“Look for the Helpers” – Fred Rogers Has Something to Say to Laypersons and Students

Published by Anonymous (not verified) on Sat, 12/08/2017 - 7:49am in



Most of us know Fred as Mr. Rogers from the children’s television program “Mr. Roger’s Neighborhood”. Now, you might find it strange or even a bit juvenile of myself to invoke Mr. Rogers as an opportunity to teach interested laypersons and students of MMT. But rest assured, in my view, it is neither strange nor[...]

The post “Look for the Helpers” – Fred Rogers Has Something to Say to Laypersons and Students appeared first on Ellis Winningham.

'Straya: Basically, she's rooted mate

Published by Matthew Davidson on Thu, 06/07/2017 - 10:58am in

Charts! Nobody asked for them, but I have them anyway! Over the last few years the Bank for International Settlements have been publishing a fab set of statistics that are not usually brought to bear in the tea leaf reading of mainstream economists. This is a shame, as they are exactly the sort of statistics which would indicate the risk of imminent financial crisis. Last month the BIS updated the data to the end of (calendar year) 2016. Here's an illustration (courtesy of LibreOffice) of where Australia is, relative to some comparable and/or interesting countries (click to embiggen):

As the BIS explains, the Debt Service Ratio (DSR):

"reflects the share of income used to service debt and has been found to provide important information about financial-real interactions. For one, the DSR is a reliable early warning indicator for systemic banking crises. Furthermore, a high DSR has a strong negative impact on consumption and investment."

So as a measure of Australia's ability to pay at least the interest on our private sector debts, if not pay down the principal, you might think this is not a bad result. We clearly substantially delevered after the GFC, thanks in large part to the Rudd stimulus pouring public money into the private sector, then levered up a bit since, but we've ended up between Canada and Sweden, which is a pretty congenial neighbourhood. But this is total private sector debt; what happens when we take business out of the equation and just look at households (and non-profit institutions serving households - NPISHs)?

Woah! Suddenly we're in a league of our own. Canada's flatlined here since the GFC, meaning the subsequent increase in their total private debt burden has largely come from investment in business capital. In such a case, provided this investment is directed at increasing productive capacity, and is accompanied by public sector spending to proportionally increase demand, this is sustainable debt. Australia has been doing the opposite.

Here's another way of looking at the coming Australian debt crisis, private sector credit to GDP:

This ratio will rise whether the level of debt rises, GDP falls, or both, so it's another good indicator of unsustainable debt levels. The current total level (in blue) of over 200% is at about the ratio Japan was at when its real estate bubble burst in the early 1990s. Breaking this down again into household and corporate sectors, we see that over the mid-1990s Australia switched the majority of its private sector borrowing from business investment to sustaining households. What happened in the mid-90s? Data here from the OECD:


From the mid-1990s to 2007 Australia experienced the celebrated run of Howard/Costello government fiscal (or "budget") surpluses. We all know, or should know, thanks to Godley's sectoral balances framework, what happens when the public sector runs a surplus: the private sector must run a corresponding deficit, equal to the last penny. There is nowhere else, net of private sector bank credit creation (which zeroes out because every financial asset created in the private sector has a corresponding private sector liability), for money to come from. When the government taxes more than it spends, it is withdrawing money from the private sector. Mainstream economics calls this "sustainable", and "sound finance", meaning of course it is nothing of the sort.

How did the private sector, and the household sector in particular, continue to spend from that point onward, behaving as though losing money (not to mention public infrastructure and services) down the fiscal plughole was not merely benign but quite wonderful? It chose to Nimble it and move on, going on a massive credit binge. The banks were happy to provide all the credit demanded, because the bulk of the lending was ulitimately secured by residential real estate prices, and these were clearly going to keep rising without limit (thank heavens, because if they were to fall like they did in the US in 2007…).

The Global Financial Crisis put a dent in the demand for credit, but as subsequent government fiscal policy has tightened, under the rubric of "budget repair", it is rising again. We are already in a state of debt deflation: Australia's household debt service ratio (as above), at between 15 and 20 percent of household income for over a decade, has dampened domestic demand, leading to rising unemployment and underemployment, leading to more easy credit as a quick fix for income shortfalls ("debtfare"). More of what income remains is redirected to debt servicing rather than consumption, and so we spiral downwards, our incomes purchasing less and less with each turn. [I will post more about some of the social and microeconomic consequences in (over-)due course.]

