Saturday, 5 January 2013

More support for MMT's external sector analysis

One of the points that comes out of MMT's floating rate analysis is that when export-led nations and import-led nations trade with each other there is a tendency for the export-led government sectors to accumulate net-savings in the import-led government sectors. This is due to liquidity action and intervention by the export-led nations in support of their exporters.

Ambrose Evans Pritchard in the Telegraph describes this incorrectly as a currency war (Switzerland and Britain are now at currency war, Daily Telegraph, 3 Jan 2013). He states 'The Swiss and UK central banks are effectively fighting a "low intensity" currency war against each other' without realising that this is essentially the normal state of affairs. It's just that at the moment it can't slip under the radar because the effects are large due to the level of net savings in all the economies.

The graphs in the article are instructive though - showing clearly how the Swiss are loading up on other country's 'debt' to keep their currency down. What MMT suggests is that this, plus the interest paid on it, is unlikely to see the light of day again. Because to do that would be to invite your own currency to rise - to the detriment of your export sector. So these financial assets essentially become 'prisoners of war' - held in Stalag Central Bank Ledger and out of circulation.

Only a policy shift away from an export-led economy would change the balance - at which point the nation is wanting to sell less abroad and more at home. Which of course reduces imports naturally in that nation's trading partners.

So it's not the US that is 'special', and its not Japan that is 'unique'. It's a general phenomenon - certainly amongst the wealthier nations.


Anders said...

This is effectively the normal state of affairs"

Do you mean that the Swiss have always been intervening (ie even pre-EUR ceiling)?

How can one distinguish accommodating from manipulating behavior by a central bank?

Neil Wilson said...

For an exporter to sell there has to be enough of their own currency in circulation for the financial arm of the transaction to complete.

Standard liquidity operations seem to have a tendency to move foreign savings to the government sector of the exporting country. Think 'sovereign wealth funds', etc.

It's slow and over a long period of time normally.

I don't think you can differentiate because the line is very grey. And I'm not sure that it matters - because all a foreign power can do in this case is worsen their own real terms of trade.

WillORNG said...

Part of this is the fallout from the Asian crisis encouraging them to give away their own resources to richer countries so they could hoard/sequester a major world currency buffer.

cig said...

Are the Swiss really export led though? If foreigners want to deposit (for non spending purposes) in your currency, and you want your xrate to stay at the level it would be if there was no such demand for stale deposits (the 'real economy' rate), you have to buy the foreign currency, usually issuer gov debt, to cancel the deposit operation. One could categorise deposit taking as an 'export' I guess, but being a monetary phenomenon it may be worth distinguishing.

Jim Whitman said...

Hi Neil
Is there something written on MMT floating currency analysis that would help illuminate exactly the points you are making?

Neil Wilson said...

Randy Wray's latest book 'Modern Money Theory' has several chapters on the external sector.

Because it is complicated with lots of factors that have to inform policy.

pp212-215 has a run down of the 'twin deficit debate' and in there is this:

"In sum, a US current account deficit will be reflected in foreign accumulation of US Treasuries, held mostly by foreign central banks".

The foreign export-led nations don't want depreciation of any currency area they depend on for export sales.

Tom Hickey said...

The problem is that no one is modeling the global economy as a closes system yet, and so individual countries harbor false assumptions and expectations in terms of the math constraints. It's really analogous to thermodynamics, and some people seem to think that they can make low pressure flow to high pressure without expending any energy. There are no free rides and no perpetual motion machines.

Anders said...


Have you seen this piece? I mentioned it to Warren but he didn't seem to think it was of interest. It seems pretty important to me - guys from the Fed and Pimco advocating that the monetary policy be subordinated to a play an enabling role for fiscal stimulus - albeit temporarily.

Neil Wilson said...

I think that is monetary policy trying to justify its existence. Essentially saying 'you might not need us now but you will in the future'.

The job of monetary policy is to maintain the Treasury's overdraft and make sure the payment system continues to work.

We need rid of it because we need to remove the narrow viewed technocrats from positions of political influence over the purse strings.

If you spend all your time exclusively with bankers the solutions you come up with will always have something to do with banks and lending money.

That's similar to those who spend all their time with others who smoke dope. Their solutions to everything always involve smoking more dope.

Tom Hickey said...

Anders, I posted the McCulley & Pozsar paper over at MNE where there may be some discussion. I hven't read it yet.

Anders said...

Neil, I think that's slightly unfair. McCulley and Pozsar are volunteering to bow down before the altar of fiscal policy. This sounds very much like functional finance to me!

One can object to the presentation taking a monetary policy standpoint, but, to use your terminology, it is the dopeheads that are in control at the moment, so you have to bear with them - at least until the marketing pitch is ready!

Tom Hickey said...

McCulley used to be one of THE "bond vigilantes" as a managing director of PIMCO. He knows how the game works and what needs to be done to pitch policy. He's one of the good guys.