Randy Wray: MMT and External Constraints

By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally posted at New Economic Perspectives

To Fix or To Float, that is the question.

MMT argues that a sovereign government that issues its own “nonconvertible” currency cannot become insolvent in terms of its own currency. It cannot be forced into involuntary default on its obligations denominated in its own currency. It can “afford” to buy anything for sale that is priced in its own currency. It might be able to buy things for sale in foreign currency by offering up its own currency in exchange—but that is not certain.

If, instead, it promises to convert its currency at a fixed price to something else (gold, foreign currency) then it might not be able to keep that promise. Insolvency and involuntary default become possible.

Generally speaking, the nonconvertible, floating exchange rate currency system provides more policy space. Government can use fiscal and monetary policy to pursue the domestic agenda. Fixing the currency reduces policy space because government must consider its promise to convert. That can conflict with the domestic policy agenda. For example, it is usually (but not always) the case that the government must pursue policy to ensure a positive flow of foreign currency (or gold) to be accumulated as a reserve to maintain the peg.  That usually means domestic unemployment to keep wages and imports down.

So far, this is just logic. Pegging your currency adds a constraint: you need to obtain that-to-which-you-peg in order to ensure you can convert at the pegged price. How binding is the constraint? It depends. In the case of China today, its “managed” exchange rate is not very binding. For example, China has committed to fairly rapid growth of domestic wages. By contrast, in the case of Nepal, the peg against the Indian currency is constraining. If Nepal were to pursue China’s policy of raising wages, her trade deficit with India would grow; unless she could somehow increase remittances from her workers abroad, reserves of Indian currency as well as dollars would be depleted. Her peg would be threatened and a currency crisis would be likely.

Now, would China or Nepal benefit from floating? I have no doubt that China would eventually be in a position where floating would not only be desired, but it would be necessary. China will probably float long before it reaches such a position. China will become too wealthy, too developed, to avoid floating. She will stop net accumulating foreign currency reserves, and will probably begin to run current account deficits. She will gradually relax capital controls. She might never go full-bore Western-style “free market” but she will find it to her advantage to float in order to preserve domestic policy space.

If she did not, she could look forward to a quasi-colonial status, subordinate to the reserve currency issuer. China will not do that.

MMT emphasizes that in “real” terms, imports are a benefit and exports are a cost. Floating the currency and relaxing capital controls allows a nation to enjoy more “benefits” (imports) and fewer “costs” (exports). The nation can “afford” to enjoy all the output it can produce plus whatever output the rest of the world wants to sell to it. It “pays for” those net imports through expansion of its capital account surplus. On the capital account, this is reflected in rest of world accumulation of financial claims denominated in the importer’s currency.

The balances balance. While many say the USA has a “trade imbalance” because the current account is in deficit, there is no imbalance because the capital account is in surplus. Dollar for dollar. There cannot be an imbalance. Foreigners want the dollar assets, and so they sell their output to the USA. Perhaps it is their national interest to do so; perhaps it is not. This is not a matter for me to judge. It is certainly in someone’s interest or they would not do it. Maybe the exporters run policy. Maybe the rich elite do. Or maybe it really is in the national interest.

Brian Romanchuk has a great piece up at his blog: “Why Rich Countries Should Float Their Currencies” (see here). He’s a bond market expert who recognizes that rich, developed countries do not face an “external constraint” so long as they float. I’m not going to repeat his whole argument—you really should read his piece—but here’s the main point: if foreigners want to sell their output to your country, you don’t need to worry about how to get the foreign exchange to finance that.

There is an accounting relationship that says that foreign entities* have to place financial inflows into a country to match the outflows corresponding to its current account deficit (ignoring small external flows like foreign aid transfers). This seems to imply that foreigners have veto power over a country’s policies, and I have seen arguments that domestics are forced to borrow in foreign currencies as a result of the accounting.

 However, the volume of foreign exchange transactions have been found to be an order of magnitude larger than what is needed to support trade flows. This hyperactivity is partially the result of foreign exchange trading, but it also reflects very large gross cross-border capital market flows. These flows determine the relative value of currencies. The ultimate counterparty to an importer is most likely a foreign investor who wishes to run foreign exchange risk; there is no necessity for domestics to have to borrow in foreign currencies to finance imports.