The Australian government needs to spend much, much more - and quickly. Modern Monetary Theory, drawing on an understanding of the nature of money that goes back a century, shows us that government spending (contrary to conventional wisdom) is not revenue-constrained; a currency-issuing government can always buy anything available for sale in the currency it issues. There is nothing about our collective "budget" that needs repairing before we can do so. The same data from the OECD shows that most currency-issuing governments with advanced industrial economies run fiscal deficits almost all the time:

In fact, under all but exceptional conditions, government fiscal surpluses (i.e. private sector fiscal deficits) are a recipe for recession or depression. The greater the surplus, the greater the subsequent government spending required to lift the private sector out of crisis, as can be seen above in the wild swings in neoliberal governments' fiscal position from the mid-90s on. The fiscal balance over any given period is nothing more than a measurement of the flow of public investment into the private sector. What guarantees meaningful sustainability is a government's effective use of functional finance to manage the real (as opposed to financial) economy in pursuit of public policy objectives. Refusing to mobilise idle resources (including, crucially, labour) for needed public goods and services is not "sound finance"; it is the very definition of economic mismanagement, as was once widely recognised:

"It is true that war-time full employment has been accompanied by efforts and sacrifices and a curtailment of individual liberties which only the supreme emergency of war could justify; but it has shown up the wastes of unemployment in pre-war years, and it has taught us valuable lessons which we can apply to the problems of peace-time, when full employment must be achieved in ways consistent with a free society.

"In peace-time the responsibility of Commonwealth and State Governments is to provide the general framework of a full employment economy, within which the operations of individuals and businesses can be carried on.

"Improved nutrition, rural amenities and social services, more houses, factories and other capital equipment and higher standards of living generally are objectives on which we can all agree. Governments can promote the achievement of these objectives to the limit set by available resources.

"The policy outlined in this paper is that governments should accept the responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment. To prevent the waste of resources which results from [un]employment is the first and greatest step to higher living standards."

Australian Government, 1945, White Paper on Full Employment

We chose to forget all this from the 1980s onward. We can choose to remember it at any time.

Wednesday, 15 February 2017 - 5:22pm

Published by Matthew Davidson on Wed, 15/02/2017 - 5:34pm in

I'm ranting altogether too much over local "journalism", and this comment introduces nothing new to what I've posted many times before, but since the Advocate won't publish it:

Again I have to wonder why drivel produced by the seething hive mind of News Corp is being syndicated by my local newspaper. This opinion comes from somebody who appears to be innumerate (eight taxpayers out of ten doesn't necessarily - or even very likely - equal eight dollars out of every ten) economically illiterate, and empirically wrong.

Tax dollars do not fund welfare, or any other function of the federal government. Currency issuing governments create money when they spend and destroy money when they tax. "Will there be enough money?" is a nonsensical question when applied to the federal government. As Warren Mosler puts it, the government neither has nor does not have money. If you work for a living, it is in your interest that the government provides money for those who otherwise wouldn't have any, because they spend it - and quickly. Income support for the unemployed becomes income for the employed pretty much instantly. Cutting back on welfare payments means cutting back on business revenues.

And the claim that the "problem" of welfare is increasing in scale is just wrong. Last year's Household, Income, and Labour Dynamics in Australia (HILDA) report shows dependence on welfare payments by people of working age declining pretty consistently since the turn of the century. This opinion piece is pure class war propaganda. None of us can conceivably benefit in any way from pushing people into destitution in the moralistic belief that they must somehow deserve it.

The Joy of Economic Irresponsibility: or how I learned to stop worrying and love the public debt

Published by Matthew Davidson on Thu, 19/05/2016 - 2:50pm in

If there's one thing I've learned in the last year that I think is so important it's worth shouting from the rooftops, it's that simultaneously studying economics and the psychology of stress while also being personally stressed about money is a very, very bad idea.

If there are two important things I've learned in the last year, I'd say that the more generally applicable one to the citizen in the street is that a government which issues it's own money can never run out of it.

