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.