 It is very possible that a fall in the currency will make a current account worse (as imports become more expensive, and quantities do not immediately adjust), a point that was made in the comments to my previous article. But since the valuation of currencies are driven by capital flows, not trade flows, this cannot go on forever. The domestic wage bill of exporters is being deflated versus international peers, and they become more competitive. (Imported input prices rise in local currency terms, but they pay the same world prices faced by competitors.) Since the exporters are more competitive, expected future profits rise, making domestic equities relatively more attractive. This effect will eventually limit the weakness of the currency. And the empirical reality is that the developed market currencies move around a lot, there appears to be a limit how far they can deviate from a purchasing-power parity fair value estimate.

Although currency volatility is disruptive, companies can use currency hedges to limit the impact of short-term volatility. In a country like Canada, where currency volatility is expected, business managers have learned the hard way that external currency economic exposures need to be controlled. (For example, the next year’s expected foreign currency revenue may be hedged, giving time to react to forex moves.) Conversely, what we we saw in Asia in 1997 was that businesses had come to rely on central banks stabilising the currency, and they engaged in speculative cross-currency exposures (such as borrowing in U.S. dollars because “interest rates were lower”). To paraphrase Minsky, instability is stabilising.

 In any event, I argue that a bid for a developed market currency always exists at some price, because of the potential demand for local currency financial assets. It would require the currency to essentially cease to exist in order for there to be no demand for the currency. This could result from the government repudiating its debt, or regime change (war, revolution). Additionally, it could result from a mass default by the domestic banking system. The latter possibility is very real, and it explains why that it is necessary for regulators to prevent domestic banks from building up foreign currency exposures (as seen in Iceland). This implies that there is a constraint on regulation – banks must be regulated in a fashion that is coherent with a free float in the currency. Many countries have failed to regulate their banks properly (e.g., foreign currency mortgages are commonplace in many countries), but their incompetence does not mean that it is impossible to run a banking system properly.

To put this as succinctly as possible, if you offer US or Canadian or Australian Dollars, or UK Pounds, or Japanese Yen, or Euroland Euros, you will NEVER find a lack of bidders. The only question is over the price. Heck, I’ve offered Mexican Pesos, and Colombian Pesos, and Turkish Lira and many other currencies  many times, and never found a lack of bidders.

Brian goes on to admit he’s only talking about the situation of “rich” countries. He says he suspects it is better for the developing countries to float, too, but they face difficult problems that he doesn’t feel he knows enough about.

I’m with Brian on that. Frankly, I do not know if Nepal would do better if it floated. I suspect that for many of the world’s poorest countries, the exchange rate regime is not the central issue—and they are probably screwed whether they fix or they float.

Critics of MMT love to point to such cases as proof that MMT is somehow wrong. They challenge us to find a solution to the problems faced by poor countries. If MMT cannot find a simple solution to the complex problems facing developing nations, then somehow MMT is wrong. It is a most bizarre claim.

All we claim is that with a sovereign, floating currency a government of a developing nation can “afford” to employ all its domestic resources that are willing to work for the domestic currency.

Will such a nation be able to import all that it wants? Probably not. Would pegging the exchange rate allow it to import more? Maybe—but then it is very likely that it will have to give up full employment at home. And it will be subject to insolvency and default risk (because it has promised to deliver something it might not be able to deliver).

Is that a trade-off that is in the domestic interest? I doubt it, but I am not sure.

What I observe out in the real world is that pegged exchange rates in developing countries are usually in the interests of the elites—who like their luxury imports and vacations in NYC and Disneyworld. Typically somewhere around half the population is either unemployed or “casually” employed (washing windshields of the luxury imports at stoplights).  Seems like a bad trade-off to me.

The big bogeyman usually raised is “inflation pass-through”. A floating currency opens the possibility of exchange rate depreciation that raises the costs of imports and “passes through” to domestic inflation. As Brian says that inflation impact is usually vastly overstated.

Neil Wilson has a good take on all this, too, in his piece “It’s the Exporters Stupid”:

The key point is that if a currency moves down so that imports become ‘more expensive’, then the ‘inflation’ that goes off is a distributional response that tries to eliminate some of those imports so that the exchange demands equalise. That also eliminates somebody else’s exports.

The important thing to remember is that when a currency goes down, all the others in the world go up in relation to it and nations that rely upon exports (export led nations) start to lose trade – which depresses their own economy.

Any one of those other economies can intervene in the foreign exchange markets, purchase the ‘spare’ currency and that will halt the slide for everybody. And all exporters to an import nation have a central bank with infinite capacity to do that.