Such a government can of course pretend, or at least behave like, it can run out of money. In fact, many have done so for the last thirty years or so, and the results have been disastrous. You don't have to take my word for it. Here are some graphs, mostly from the RBA Chart Pack, except where otherwise indicated. Here's the Australian government fiscal balance, misleadingly labelled "budget balance" as per the conventional misunderstanding of reality.

Things took a dip from 2007/8, but deficits are improving, and we were in surplus for most of the preceeding decade. And that's good, isn't it? Surpluses mean we have more money, don't they?

Generally, yes. A "budget surplus" for a business or household means more money at hand to spend later. However, for an economy with a sovereign-currency-issuing government, public fiscal surpluses mean we have less money.

How is this possible? To understand this, you have to understand that accountancy—specifically double-entry bookkeeping and balance sheets—is the foundation of economics; at least economics of a realistic kind. All money is credit money. You make money—literally—by being in debt to somebody, and by denominating this debt in the country's transferrable unit of account. Spending is the simultaneous creation of a debt on the buyer's side of the ledger, and a corresponding credit on the seller's side. However, if you happen to hold enough credits that have already been generated as the flipside of a debt in your favour, you can use these credits to immediately cancel the debt of the current transaction. One way most of us do this on a daily basis is by using cash. Cash is a transferrable token of public sector debt and private sector credit.

Three percent of the immediately-spendable money in the private sector is in the form of cash. The other 97% is just numbers stored on computers in the commercial banking sector. Most of this is money that originated as commercial bank loans, and will disappear from the bank's balance sheets as those loans are repaid (though of course in the meantime more loans will have been made). However, a significant amount of money originates as loans the government makes to itself (technically the central bank lends to the treasury), eventually ending up in the private sector as cash, or (through a mindbending process I will mercifully omit from this account) as commercial bank deposits. A currency-issuing government can always lend more money to itself in order to spend, and never has to pay it back. It follows that such a government does not need to tax in order to spend, and only ever taxes for other reasons. Economics textbooks, and economic commentators, routinely get this utterly and comprehensively wrong. Consider this textbook description of economic "automatic stabilisers":

"During recessions, tax revenues fall and welfare payments increase thereby creating a budget deficit. In times of economic boom, tax revenues rise and welfare payments fall creating a budget surplus."

Budget deficits are not an eventual consequence of government spending; the spending and the creation of a debt are the same operation. Tax revenues merely redeem a part of the already-accrued debt; the money issued by public spending  is a public IOU that effectively disappears when private parties use it settle their tax debt owed to the public. Tax revenues therefore cannot be used to fund public spending; in order to spend, new public debt must be issued. The automatic stabilisers are real (assuming a somewhat sensible tax system), but the important part of their function is on the private side: injecting new money to stimulate demand when needed, or putting the brakes on dangerous speculative activity in a boom. The government's fiscal position from one year to the next is an inconsequential side-effect.

Taxation is the elimination of money, and hence of the demand for goods, services, and assets that drives the private sector economy. Don't believe me? Lets take a wider focus on the fiscal balance numbers above:


Generally, and especially prior to the neoliberal period, public fiscal surpluses are the exception, not the rule. And for a good reason; it's generally not a good idea to drain demand out of the economy. So what happens when you toss good sense aside, and insist on surpluses for their own sake? Here's what happened to public sector debt:

I'm presuming (the ABS Chart Pack doesn't specify) that this is debt owed to private sector banks in the form of loans and government securities. I should stress that, as with taxation, these operations are not required to finance spending, and are only ever done for other reasons (such as hitting interest rate targets). Also, because they don't issue currency themselves (though this is possible, and has worked elsewhere), lower levels of government do have to rely in part on revenue-raising to fund spending, though grants from the federal government also play a big part in determining their fiscal position.

Still—phew!—we got that scary public sector debt under control until the GFC, and we can do it again! But hang on, if that's taking money out of the private sector, where does the private sector get the money to sustain demand? Here's the private sector debt over the same period:

Note that this is one and a half times GDP, compared to the one third of GDP outstanding to the public sector, at the height of its alleged fiscal irresponsibility. When government self-imposes limits on its ability to spend, private sector credit creation takes up the slack. Who do you want controlling how much money is created, who gets it, and what it gets spent on? A mix of the commercial finance sector and a (somewhat) democratically-accountable government? Or just the bankers?

