
Neoliberal policy is seldom a good policy when there is asymmetry. Most people forget that the US did not run a liberal external policy until post-WWII. It used "protectionism" to get a leg up when it was an emerging country entering the global marketplace.
If the developed countries want neoliberal external policy, they they have to stand ready to accomodate the needs of emerging countries to offset the asymmetry.
The US is doing that to a degree with its out-sized CAD, but it is not sufficient globally, and the US is also not addressing the domestic reaction that a disruption of previous equilibrium that one-sided action necessarily results in wrt an open system as it adjusts to a new equilibrium state.
Germany is not doing that in the EZ and as a result the EMU is floundering.
This is an international problem that makes a "case for concerted action" to address asymmetries.
Matt,
See India to establish nuclear reactor that uses Thorium as fuel: Atomic Energy Commission
See also Nuclear Power in India
I'm sorry I just don't see the difficulty people have with this aspect of MMT. In my intepretation there has always been a big IF in the MMT position.
A country can run a current account deficit IF foriegn agents are willing to exchange their goods for that countries money. It's implicit you will have a problem IF they are not willing to exchange their goods for your money.
I don't think anyone is saying there is no risk running a CAD. If a country cannot trade real goods in exchange for the imports it needs (currently or in the perceived future), there is always a risk the foreign agents will withdraw their goodwill and cease to export.
It'd say it's fairly obvious you can't continue to run a CAD after foreign agents lose confidence in your ability exchange something of real value for their exports.
The USA is still stuffed full of good things to buy with US dollars. If your country is not so blessed with stuff there a lower limit on your ability to run a CAD.
I haven't figured out why some people think they have doscovered such a damning indictment on MMT.
Clonal,
I virtually ran into this guy the other day on the street (in town from MIT for a DOE conference).
He has an 'artificial leaf'.
http://www.youtube.com/watch?v=KTtmU2lD97o&feature=results_video&playnext=1&list=PL42B6FABFAA9BD6B3
Approaches the problem as a 'closed system' (ie earth) and this looks interesting.
Looks like he thinks we can crack H out of H2O via sunlight...
btw I specifically asked him about LENR and he said they are FOS... I think his exact words were "they think they can violate the 2nd law of thermodynamics..."
anyway fyi...
resp,
Andrew: "I'm sorry I just don't see the difficulty people have with this aspect of MMT. In my intepretation there has always been a big IF in the MMT position."
Right. MMT economists say that the the external balance is contingent on changing desire of other countries to save in one's currency. Clearly,the desire to import, especially resulting from the need for resources the country does not have, and changing desire for one's exports also come into play. Floating rates moderate these changes but do nor overcome them. International institutions are designed theoretically to make up for these differences to facilitate development, but that's not always what happens practically.
"A country can run a current account deficit IF foriegn agents are willing to exchange their goods for that countries money. It's implicit you will have a problem IF they are not willing to exchange their goods for your money."
which is not right because the balance of payments financing occurs in both the domestic and foreign currencies. A simple way to disprove the above is when a nation purchases all imports in foreign currency.
i.e., foreigners have a portfolio preference and can simply move out of the currency
"Are you suggesting that peso would have collapsed if the mexican gonernment would not have borrowed from IMF. "
The point is the Peso collapsed and Mexico had an external crisis.
"I get that. And the MMT economists make the point that their theories apply to currencies that do float. I'm not sure they think everyone could just decide to float tomorrow if they wanted to. Wray mentioned in one of his MMP blogs that developing countries were more likely to be on fixed exchange rates.. So I don't know. "
Well they write all sorts of confused things. They are not even sure of their proposals. Mitchell writes regularly saying the nation X (under discussion) should simply float.
"That's the bit I'm unsure about. Why do you say 'financing'? Isn't the problem more likely to be high inflation?
You talked before about a rapid fall in the currency leading to banking collapses, but as far as I could tell that was inconclusive."
A current account deficit is a deficit which has to be financed by definition. If it is financed in the domestic currency it is fine because a depreciation of the currency prevents a revaluation loss on net foreign assets. However, if foreigners wish to not hold the assets denominated in the domestic currency - at some point later, we have banks having trouble financing themselves. So that is what happened to Australia - lot of repatriation of funds by foreigners with banks having trouble.
"they write all sorts of confused things. They are not even sure of their proposals"
I doubt that's true. Sounds more like a cheap shot.
"that is what happened to Australia"
You say that's what happened, but the Fed also arranged swap lines with all sorts of other countries during the financial crisis, many of which had current account surpluses, such as Switzerland, Canada, Denmark, Norway, Japan, Singapore, and Sweden. A swap line was also arranged with the ECB.
"Mexico had an external crisis"
Mexico's crisis appears to have consisted of 6.5% inflation. Granted it may have been much higher without the vote of confidence of the IMF and the "insurance" of its credit line. Inflation is generally presented in MMT as the limit to sovereignty, though it is a flexible limit.
I wonder whether it could be argued that Mexico's 'sovereignty', with regards to its monetary system, is undermined by being a junior member of NAFTA.
Sounds to me like if Mexico had just used only Peso "chips" in it's "casino" aka the 'Mexican Banking System' instead of USD "chips" then Mexico wouldn't have had an external problem.
Thank goodness the US Fed came in to provide more USD "chips" to the Mexican "casino".... gracias Ben!
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