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.

Anonymous said...

The causality is wrong.

Some of the biggest anglo-american culture economies have had a policy for 30-40 years of exporting demand and importing unemployment, and they have hugely succeeded at that.

They call that with euphemisms like “controlling wage inflation” or “reducing the power of unionized industries”.

Importing capital and exporting jobs also helps drive down interest rates and up asset prices, and helps to cut taxes while at the same time financing multiple wars.

They have had monetary and fiscal policies driven by the desire to fund cheap imports and to make it cheaper for corporations to offshore entire industries.

To a large extent the imbalances in China have been made possible by the flood of cheap money and the other policies that the largest anglo-american countries have adopted.

Indeed one of the themes of M Pettis work is that when “core” countries choose to flood the world with credit, including expanding adoption of ZIRP, “peripheral” countries suffer (if that’s the right word) with extreme investment booms. It has been to some extent a good choice for China that the chinese government have decided to “sterilize” some of the flood by creating a “saving glut” parked in USA securities.

Anonymous said...

This is the usual delusion of some MMTers that issuing your own currency means one can always rectify an unsustainable debt position on their own. The condition for being able to default indirectly is not having the "right to issue money", but the *credibility* to issue debt in whichever currency lenders are willing to be repaid in.

It's all about credibility.

Argentina would like to borrow in their pesos, Cambodia would like to borrow in their riels, and nobody is sort of willing to do so. If you wan to lend a few dozen billion dollars to Argentina or Cambodia in their own currency, please go ahead!

Just look at greek government borrowing interest rates and drachma exchange rates in 1985-1995.

Conversely, "deficit-fetishist" countries like Germany can borrow at -0.25% in a "foreign" (one that they don't control) currency like the euro. Norway can also borrow at -.25% in their own currency but only because it has real liquid (oil) wealth to back the value of that currency.

It is one of the common delusionary conclusions of those who misunderstand MMT (which is a sound description of monetary matters) that issuing own currency is a magic money tree.

There is a very big grain of truth in "deficit fetishism": that both government and trade deficits in general lead to more borrowing, and in particular to *pro-cyclical* borrowing, and therefore to a significant worsening of the resilience of an economy to shocks.

This is a point made with compelling arguments by M Pettis in his book "The volatility machine", and the "Economists" systematically disregard, about balance-sheet fragility.

Of course responsible, limited, counter-cycling, "lucky" borrowing to finance deficit spending *can* be a very good idea, especially if within the context of a national policy of limiting balance-sheet fragility.

But there are very many examples of the opposite happening. And then one must consider the alternatives: just suffering less-than-optimal conditions during a recession, versus a suffering the consequences of a potentially catastrophic national bankruptcy or devaluation.

Sure, middle class and upper income residents can invest in protecting their personal wealth from such events, usually by exporting wealth to countries that do have "deficit fetishim". but for lower income residents national bankruptcies or devaluations can have devastating effects. Perhaps cumulatively less-then-optimal post-recession periods cost more than a shorter is much larger shock due to national bankruptcy or devaluation, but those shocks tend to hit *disproportionately* the poor and low income earners as many of them are close to personal bankruptcy.

Anonymous said...

The whole gigantic debt bubble will eventually burst when it reaches a "tipping point", and that will be sooner than later, because the UK is current again a large oil importer like it was in the 60s and 70s:

and how important that is was explained by Tony Blair in 1987 in this extremely important article, which describes the electoral strategy of every UK government, including his own, in the past 25-30 years:

The UK economy needs austerity to cut growth by being contractionary via a sustained cut in living standards, because:

* In the 5 years since the UK have become a net oil importer the cost of imported oil has dramatically increased, and the pound has become weaker because of the impact on the balance of payments. Continued contraction and low consumption are vital to avoid a collapse in the pound, causing a spiral in the cost of imported oil.