Most of private-sector money creation is commercial bank loans, and as economist Michael Hudson notes, in the US, UK, and Australia, 70 percent of bank loans are mortgages. That's a hell of a lot of money (what's 70 percent of one and a half times GDP?) dependant for its existence on the soundness of pricing for a single class of asset. If real estate prices suddenly crash, and mortgagees start to default on their loans, poof! The corresponding credits on the other side of the ledger are gone too, and the real estate sector takes the whole economy down with it. You can't argue with balance sheets.

Still, I expect we'll be fine as long as we stay the fiscal responsibility course, and don't let the government "spend more than it earns". Real estate prices only ever go up, don't they? And it's not like bankers would ever be led by their own short-term interests to make a huge amount of risky loans and inflate an enormous real estate price bubble…

Panama Pandemonium

Published by Anonymous (not verified) on Wed, 06/04/2016 - 6:22pm in

Panama HatsThe leak of the Panama Papers has focussed a little light on the shady world of offshore shell companies and sent the press into complete meltdown as they feed like a shoal of piranhas on the juicy details contained within.

There is a very good analogy of the situation on reddit that explains the furore. Essentially it all looks really dodgy and it looks like you've been hiding the truth from MoM. And that means MoM is going to have to investigate these things thoroughly now - even though she sort of had an inkling what was going on before.

Tax evasion is illegal and should be prosecuted with the full force of the law. Here in the UK the long rubber-gloved arm of Revenue and Customs was once feared for reaching the parts where the sun don't shine and extracting the proper dues. Stones bled spontaneously in their presence. Not so much these days as successive governments have failed to hire sufficient staff of high enough quality to keep on top of the sophisticated techniques used by the wealthy and the finance sector.

Policing the finance sector has not been much in vogue over recent decades. Perhaps now governments will look at that and start charging them the cost of containment. The Regulators and Tax collectors should have the best people, which means bidding them away from alternative roles. And that should be charged back to the industry that is creating the alternative roles. There can be no better example of the MMT principle that taxes free up real resources for other uses, than a tax on the finance industry to fund a proper enforcement regime to keep the finance industry in check.

However as the analogy above shows, many of the people using shell companies are evading no taxes at all. They are often used shielding purposes - some reasonable, some less so - and for tax planning.

So then we get onto the thorny issue of tax avoidance.

Let's be absolutely clear here. Tax avoidance is legal. Not only is it legal it is required, because otherwise none of those 'tax engineering' nudges so beloved of certain political classes would work. And we all do it. If you pay into a pension you're avoiding tax. If you pay into an ISA you're avoiding tax. If you use a work computer then you are avoiding tax. If you claim travel expenses you are avoiding tax. If you're a business investing in R&D and get credits for that, you're avoiding tax. If you decide to invest in one company rather than another based upon one being eligible for the Enterprise Investment Scheme, you are avoiding tax.

Tax avoidance is everywhere. It is legal. It is required.

The problem arises due to the political process. We don't all agree on interpretations. Almost certainly my interpretation of social security is going to be different from Iain Duncan Smith's. Tax law is a minefield of interpretation.

Ultimately whether a tax break ends up as avoidance or evasion is a political matter. Every entry in the tax code is supported by a group of people and opposed by another group. Those in the ratio 95/5 - like paying into tax relieved schemes - barely get discussed. But those where the groups are more 50/50 over a particular interpretation get debated all the time. It's when the mood changes and the majority of people are against something that action must be taken.

But that action is a matter for government and the legislature. If the representatives sense the mood of the people have changed, then they have to take action, pass a law and change something from avoidance into evasion.  Only then does it become illegal and can be stopped.

Tax has to be seen to be fair and fairly distributed. That means supported by the majority of the population and their representatives. Which is why those representatives linked to Panama are the ones that are under the most scrutiny. You can't have those setting the rules abusing them.  They must be whiter than white.