Export-led nations have to constantly provide liquidity into the rest of the world to allow others to buy their goods. Otherwise the rest of the world runs out of the particular money that is needed for the export transaction to complete and the export never happens (UK buyers buy Chinese goods with GBP, but Chinese workers are paid in Yuan. The relative shortage of Yuan due to the export differential has to be provided by the Chinese or Chinese goods become, in absurdum, infinitely expensive).

So the important insight, IMV, is that exporters need to export and the central banks that support that policy with ‘liquidity operations’ will ultimately halt any slide for any important export destination – either explicitly or implicitly through their own banking system….

For me the policy response to sliding currencies is to control the distributional inflation by temporarily banning the import of ‘luxury’ items. That forces the problem onto the exporters, which they can relieve by systemically intervening and fixing the currency imbalance. Forcing them to do what they normally do through the course of trade.

I agree with Neil that it is better to float and then deal with the pass-through inflation; and it makes sense to force as much of the “pain” of fighting the inflation on the rich as possible. After all, they are the ones importing the BMWs and taking the kids to Disneyworld. As Neil notes in response to Ramanan, I have argued as follows: “the MMT principles apply to all sovereign countries. Yes, they can have full employment at home. Yes, that could lead to trade deficits. Yes that could (possibly) lead to currency depreciation. Yes that could lead to inflation pass-through. But they have lots of policy options available if they do not like those results. Import controls and capital controls are examples of policy options. Directed employment, directed investment, and targeted development are also policy options.”

I am not flippant about the many real constraints faced by a poor, developing nation. At an early stage of development, imports are very hard to get. The national currency faces little external demand. The world doesn’t want the nation’s produce, so it cannot export. Borrowing foreign currency can easily lead to excessive debt service and financial collapse.

Neither floating nor fixing is going to easily resolve these problems. That MMT does not have an easy solution to them does not, in my view, prove that MMT is flawed. My suspicion is that floating the currency and taking advantage of the sovereign’s ability to spend domestically is a step in the right direction. Capital controls are probably necessary—even more so if the country does not float. Foreign aid is probably necessary to finance needed imports.

Full employment of domestic resources is even more important for the developing nation than it is for the rich, developed nation. And yet what we find is precisely the reverse: unemployment is much higher because the government thinks it cannot “afford” to offer jobs. Hence, MMT can offer useful advice even if it cannot offer a magic wand to wish away all the problems faced by developing nations.

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  1. allcoppedout

    Some critical edge here – http://static.squarespace.com/static/51ab60bee4b0361e5f3ed7fb/t/52dd394ce4b086a638882980/1390229836102/RWER%20no.66%202014%20J.Huber%20MMT%20and%20NCT%20comparative%20discussion.pdf – and here – http://bib03.caspur.it/ojspadis/index.php/PSLQuarterlyReview/article/view/11552 – and here –

    I’m afraid I’ve lost all faith in economics. MMT at least helps us question what money is. I think we need to be more radical on wealth distribution, bent politics and media, analysis of work, its allocation and motivation to do it. We need to exclude race to the bottom conditions and the motivation to massive inequality and dominance through accumulated money. It’s so easy to enter in to technical quibble on MMT (as above) I doubt it has much significance in the real change needed.

    1. Ben Johannson

      If poor nations can’t import then they literally have to make everything themselves, which effectively consigns them to permanent poverty. Contrary to your statement, trade and currency policies are crucial to justice and equity.

      1. craazyman

        If they have sufficient natural resources why can’t they make things themselves? Consider Matthew 6:28. What if they were the only people on earth, what would they do then? Import from another planet? Not intending to be flippant, these are serious questions that illuminate the totally imaginary nature of “money”

        1. susan the other

          If poor nations can’t import because they are not technologically advanced enough to produce things other nations want in exchange for the high tech they wish to import themselves, isn’t the argument obfuscating the fact that if they had the technology they would not have to import all that stuff? So a better solution all round, for employment, equity, conservation of national wealth and natural resources, and the environment – etc. would be to provide the required technology to poor nations. If they are so poor they can’t even produce what they want with the help of (essentially) donated technologies then it doesn’t matter in the first place. Trade is just a ruse to enrich middlemen (banks) and international corporations who really don’t make “profits” because they have such enormous tax subsidies in their domestic nations where they manage to socialize all their losses. MMT (which is good for a domestic economy) really doesn’t seem to apply here. I don’t trust trade arguments.

