Modern Monetary Theory & International Trade

A pretty old issue – Ancient silk road trade routes across Eurasia.

I had planned to do a somewhat longer Q & A type post on this topic, partly based on this exchange with Warren Mosler where Warren writes “And in any case, in general they all remain blind to the fact that imports are real benefits and exports real costs.”But really I think most of the issues are discussed so well by Sergio Cesaratto in the following links that there is  not too much to add:

NAKED KEYNESIANISM: The spurious victory of MMT

and summarized so well here

Some Serious Criticism of MMT  (this includes good stuff from Bill Mitchell, the bit on Kazakhstan)

I will still post a few thoughts later, but if anyone has not read Sergio Cesaratto’s stuff (and the comments, especially by Neil Wilson) they will find them very enlightening.

5 Thoughts.

  1. “Returning to the criticism to Wray and his MMT fellows, full monetary sovereign, that is the power of a country to issue a non-convertible currency that is fully accepted for domestic and foreign payments, is not, with the possible exception of the US, a full prerogative of all countries and, therefore, the panacea MMT exponents envisage.”

    MMT doesn’t argue that the capacity to make foreign payments in one’s own currency is a panacea. The point Wray is making is that having a current account deficit simply isn’t a big issue in terms of running out of money or “debt” to countries like China.

    A currenct account deficit is a demand drain on the partner running the deficit: we get goods and services produced in another country, and in exchange they get dollar reserves. They can convert those reserves into another currency or they can spend them buying assets denominated in U.S. dollars.

    The “panacea” is that a monetarily sovereign country can always afford to spend up to the limits on its domestic resources and generate full employment.

  2. Right – it is like thinking of your own money just as any other commodity, and we wouldn’t think of two countries trading two different commodities as unbalanced. I think the point of the criticism listed above is, though, most troubled countries, in addition to having poor governance and/or limited resources, also have a currency no one wants as a commodity, so they are pretty screwed even if they are an issuer.

    The part about domestic spending is indeed crucial and for some reason is just not understood widely enough – a sovereign currency issuer can spend domestically to achieve full employment. In the international sphere, the benefit of being a currency issuer is not so clear (a gov’s fiat and tax power does not apply outside its borders), and as was pointed out really only applies to well-off Western countries. It amounts to saying that the well-off are in a good position because they are well off.

    The MMT position is an important corrective for countries like the US – to quit worrying about something there is no need to worry about. We can send $ abroad til the cows come home as long as people want them, and they will for lots of reasons about the USA (and Europe can do the same, and the UK). I think the point in the criticism, however, is to point out it is no fix for poorer countries. They still have to achieve more productive societies (or be like Saudi Arabia or Australia and have resources, although somewhere like the Congo shows how clearly social organization trumps resources, as does Switzerland in the converse situation).

    • “I think the point of the criticism listed above is, though, most troubled countries, in addition to having poor governance and/or limited resources, also have a currency no one wants as a commodity, so they are pretty screwed even if they are an issuer.”

      I think that’s right. The issue is, as I see it, that poor productivity is harmful to a nation’s ability to acquire via international trade, for exactly the reason that others aren’t going to want to save in its currency. If country X doesn’t produce anything desirable then there’s no reason to stock up on its currency by exporting to it.

      Basically the international value of a currency is dependent on the efficacy of the issuer’s governance and resource allocation. Trading partners are going to be wary of even a very productive nation if its political system is dysfunctional and unstable, because they’d have no assurance their investments and reserves would be sare.

  3. Within a country, money is valuable by fiat and the power of the gov. to tax. But internationally, neither of these apply
    Therefore a currency must be valuable for some other reason on the international market. Basically, on the international market money is valued (and acts like a commodity) because some combination of being backed by

    1. desirable natural resources of the issuer

    2. the technological/organizational ability of the issuer to produce desired (the more technologically advanced and value added, the better) goods

    3. and/or the social capital and political stability of the issuer.

    Australian money on the international market embodies a lot of (although not only) resources; US Dollars embody a lot of political power and stability – the US exports its political power and stability via dollars (or people like to store US political stability in their banks, you might say). German Marks (in the past) and Japanese Yen to a great extent embody technological and organizational power.

    Reason 1. is always precarious – markets change, or resources run out.

    Reasons 2 and 3 are good and go hand in hand. However, the US, for example, gets stuff (as Mosler points out) from the world because they want US stability in their bank accounts – this is a real good and there is no imbalance. There is no money imbalance between China and the US – they are happy for us to have their stuff and to hold US Dollars, or they would not do it.
    But the US shouldn’t let other people making our stuff end up undermining reason 2 above – technological and organizational capacity to produce desired goods. This is strategically dangerous for starters.
    Worse, it undermines a major domestic MMT goal – full employment. We (I am American) cannot long stay a politically and militarily powerful country without a rich and varied economy that provides many different types of jobs for the population. We can’t depend on political stability and power alone to guarantee people are going to want to keep holding our currency in return for giving us stuff in the long run. Better to have a richly varied manufacturing sector along with political stability.{The US also has a lot of natural resources and tech./org. power, so there is not too much of a problem; but with more borderline nations, they really must think to themselves very hard: “why would anyone even want our [Dalasi, Dinar, Lempira, Mohar, Qiran, Shekel, Tallero]? That is a very good question.

    Also, on Bill Mitchell’s point – if you are a country without many internationally desired resources, nor much skill in producing things the world wants, and without a lot of political credibility, then MMT principles of foreign exchange are useless to you- no one is going to want your currency, period. Maybe MMT principles can help in the domestic arena, but perhaps even that is doubtful as even there people will prefer to hold foreign currency, and the gov to impotent to tax. Then again, this just amounts to saying that a screwed up government/economy is a weak government/poor economy and vice versa, which we all already know anyway.

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