But at the same time we can't have tax lynch-mobs and self-appointed 'tax experts' going around trying to dictate what is and isn't 'moral' or 'acceptable' on their own grounds. You can't have sons held accountable for the alleged crimes of their father.  I have no more time for vigilantes in tax than I have for vigilantes in crime. There is a presumption of innocence and due process to follow for a reason. Make your arguments through the legislature.

In general excessive unacceptable tax avoidance is nature's way of telling you that your tax code is too complex and needs simplifying. It's an important check and balance on those who think social engineering via tax breaks is clever. The whole concept of tax engineering relies upon avoidance in the first place. That ought to flash warning signs, but it never seems to.

Once tax is seen to be fair, it becomes  enforceable and it can drift into the background as the 'hygiene factor' that it is.

So I agree with Jeremy Corbyn when he complains that there appears to be one rule for the rich and one rule for the rest of us. In fact the rules are ridiculously complicated and need massively simplifying so that you don't get emergent behaviour in tax. The love of complexity first introduced by Gordon Brown has been a failure and it needs reversing - however many squeals that produces from those people enjoying 'tax breaks'.

Where I part company with Jeremy is when he starts talking about tax as 'revenues', and linking them to government spending.

Although dealing with tax dodgers is vital from an equity point of view, none of it increases the government's capacity to provide services. It is a mistake to link them, and it is a hostage to fortune that will come back to bite the Labour party. They should be working to break that down rather than reinforcing it all the time.

Government's capacity to provide services is down to whether there is anything available to buy in its currency that will provide those services. If there is then government can buy them, and that will automatically create its own funding for any positive tax rate. There are no fiscal constraints on government.

If there isn't anything available to buy then government needs to look at what the required resources are currently being used for and stop that from happening. Tax is one power that can do that, but only if it stops current spending on the required resources. Taxes on savings just change what is essentially voluntary taxation into compulsory taxation.

For example if a rich person is buying property and has been evading taxes, then it is unlikely that imposing the tax on them will free up the property. Why? Because they will simply go to a bank and borrow the difference. They have the income stream to support that.

Property prices are high, not because of tax evasion, but because of an excess of borrowed money in the market chasing a supply that is being constrained by low productivity techniques, land hoarding and a lack of investment.

The idea that tax havens are somehow an El Dorado that can be used to create the new Utopia is a myth. Taxing rich people doesn't solve the root cause of the problem. It never does. Because taxes for revenue is an obsolete concept.

UK Private Debt Levels - Q4 2015

Published by Anonymous (not verified) on Sun, 03/04/2016 - 11:04pm in

And here are the Q4 2015 private debt ratios

The household sector is the only sector increasing its debt levels relative to GDP.

Source: Office of National Statistics. Private sector debt based on tables NLBC, NKZA, NNQC, NNRE, NNXM, NNWK, NLSY, NLUA, NJCS and NJBQ (Lending and securities per sector, not seasonally adjusted) scaled by BKTL (Gross domestic product at market prices, not seasonally adjusted). Data and calculations are available online

UK Sectoral Balances - Q4 2015

Published by Anonymous (not verified) on Sun, 03/04/2016 - 9:24pm in

Q4 2015 sectoral balances are now out. Sorry it's taken a while to get these published. The ONS has completely trashed their website and disabled all the access URLs for data. No doubt the team there are patting themselves on the back and virtue signalling like mad with their multi-lingual front-end with loads of accessibility features. But until I can type in a simple


then they haven't got the mashability right. Why, oh why are unique reference ids hidden in a hierarchy, eg.


Hierarchical classification is in the eye of the beholder. Use tags instead.

On the plus side when I finally did get the data, it has been extended back to 1987 once more and therefore I've extended the graphs accordingly.

The present government is well on their way to achieving their aim of restarting the financial crisis. The government deficit is dropping as households borrow more and the percentage of GDP spent on housing continues to rise. (Currently at 5.13%). When it gets above 6% for any length of time it usually ends in a private debt crisis as people over extend.

The five sector chart shows the household/corporate distinction much more clearly. The household sector is now borrowing consistently and represents 32% of the overall net lending to other sectors.

The pattern continues as the corporate sector prefers to hoard rather than invest and the government tries to push debt onto the backs of the household sector.