          1. craazyman

            I think you’re on to some quite solid reasoning. Economics is a mental disorder because it can’t separate the ideas of quantity and form. It would be as if the Greeks couldn’t separate Apollo and Dionysus. You can throw quantity at formlessness and the formlessness won’t change, but you can throw quantity at form and the form can enlarge itself. If economics is criticized on these grounds it resorts to the “normative”/”positive” dodge. The dodge fails to recognize that quantity-based economics arguments presuppose the existence of a specific idea of form, and are therefore “positive” sui generis. This is a bit abstract, I admit, but it’s still a “QED from the Reality Ranch.”

          2. Calgacus

            You and craazy are right. Poor nations are not consigned to poverty by not being able to import. Earthlings are not consigned to poverty by not having the Vulcans trade with us, although of course those snooty bastards could help. Of course trade can only make things better IF the poor country has political independence – military and national security, security from threats of massive economic warfare from the economically developed, morally degenerate states. Basically if the poor country is big enough, has a strong enough state, and uses its political independence intelligently. Then classical “free trade” ideas apply, and trade can only benefit the poor nation. But it is a big “IF”.
            But the main way that the developed world has underdeveloped everybody else is by fooling them into cutting their own throats by suggesting, intimidating them into following insane policies. “The most potent tool in the hands of the oppressor is the mind of the oppressed.” (Steve Biko)

            MMT (which is good for a domestic economy) really doesn’t seem to apply here. I don’t trust trade arguments. MMT is perfectly good for international economics, covers external trade etc already, as Wray’s article emphasizes. Unfortunately many/most MMT fans don’t understand this. They should read Lerner, or Keynes’s essay, “National Self-sufficiency”. Using modern technology, but (near)total isolation from the rest of the world, autarky, would be better for many poor countries, especially big ones, than the entirely destructive, prima facie insane policies that they are fooled into that govern their foreign interactions.

        2. Ben Johannson

          Very few nations have the necessary resources. The U.S. did because it’s a continent, but Burkino Faso doesn’t have that advantage. It needs outside trade to develop the technology and industrial capacity to make more of the stuff it wants to have. When countries do manage to develop a lot of these things on their own they typically do it by conquering an empire and extracting the needed resources from others as Japan did in the early 20th Century. After WWII the U.S. made large technology transfers to Japan with the intent of developing its economy as rapidly as possible, but if we’d simply bottled them up in their islands it’s a good bet the Japanese wouldn’t have the third largest economy in the world.

      2. diptherio

        Here, I think, is the (or a) crux of the situation:

        pegged exchange rates in developing countries are usually in the interests of the elites—who like their luxury imports and vacations in NYC and Disneyworld. Typically somewhere around half the population is either unemployed or “casually” employed (washing windshields of the luxury imports at stoplights). Seems like a bad trade-off to me.

        Take Nepal, a country with a twelve month growing season, soil that can easily be turned into bricks, and a still-existing base of knowledge on traditional, sustainable agricultural techniques. There is no question that the country contains within it’s borders all of the essentials necessary for life. While it is true that Western-style advertising has infiltrated the culture and drives endless wants, just as it does here, it is also true that every single one of my friends, despite wanting to live in the city now, when they’re young, all want to retire to the village where there are little or no “mod-cons”….and that’s a big part of the reason why they want to spend their declining years there. Westernization is still new enough in Nepal that even my youngest friends, now in their late twenties, can remember a time when it was possible to travel to any temple in the country and be sure of finding free hospitality at every place you stopped along the way. And they have all lived without mod-cons and they know it’s not that bad, most of the time.

        What I’m saying is, most of the normal po’ folk that I hang out with actually have pretty limited import needs. Cell phones are a God(dess)-send in that country and motorbikes have made getting around much easier (so long as you’ve got one). In Nepal though, most people still remember what it takes to actually lead a happy life: hang with friends, drink tea, make jokes, play music, have the occasional intoxicant and dance your heiny off. And that’s what life in the village revolves around (not that village life is perfect, by any means). It’s not a lack of imports that can make life difficult for average people, it’s not being able to afford enough food because half the countries rice output is being shipped to India. That’s a real problem that needs solving.

        Not being able to afford as many imports as they “want” isn’t that big of a problem, from what I can see. Most of the people who consume lots of imports are, as Wray implies, relatively well-off and constitute a small minority of the population. Most people can’t afford to buy imports as it is.

