Monday, 24 February 2014

It's the Exporters Stupid.

A very good article here that comes closer than most to what I consider the crunch issue.

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.

Every analysis I've seen analyses the situation from the point of view of the currency that is being depressed. Almost none look at it from the exporter's point of view. So where are the goods they no longer can sell to the importer going to go in a world where overall export growth is fundamentally limited by the increase in world income? In a world where 'export led growth' is the insane mantra, that is a mistake and leads to a mistaken view and mistaken policy recommendations.

So its a bit like borrowing from a bank. If you import a little then the exporters own you. If you import a lot then you own the exporters - because they then have nowhere else to go.

The shift to manufacturing in the 3rd world has generated a huge export overhang with the West. They *need* to export to the West or their economies collapse. And that is one of the reasons why the Western currencies have remained valuable - because the Eastern countries are forced to run up huge stockpiles of the stuff to enable their economies to work.

And that will continue until they realise they are being had, eliminate the export overhang and move to domestic consumption. You'll note that the Japanese have only just done that, so it ain't something that is going to happen overnight.

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.

No country has an automatic right to import any more than it exports. The corollary to that is that no country has an automatic right to export more than it imports. It has to buy that right - either by stockpiling foreign financial assets or by convincing a bunch of dumb countries into a monetary union so that it can export its unemployment to them - cf. Ecuador vs. USA, Greece vs. Germany and arguably Scotland, Wales and Northern Ireland vs. England.

So let's stop looking at this problem from the wrong end.

It's the exporters stupid.


Ramanan said...

"For me the policy response to sliding currencies is to control the distributional inflation by temporarily banning the import of 'luxury' items."

Yeee! Import controls!

But wait a sec ... I thought for Moslerians, imports are benefits because economics is the opposite of religion.

Neil Wilson said...


If you're going to comment, then drop the facetiousness and engage with the argument.

Taking simplified points from a talk and trying to spin them out of context is a practice reserved for the politicians, creationists and neo-liberals. You're better than that.

Here's Randy on the subject:

"But 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."

For me the threat of the imposition of import controls and capital controls - imposed, in extremis, to slow the change so that the economy has time to adjust to a lower currency level - should be enough to control things via expectations.

There is nothing unusual about this. Stock Exchanges have timeout periods and rivers have flood barriers. It's a perfectly sensible shock response - certainly more sensible than putting up interest rates.

Ramanan said...


The reason for what you call my facetiousness is that what you are saying is so contradictory to what is found in the MMT blogosphere.

Regarding Wray, he says that but also says "Imbalance, what Imbalance".

Wray is trying to have it both ways. In fact your quote suggests that the inability of doing so - may because of opposition from mainstream economists and policy groups, think tanks, corporations is a constraint on fiscal policy in reaching full employment.

Here is Mosler who claims using Buckaroos as example that without any controls, full employment is possible:

Neil Wilson said...

I'm sorry but you're trying to twist words to fit your beliefs.

Much like Palley is doing, and for the same reason. You don't have an answer to the actual argument.

Ramanan said...

Well feel free to believe that.

Funny how the just deficit spend sayers are now advocating import controls. Nothing wrong with the latter, but funny.

Neil Wilson said...

There has never been anything in the MMT literature, when properly read, that suggests otherwise.

The line put forward has always been that the interest rate response is largely counter productive, and that the exchange rate should be allowed more space to find its level. But beyond that there are other policy tools that can be put in place to handle extreme cases.

You are unlikely to get melt down because exporters can't allow it to - and they are in competition with each other so one can gain an advantage over the other by stepping in.

Warren has mention a 20%ish band that currencies tend to move in and as the linked article above shows you need a lot more than that before you get serious supply side inflation any way. Normally the distributional issues are resolved via an increase in price of luxury items.

I'd suggest putting in place import and capital control systems that come into action on an extreme movement, which then gives market participants a steer as to what will happen on extreme moves. What that is saying is if the market won't sort out the distributional battle then the government will step in and force the issue.

