Monday, September 24, 2012

Warren Mosler's draft presentation to some euro central bankers in October


Sneak peak.

MMT DALLAS DEFICIT OWL COMMITTEE
Draft
Warren Mosler

10 comments:

y said...

"the price level is necessarily a function of prices paid by the government of issue when it spends, and/or collateral demanded when it lends."

Can someone explain this to me? I've read this by Mosler before but never understood it.

Tom Hickey said...

Simply means what it says. Government can bidup prices by competing for scarce goods in the market and accepting high offers or it can bid under the market and wait for sellers to meet its bid if it wishes to lower the price level. Govt purchases in such volume that it can move markets in either direction by setting its price accordingly.

Govt controls its "own rate" through its cb setting the interest rate, and could influence the "other rate" (price level) through setting the floor wage iaw the MMT JG.

Wekasus acct said...

My guess is that he is saying that the amount of government spending and taxing plus the amount of central bank lending determines what prices are. If the State wants to increase the price of most things the government could spend more, and/or relax central bank collateral requirements. For example if the State allows cars as acceptable collateral then this would increase the demand for cars. This would drive up the price of cars and the inputs needed to build cars.

Of course the state could do the opposite if it wanted to slow aggregate demand.

Wekasus

Tom Hickey said...

I think it has to do with buffer stocks, which is traditionally the way govts control "other price," .e.g, commodity buffers like the Australian wool buffer and US grain buffers. On occasion the US has also tapped the strategic petroleum reserve to lower oil/gasoline price during supply shortages. Economists have observed that a govt can control oil price by using a buffer stock all the time to set the market price by affecting supply and demand.

y said...

how does the exchange rate fit into that? If there is a flight out of the currency and the exchange rate collapses, how can the government setting the price at which it buys and lends stop prices from spiralling upwards, given the rise in import prices?


Also, a buffer stock lowers prices by increasing supply. That's different to the government setting the price level through its spending or lending. And it may be limited in scope and duration, depending on how large the reserve (oil, for example) is.

Wekasus acct said...

how does the exchange rate fit into that? If there is a flight out of the currency and the exchange rate collapses, how can the government setting the price at which it buys and lends stop prices from spiralling upwards, given the rise in import prices?

My belief is that changing the amount of state-spending and state-lending is inadequate at preventing a currency collapse. This belief applies to situations where the market has lost confidence in a currency. I believe that the state would need to resort to physical capital controls. Basically controlling the amount of money in the economy. This would become tedious as this could only be implemented on a per-transaction basis. So when I read the above statement by Warren, I basically believe it only applies to economies where markets still have confidence in the currency.

To reduce the effect of a costly import, the state would need to reduce the demand for such an import. The preferred mechanism will depend on the import.

Wekasus

y said...

but the exchange rate is precisely MMT's problematic area, as far as I can see.

In the Columbia talk Wray said he couldn't see why countries (like Brazil etc) pay interest on their debt. They do that to support their exchange rate.

Wekasus acct said...

but the exchange rate is precisely MMT's problematic area, as far as I can see.

In what way do you mean this?


In the Columbia talk Wray said he couldn't see why countries (like Brazil etc) pay interest on their debt. They do that to support their exchange rate.


I think most MMTers would agree that paying interest on soveriegn debt is a silly idea! But I don't think that interest is paided to support the exchange rate. What supports the exchange rate is what can be bought with the currency of concern. For example if American goods are in high demand, then naturally American dollars will be in high demand. If the American government prefers an export-driven economy then the FED can issue USD and sell them for other currencies. So if the Japanese want some American hotdogs the FED can help the Japanese by selling them USD.

If the Japanese no longer want American hotdogs but prefer French crossiants then the Japanese will dump their American dollars. Naturally this would cause the American dollar to collapse. This may not be explicitly clear by MMT, then again maybe it should! :)

There is one chap by the name of Ramanan that believes that MMT inadequately explains currency markets. I don't understand the argument so I can't really give my opinion on it. However, I do believe that the nation that has its currency widely accepted as the means of payment between countries does have a 'special privilege', and it has the ability to run significantly higher trade deficits than other countries.

Wekasus

Tom Hickey said...

y Also, a buffer stock lowers prices by increasing supply. That's different to the government setting the price level through its spending or lending. And it may be limited in scope and duration, depending on how large the reserve (oil, for example) is.

Govts use buffer stocks by buying when price is at the floor of its desired price corridor and selling when as the price approaches the ceiling of the corridor. This has typically been done in commodity markets in the past.

y said...

The Indian 10 yr bond yield is currently over 8%.

Yes the Indian government could choose to pay 0% on its debt, but then the Rupee would probably depreciate significantly, possibly even collapse in value.

The US (and UK) get to have very low rates because everyone wants their currencies. In turn US and UK banks demand high interest rates on developing countries' bonds. If they don't get what they want, they sell the developing country's currency and its value falls.