    2. Calgacus

      As for those papers I don’t see the immediate relevance of the older ones, and Huber doesn’t understand what he is talking about. A major part of his argument is a not very intelligent syllogism:
      Bank(sters) are bad. [OK]
      MMT descends from the 19th century Banking School [True enough].
      Therefore MMT is bad.
      About as serious as a proposal to destroy piggy banks and river banks because banks are bad. F Beard isn’t that hostile to banks! The most basic policy of MMT & real Keynesian economics is that unemployment= forcing people to not work is never beneficial, thus the JG. And all by its lonesome, the JG will end the worst maldistribution, inequality, dominance etc. – as Wray says “predistribution, not redistribution” is most of the answer.

  2. Hugh

    If imports destroy local industries and jobs, who cares that a plus in the capital account might result?

    I agree with allcoppedout’s concerns. I agree too that MMT helps begin the conversation about what money is. But its failures to tie money to resources and look at the end purpose of the economy seriously weaken any appeal it might have.

    1. Adam1

      MMT is all about real resource utilization. What you complain about is poor (or elite interest) policy response to what is occuring. Local industries don’t have to be destroyed. MMT says there is policy space to ensure those industries (or new one) and people can remain employed. However it does not say that such policy will be IMPLEMENTED, just that it can be. At some point theory gives way to real local politics and those with the power and means to make policy decisions.

      1. Hugh

        This is, of course, completely beside the point. As Dan Kervick notes below, resource utilization to what end, for what kind of a society? What is a resource? What is the nature of work and employment? Again what are their purposes? MMT does not engage on any of these. At best, it punts as you do, “Theory gives way to real local politics, etc.” The whole point is that if economics is not tied into the larger questions of what kind of a society we want to have, it is a thoroughly pointless excercise.

      2. Calgacus

        Absolutely right, Adam1

        Hugh: But its failures to tie money to resources
        That is not a failure, but a success. It means “being careful.” “Tying money to resources” usually means some form of the commodity theory of money. Which is wrong. The only sensible way to tie money to a resource is the JG – the labor standard – the equation of a dollar with labor time – which is the basic source of all wealth, and always was what the value of money was really tied to. Like all true science, MMT is all about finally noticing what was in front of your nose all the time.
        and look at the end purpose of the economy seriously weaken any appeal it might have Of course MMT looks at “the end purpose of the economy”. But ultimately these purposes are not the decision of academics, but of a self-governing people. The 2 main purposes focused on by academic economics are low inflation and low unemployment. MMT points out that there is a very, very, very easy simultaneous solution which has worked spectacularly well whenever it has been even half-tried – just run national monetary economies as everything else is run – full employment.

        There is no larger question, no more important point than this. Thinking that there is, incorporating “end purposes” and “resources” usually means carelessly falling into classical or neoclassical errors – usually that it is all about redistributing an immutable pie, not making your own pies, with the aid of the very real, but completely “imaginary” (conceptual, moral) not-thing called money. MMT & the JG is like saying: Part of your business plan is that you should not burn your store down every 5 years to sacrifice your inventory to invisible Dark Gods. Totally worthless advice – except in a world like ours! Where it is immeasurably valuable – where everybody has convinced themselves that these Dark Gods exist, and the cult beliefs have infiltrated the corners of everyone’s minds.

          1. skippy

            That was uncalled for Hugh and beneath someone of your capacity.

            To elaborate, which is more beneficial to human needs w/ an eye to sustainability, transactions or the perceived value of the “thing” that enables transactions [at any given point in time and space]. Its just numbers Hugh, given gravitas via quasi religious morals about claims on stuff or outcomes expectations.

            skippy… are you to say we can’t fix stuff because were out of money?

    2. Dan Kervick

      I follow the economics blogs fairly closely, and in recent weeks they have all gone back to discussing unexciting academic topics, and arguing about history. That’s a sign that for them the crisis is over and it is time to move on to business as usual.

      Some types of macroeconomics are superior to other types, and offer more solid guidance in the area of countercyclical policy. But in the end, countercyclical policy is all about returning the economy to a normal state of full employment, mean trend levels of GDP growth, etc. But if normal is itself awful, economics has little to say about it.