I'd say that is a very sensible policy suggestion based upon a correct understanding of how the exchange system works on the ground.

Ramanan said...

"There has never been anything in the MMT literature, when properly read, that suggests otherwise. "

Ha ha ha.

Neil Wilson said...

Still no engagement with the argument I notice. I need to see that before you get any more comments published.

Brian Romanchuk said...

Thanks for the compliments on my article.

I agree with Neil that it is unfair to take some quotes out of context. There are some hidden assumptions embedded in MMT, but they seem relatively obvious, and authors cannot spell out every caveat in every single paragraph they write.

For example, MMT assumes that there is an effective tax system; you will not be able to have welfare state policies and price stability unless taxes can take a bite out of nominal activity. However, this assumption does not apply to a lot of countries. Yes, but so what? Having an effective tax system is an obvious necessary reform, but no one is going to stick that disclaimer in the middle of a discussion about policy options for OECD countries.

If you are a policymaker in Iceland, you have an inherently difficult problem with the external sector. This is a place where McDonald's had to leave the country after the crisis because it was unable to import beef (at least that is what I read on the internet). However, the disappearance of McDonald's is not exactly an issue on the radar screen for a lot of other countries. The message of MMT, as far as I understand it, is that countries face real constraints, and those real constraints will vary depending upon the situation of the country.

PeterM said...

How does this apply to Germany? They are running an external surplus of about 7%. Their internal budget is just about balanced.

So, if these figures are right, sector balance accounting must mean the private sector is taking in all of this?

Is this an inflation risk for Germany? How are the export surpluses recycled to the net importers? Is it the private sector banks who are purchasing treasury securities rather than government?

Auburn Parks said...

Great Post Neil

I'd like to add a thought that has not been mentioned thus far in the discussion. Everyone has referenced the term "rich nations" in some guise but nobody has brought up the wage level as a natural corollary.

For example:
In a perfectly free trade environment, the cost of any good should roughly be:
labor costs + plant, equipment, financial services costs etc. aka capital costs + transport costs

What does it matter if labor and transport cost ratios are inverted?

If the Chinese can afford to ship socks half way across the globe to my local walmart (and still be priced competitively with socks made 90 miles away in Milwaukee) because of their relatively cheap labor costs, why should that matter more than the size of the deficit?

In other words, why is it better to suppress our wages in order to placate the trade balance gods, than to just run bigger deficits?

Unless we are willing to impose tariffs to artificially inflate import prices, as long as we have higher wages, as far as I can tell, we will be a net importer.

Neil Wilson said...

"So, if these figures are right, sector balance accounting must mean the private sector is taking in all of this? "

Germany is in a currency peg with other countries. For Germany to run the export surplus it has to net lend to the external sector, and that has to come from the German financial system.

Germany is 'vendor financing' its export surplus. The capital account has to mirror the current account - Euro for Euro.

You can see a good chunk of this via the TARGET2 balances which shows how many Euros Germany has placed centrally with the Euro clearing system.

Some of that has now been replaced with direct lending, rather than intermediating via the ECB, but the balances are still massive.

Neil Wilson said...

B110 has left a new comment on your post "It's the Exporters Stupid.":

@Ramanan "Ha ha ha."

You have a beautiful opportunity to cite these contradictions from the literature here. I suggest you do so instead of posting these junk comments.

...provided these contradictions even exist, of course.

colin baker said...

Neil, I am having trouble reconciling the "rest of the world" sector plus the "private sector"; being financed by the "government sector" deficit, with the balance of payments deficit being "balanced" by "net lending from the rest of the world". (the B9 in the national accounts). Who is paying whom for the net imports

Neil Wilson said...

It's B9 in the national accounts across all sectors. All the B9's sum to zero (statistical discrepancy aside).

See Table C page 6 in the national accounts

The same data (just about) is in Table I of the quarterly accounts (pp 60)

Neil Wilson said...

Very much so. I have a piece on here about how to make banks work, which is based upon Minsky's view of what banks should do.

Warren Mosler's piece at the Huffington Post is a similar sort of thing from the US viewpoint.