Source: Office of National Statistics, tables RPYH, RQAJ, RQBN, RQBV, RPYN, RPZT, RQCH, DJDS (Seasonally adjusted Net Lending/Borrowing per sector plus residual error) and YBHA (Gross domestic product at market prices, seasonally adjusted). Data and calculations are available online

The Limits of understanding of MMT

Published by Anonymous (not verified) on Mon, 29/02/2016 - 6:36pm in



I've got a good amount of time for LK's blog. It is my 'goto' blog for good sense on many a topic. But I have to say I'm somewhat disappointed at the latest missive on foreign trade. It still has the usual straw men in it. I really don't understand why PK people can't get their head around the dynamics of floating rate exchange systems and still stick to fixed exchange analysis based around apparent Kaldorian views.

Bill has already debunked the Kaldorian points in his post of a few weeks ago.

I'll take the points in LKs post one at a time.

Now MMT would work for the US, Western Europe, Australia, Japan, South Korea or Taiwan, but not for much of the Third World.

MMT works wherever it is used for the fairly obvious reason that it is a description of how a floating rate exchange system on a sovereign currency works. With the correct policy operations it is perfectly applicable to all nations.

But it is important to note that the fiscal space and the real space are separate entities. Each operates within its own sphere and the influence of the fiscal space on the real space is akin to an electrical induction circuit. Importantly there is no one-to-one relationship between the two.

As Bill's blog on world development shows, it is the real constraints on a nation that limit how prosperous it is. If you have a country with a small population and limited real resources then what it can create at full output may not be sufficient to adequately feed, house and clothe the population. No amount of financial wizardry can help sort that out and the country needs international gifts of real aid.

That is, MMT-style policies are best suited for advanced capitalist nations, not necessarily for Third World countries, because most of them face severe balance of payments constraints. Increasing aggregate demand would, for many Third World nations, simply cause a balance of payments crisis, as imports surged.

There isn't really such a thing as a balance of payments crisis in a floating rate exchange system.  For those excess imports to exist at all, the saving of the local currency must occur at the same time. Otherwise the financing of the deal would have failed and the transaction would never have happened.  And there would be no excess imports. The floating rate balances out the successes and failures automatically. That's its job.

Very simply imports cannot 'surge' unless the equivalent local currency savings by foreigners 'surges' at the same time. And if the savings don't surge then the exporter loses a sale and their economy shrinks as well - because there is nowhere else to export to in aggregate. Mars isn't open for business as yet.

Generally this entire misconception comes about by failing to analyse a transaction end to end,  and by failing to separate the transaction into a real and financial component. (Every transaction requires the real part and the financial part to be in place before they will complete). And in particular failing to model the transaction(s) coming in the opposite direction that allows the FX swap to happen in the first place.

Imagine a system where nobody in the world wants your tally sticks. You want a larger standing army which means freeing up some people from land work. So you impose a tax on the land and issue tally sticks to those who sign up to your army and those that make pointy sticks. Productivity is improved by division of labour and the army gets the spare manpower  and goods - which they then use to improve the water drainage and irrigation systems further boosting output.

Everybody is more fully employed by using the state's power to create money, but there is no 'surge' in imports because nobody wants your tally sticks outside your border. But inside the border there is a demand due to the taxation system.

Only when you have that 'reductio' clear in your mind can you get a grip on the dynamics within a floating system. Where you have drawn the border is an artificial device based on political boundaries. If you just have a dynamic border that encompasses everybody holding a denomination then it becomes much clearer to see what is actually happening.

But it boils down to this. The end buyer always gets to use the type of money they want and the end supplier always gets the type of money they want. Otherwise there will be no deal. It doesn't matter what the invoice is priced in. It doesn't matter what the currencies are. It doesn't matter where people are physically located in the world. The finance system has to make the finance channel tie up or it all stops and the deal chain collapses.

Statistics showing excess of imports or excess of exports are thus the result of successful end to end deals on both the real and financial sides. They can't be anything else in a floating rate system.

Moreover, a huge stream of imports from the developed world tend to cripple the development of a domestic manufacturing sector in developing world nations

That is simply bad policy. MMT makes the point that excess imports, if you can get them, increase the standard of living of the population. But primarily you have to maintain your domestic economy at maximum output. And that will require anti-dumping policies, equality policies and other policies along those lines to ensure that the development of your economy proceeds in a sensible manner. That would include sourcing imports from multiple competing nations to ensure diversity of supply.