      Macroeconomics, with its lofty, abstract aggregates, has no way of distinguishing a situation in which the society is fully-employed in the expanding production of goods and services conducing to a world of beauty, love and human flourishing from a world in which they are fully employed in an equally rapid expansion of mutual abuse, human degradation and sadism. For macroeconomic economics, 3% unemployment is 3% unemployment; 5% growth is 5% growth.

      Real structural change requires engagement with social and political issues that lie outside the parameters of permissible professional economic discourse. As a result, if economics is the study of the allocation of scarce resources, most economic issues are too important to be left to the economists.

      1. diptherio

        I have determined that it would be good macro-economic policy for the US gov’t to hire half of the unemployed to kill the other half. You see, the expense to the government of hiring so many people would be exactly offset by the cost savings realized due to the reduction in unemployment, food stamps and other entitlement payouts. The books will balance and unemployment will be reduced, so it’s a win-win…QED

      2. Ben Johannson

        The purpose of economics should be the allocation of scarce resources for the well-being of the most people. Well-being is the only goal worth pursuing.

  3. Jim Haygood

    “MMT principles apply to all sovereign countries. Yes, they can have full employment at home. Yes, that could lead to trade deficits. Yes that could (possibly) lead to currency depreciation. Yes that could lead to inflation pass-through. But if they do not like those results, import controls and capital controls are examples of policy options. Directed employment, directed investment, and targeted development are also policy options.”

    Excellent description of Venezuela and Argentina. Workers Paradises!

      1. F. Beard

        Actually, it’s government-backing for the usury for stolen purchasing power cartel, the banking system, that is the biosphere’s worst enemy since it subsidizes a form of endogenous money, credit, that REQUIRES exponential growth so the usury can be paid.

        Otoh, common stock (shares in Equity) is an endogenous private money form that ALLOWS but does not REQUIRE growth, that shares rather than unjustly concentrates wealth and power, that gives everyone who accepts it some equity, rather than someone else’s debt.

        What’s that expression? “Everything I needed to know in life I learned in kindergarden”? So what part of “people should share”, don’t people get? And no, theft by the so-called “private” sector is NOT countered by theft by the public sector anymore than two wrongs make a right except accidentally and probably not for long.

        1. allcoppedout

          Spot on Beard. Afghanistan wanted to try change along the Turkish model with local production and new agricultural methods (towards western modernisation). This was about 1930. ‘We’ screwed that and the unholy mess continues. Thinking Islam for a moment, we have Islamic banking, and nice as this sounds on equity and risk sharing ahead of interest, I haven’t seen it do anything about poverty or fair shares. Words, of course, are only a small part of the equation.

          I see the problem as Nietzschean, but reject his ‘solution’. ‘Conscious of the truth he has once seen, man now sees everywhere only the horror of the absurdity of existence’ (Birth of a Tragedy, about p.60). I believe this true, but also that some form of biological-hierarchic castration makes us feel this way. MMT has a few degrees of the theoretical optimism that economics has fathomed the nature of the ‘things’ it studies and that knowledge has the power of a panacea to fix stuff. Randy and others could face the same ridicule Nietzsche focused on Socrates, which wouldn’t be my point at all. I want to believe in a fix and think we still need to understand the enemy better. Hence we have to pay some attention to Nietzsche and other apologists for a very cruel rich and biological determinism like most economists. The danger is that we go native and get married into the enemy camp. I’m not sure MMT puts the question marks in deep enough or in the right places. But then I’m not much for the scripture-swankers, but find Beard knocking a lot of nails on the head and we seem to have forgotten some radical religious origins in freedom demands against the very debt indenture rampant now. My own guess is that economics is not rational and lacks the very spirit of (admittedly an ideal type) a free speech situation.

          1. F. Beard

            The problem with the Islamic model is yes, there is no interest required but there is still profit-taking which is bad according to the Bible (except from foreigners?) And from a common stock as private money point of view, there is no need to distribute (take) profits since the profits accumulate in the number and price of the shares. That said, some distribution of fiat from the company’s assets may be necessary so the stock owners can pay their taxes (with fiat, of course).

            1. F. Beard

              I.e. Islam still allows dividends while the Hebrew Bible allows neither interest nor dividends, at least not from one’s fellow countrymen.

            2. F. Beard

              Actually, a common stock campany should NEVER distribute fiat since that is a reduction of the company’s assets. Instead, let the stock owners sell some of their stock to pay their taxes if necessary.