* After 20-30 years of a gigantic debt bubble, the government, the financial sector and people have an enormous debt load, perhaps one of the highest in the world relative to income. It is vital to keep interest rates low by reducing imports, and by keeping demand and wages low to keep inflation from blowing up (but moderately high so it erodes the value of the debt).

At least in the short and medium term I think that if the UK grows that can bring it to a sudden Mexican or Argentinian style collapse, because it is hard to generate growth from an economy addicted to rewarding investing in debt and punishing investment in industry.

If interest rates go up, debt becomes unaffordable, asset prices collapse, mortgages go underwater, the whole financial system blows up, including nearly all pension funds; nobody seems to remember that just a few years ago the biggest UK banks went bankrupt, there was a run on a substantial high street bank, the pound collapsed by 30% and the government has spent since hundreds of billions in their industrial policy of saving the bonuses and jobs and pensions of bank traders and executives.

But *eventually* a Mexican or Argentinian moment will happen, because there is no way to generate real growth from riskier value added industries.

Neil Wilson said...

"The causality is wrong"

No it isn't. The causality is exactly right. In a world short of demand, those with demand have the upper hand.

You do not have the management of floating rate systems correctly analysed or correctly operating. Largely because you are operating in fixed exchange rate mentality.

Neil Wilson said...

"This is the usual delusion of some MMTers that issuing your own currency means one can always rectify an unsustainable debt position on their own."

No delusion. The delusion is in believing that you can apply fixed exchange thinking to floating rate systems. You can't.

Lot's of words. Little understanding of the issues. And even less of the failures of managing the system.

The problems you talk about are simply down to mismanagement. People in charge driving the fighter aircraft of a floating rate system as though they were operating a peddle cycle. And then having the cheek to blame the aircraft rather than their own lack of skill and understanding of the different mode of operating.

Anonymous said...

"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."

Blatant lie. Not for everybody. Just against their own currency. Nobody cares if Zimbabwe are swapping their cardboard tokens for GBP and depressing the exchange rate. GBP still goes down vs USD.

Anonymous said...

"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."

Why would exporters cover each others backs. And where is infinite capacity from??

Neil Wilson said...

"Blatant lie. Not for everybody. Just against their own currency."

It has the effect of fixing the problem for everybody, because all the currencies trade with everybody else and the arbitragers make sure that the effect spreads out across all the currencies.

If Japan suddenly decides for whatever reason that it doesn't like Sterling and starts selling Sterling for US dollars, then that move will spread via the other currencies - because there is suddenly money to be made buying and selling RMB/USD pairs and USD/GBP pairs. And there is suddenly excess demand for US dollars affecting every pair linked to the USD.

So other exporters to the UK are affected by the entities in Japan's decision - since the supply and demand has shifted.

Suddenly China has a problem with its dollar peg because there is an increased demand for US dollar, which it can fix by supplying the USD and buying the Sterling to keep the currencies in a range that it requires for its own exports.

All excess exporters have spare currency. The spread effect means that what they lose on Sterling won't necessarily be corrected by increases elsewhere - because of course nobody exports everywhere. Everybody has major markets and minor markets.

Everybody acts with view to their own interests and that tends to balance things out. An importing country can help that by ensuring that any currency pain is felt by those countries exporting to your country - imposing import restrictions on luxury goods for example.

Neil Wilson said...

"Why would exporters cover each others backs. And where is infinite capacity from??"

They cover their own backs. If an exporter's currency strengthens too much, then their export led growth is threatened. So they weaken it by issuing their own currency.

You go to a Japanese bank with US dollars and 'sell' them for Japanese Yen, then the bank just holds onto the dollars and issues the Yen by marking up your account. The result is a balance sheet expansion at the bank.

Or there is a mechanism within the country for the banks to back off that risk onto the central bank. Which is what happens in China.

Or the country taxes foreign earnings hard which results in the state itself buying foreign currency to put in a 'sovereign wealth fund' in return for its own currency so that locals can pay taxes.

Exporting to excess is just a way of injecting your own currency into your economy, but with an 'asset' there to make the accounting look better.