As Bill's blog above also mentions: Selective import controls, if they can be effectively designed, can ensure that a nation with a limited export base can import goods and services that target the provision of benefits via imports to the poor in the first instance

There is no super powerful magic in a floating rate. It's one tool. You still have to do all the other stuff to develop an economy. But with a floating rate you will ensure that you have all your available resources fully occupied and the development should then proceed at a brisker pace. That is the key issue that always appear to get lost in these discussions.

Exports matter a lot even for some developed countries, because exports bring in foreign exchange if you can’t attract foreign exchange via the capital account

This is particularly confused in a floating rate setup. It doesn't matter which side of the fence the swaps get done on - the buy side or the sell side of the currency zone boundaries. They have to happen at the same time as the real transaction or there is no deal. The whole chain collapses.

You don't need to 'attract' anything. The process is handled via the FX system which is a swapping mechanism. Insufficient matches = no deal.

These processes all happen in parallel and in real time. Attempting to serialise the process in your mind leads to the wrong result.

Where is this idea that you don't export coming from? If you have an excess of coffee you will export it and import something more useful - like corn. Or you may export your fish and import beef - because basically you're not a fish kind of people.

I feel the missing part here is understanding the process from the other point of view. Again the focus on a particular economy rather than the world in toto leads to a skewed viewpoint. Let's look at it from the exporter's point of view.

When exporters export to excess (i.e. beyond what they buy back in imports) then they cease to be exporting in any generally understood sense. In reality they have started to import demand. And that is what a net import nation is selling - demand to a wider world that is short of demand due to export led policies. Since demand is in short supply, it is valuable in its own right.

Excess exporters simply take foreign currency, discount or swap it for their domestic currency in some way and then figuratively chuck the foreign currency in the back of a drawer - pretty much like most of us do after a foreign holiday. The whole process is in fact a way of injecting domestic currency into the excess exporters economy, but they have a foreign currency asset to make the books look better. It's that simple - and that stupid.

The feedback into the import economy is the same as any saving. A reduction in domestic flow that has to be accommodated or you get a paradox of thrift. That is rarely done due to neo-classical beliefs. So you can't use economies that are operating under neo-classical rules and have failed to support an argument against floating rate systems. That's like blaming the aircraft for crashing when the person piloting didn't know how the controls worked.

Finally, manufacturing matters – a lot.

Never understood the metal bashing argument. I work in software - which is a service business. I can license tens of thousands of copies all across the world with next to no distribution costs. That's a far more efficient way of exporting than anything real.

If you have to import your resources it doesn't really matter if you import the steel or the iron ore. You've still got a supply chain requirement. That's why I can't understand the argument for virgin steel works in the UK. We've had to import iron ore, and these days coal, for decades. In fact our steel plants can't even work on the remaining iron ore deposits in the UK because its the wrong type for the plants that have been built. So why bother importing the rock, when you can import the steel from multiple locations? UK steel works should be recycling plants.

(I understand the 'good jobs' argument, but that is similarly controversial for other reasons which are outside the scope of this post).

The secret is the same as any business resilience plan - diversity of supply. And definitely diversity across political groupings. Because the USA, Russia and China are never going to be on the same side in anything.

I certainly don't go for the comparative advantage nonsense however. You need a multi-culture.  If you can't get diversity of supply you need to create at home. There is always a trade off between resilience and efficiency to get a sustainable cohesive economy that has low-coupling with the rest of the world.

But I see little difference between manufacturing and services. It's an old fashion separation that really doesn't hold that well in a modern world.

It seems to me that effective demand is the real source of power.

If you think imports are only a benefit, look at the devastating de-industrialisation of large parts of the Western world

Again this 'only a benefit' is a strawman argument that nobody seriously looking at floating rate systems is proposing. Imports is an aggregate. What is in that aggregate? BMWs or food? What are the strategic issues of supply and creation outside your political borders vs. inside them. And similarly what are the 'beggar thy neighbour' impacts of changing the status quo? Do we really want our fellow humans in China back in paddy fields dying of starvation?