  4. JGordon

    “What I observe out in the real world is that pegged exchange rates in developing countries are usually in the interests of the elites…”

    Every policy in every part of the world is in the interest of the elites. No matter which particular ideology you decide to base your society around the elites will subvert and take it over given a bit of time–whether that is “Communism”, “Capitalism”, Fascism, Keynesianism, or MMT. No matter which policy alchemy is tried, a certain segment will always come out ahead while everyone else is screwed.

    That’s because in the current world the state of things is not determined by theories but by might. The strongest win. The end. With that recognition of reality we can switch from ineffective strategies for improving the lives of people–such as advocating bizarre and complicated monetary theories that rely on multiple untested and jury-rigged premises to function–to effective strategies which would include things like teaching your neighbors how to grow and preserve their own food and working together to create local community support structures that can replace the ossified and decaying central structures.

  5. JuneTown

    “”MMT argues that a sovereign government that issues its own “nonconvertible” currency….””
    Theoretically-speaking, of course.

  6. Synoia

    MMT emphasizes that in “real” terms, imports are a benefit and exports are a cost.

    Without rational explanation. It appears as a form of dogma with tortured logic.

    Please explain why nominal imports are of less quality that goods imported.

    1. Adam1

      You’re thinking about it wrong. If for a moment you think about total imports and exports as a pile of stuff, who would you rather be… the nation who works really hard so that they can produce things and send them to another country (export surplus) OR the country that consumes all it needs PLUS what some other country send them (trade deficit)?

      When looking only at the real things (not monetary things) exports are costs and imports are benefits.

  7. washunate

    It’s interesting contrasting this piece with the one up about CEO pay.

    Inequality and its inherent authoritarianism is the elephant in the room, regardless of whether monetary policy is a fixed exchange rate or a floating exchange rate. What matters is who gets the money, not how much is printed.

    1. F. Beard

      What matters is who gets the money, not how much is printed.

      If your defintion of “money” includes credit then why should the probable ability of the so-called creditworthy to repay what is in essence the purchasing power of the entire population*, NOT back to the population, mind you, but to the banking cartel which legally stole it, entitle said “creditworthy” to loans of stolen purchasing power? It doesn’t, morally speaking. Creditworthiness does not exist as far as government-backed/enabled banks are concerned. Otoh, credit extended by the government for the GENERAL WELFARE is proper.

      *By virtue of the banks’ enormous government privileges.

      1. washunate

        I agree credit is distinct from currency. Obviously if we have a more fundamental view, the concept of money would encompass everything from currency to credit to gold coins to cigarettes to bus passes. But I just meant currency, the colloquial usage of money, where neither non-financialized credit nor real tangible assets are money.

        One of the biggest failures of liberalism during the past couple decades, in my opinion, has been how it has jumped in bed with the idea that currency should be given to the thieves rather than being taxed from them (ahhhhh, austerity!). I heartily agree backing bankster credit with public currency is rather immoral, not to mention impractical and unwise.

        The whole point, after all, of a floating exchange rate is that markets should clear based on price rather than government decree. If one actually believes that philosophy of market-based economics, well, the price of bankster orgs should be right about zero.

    2. Calgacus

      Yes, but the point is that only floating rate can always allow money to get to working people, can always allow rational policy. Foreign exchange rate “monetary” policy is important because it is not really monetary policy at all, but fiscal policy. And usually one directed “in the interests of the elites” (the extremely, ridiculously short term interest, too) – which as Diptherio notes above, is the crux of the situation.

      Monetary policy hardly ever does much of anything one way or the other. Which is why its mystical power is the focus of academic “economics”, coupled with the incredible, ludicrous idea that “fiscal policy” – real government policy – is ineffective.

      1. washunate

        I agree floating exchange rates are better*.

        But, this is basically irrelevant. The reason industrializing nations have difficulty with exports is due to meddling by the industrialized world, from direct military intervention and sanctions to more subtle – but equally traumatic – corporate welfare and looting.

        *of course, more fundamentally, I would argue that all exchange rates are floating exchange rates. Fixed exchange rates are only fixed until they aren’t.

  8. F. Beard

    Morally speaking*, a nation’s fiat should float, not only against other nations’ fiat but against everthing else too otherwise governemnt is either stealing from (exchange rate is too low in which case confiscation is also required) or subsidizing (exchange rate too high) special interests. The former is tyranny while the later is fascism.

    *Ethics is a tool that cracks many (nearly all?) problems wrt symbolic purchasing power creation.

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