And note that this all came about because governments operated neoliberal policies that didn't understand net-importing causes a paradox of thrift effect that has to be compensated for by government action. Precisely my point above.

As Alex Douglas discussed recently, even the supposed Post Keynesians still don't seem to get the issue with savings desires.

The dynamics at the borders of currency zones is indeed complicated and there is much to learn about how to manage them more appropriately. But it would help if people stopped analysing aircraft flight as though they were driving a car. It gets a bit tiring having to point out all the time that yes you do have to pay attention to the Z axis as well.

Thursday, 11 February 2016 - 1:39pm

Published by Matthew Davidson on Thu, 11/02/2016 - 1:39pm in

I'm reluctant to contribute to the Piketty backlash, as it seems to me to be mostly motivated by the unrealistic expectation that his book should have provided a comprehensive theory of everything. However this blog post from Alexander Douglas provides such a pithy account of the workings of public fiscal balances that it's worth recirculating. In response to the claim that "there are two main ways for a government to finance its expenses: taxes and debt," he writes:

Government spending isn’t financed by anything. The government pays for everything by crediting the non-government sector (employees, companies, foreign governments, etc.) with financial claims. Some of these claims are returned to the government in order to settle liabilities to the government (for instance in tax payments); others remain as financial holdings for the non-government sector. At any given moment the claims remaining as financial holdings constitute the whole of the ‘public debt’.

Tax revenue largely depends on the volume of spending. Decisions to spend rather than save are largely at the discretion of non-government agents. It is therefore very misleading to speak, as Piketty does, as if the government chooses to ‘finance its spending’ through taxation or debt. The amount of government spending that remains as ‘debt’ is largely up to the discretion of non-government agents choosing whether to hold onto financial claims or pass them on so that they can eventually find their way back to the government.

It therefore makes no sense to panic about government "budget" deficits, if you're not also going to bemoan private savings. Ironically, as it happens, private savings currently is a big problem, as corporations hand out mattress stuffing — in the form of dividends and share buybacks — rather than investing. Yet more ironically, the appropriate response is for the government to make up the investment shortfall through large fiscal deficits. Otherwise the economic stagnation rolls on until (sorry, I can't resist it) r>g.

The Procrustean Economy

Published by Anonymous (not verified) on Mon, 11/01/2016 - 6:45pm in



In the Greek Myths Procrustes offered a unique proposition to the weary traveller. He guaranteed that whoever you were he had a bed that would fit you precisely.

Of course once the deal had been made, the reality emerged. There was just one size of bed. If you were too short you were put on the rack and stretched to fit. Too long and your legs were shortened with an axe.

So it has been with the economies across the world for decades now. They have been promised riches by the snake oil salesmen who try to pass themselves off as scientists and then rammed into a 'one size fits all' ideology, based around the false idea of equilibrium.

All the world economies have been forced to fit this peculiar bed, and have had their policies tailored to the idealised model, with the actual underlying people rammed into the structure regardless.

The consequence of this should be obvious, but seems to pass people by. The data collected from such economies will resemble the data you would expect from the model.

It really can't do much else - since the policies are there to prevent deviation from the norm. Therefore when you do empirical studies what you are actually using as data is the output from a system rammed into an inappropriate model. The data is tainted and what the taint means has to be understood.

It becomes part of the Orwellian self-referential structure that reinforces the norm - academic journals  where the peers doing the reviewing 'believe in the concept' and therefore reject anything novel out of hand, awards created by people who 'believe in the concept' and awarded to other people based on how hard they also 'believe in the concept', and data used to try and validate policies that are derived from structures that are already moulded into the form of the policies.

If you observe the movement data from a man in a straitjacket then you will form a particular view of the movement capabilities of a man. The problem is that you are neglecting to notice the straitjacket or the possibility that it could be removed.

Moreover even if you do notice the straitjacket, it is impossible to find an instance of a man without one, or to get into a position where you could remove it and see what happens.

To move forward we really need a world where the restrictions can be removed. The mainstream may have locked out the physical world with their politics and policies, but these days people have alternatives to the physical world that they can immerse themselves in.

We have virtual worlds.