Now let’s continue the thought experiment from my previous post to another kind of currency, the regional currency union (‘cough’, Euro! ‘cough, cough’).
In this instance, let’s think of Country AX and BX, who both use the common currency X. Neither of them issues their own currency. Currency is issued by a master headquarters comprised of bureaucrats from both AX and BX.
Now AX is a more productive economy than BX. As a result, it experiences a string of surpluses, while BX does not. In fact, just to catch up to AX, BX incurs debt (in X, of course) to finance its growth programs.
AX continues its string of surpluses. BX does not have the same results. The main reason is that AX’s string of surpluses is making X, which is a floating currency, more valuable. This makes BX’s exports more expensive for other countries, so it cannot hope to replicate AX’s results.
So to finance its deficits, and to finance its debt services, BX incurs more and more debt in X.
Now everything would be fine if AX would just give all its excess earning of X to BX. But that was not the point of incurring surplus in the first place. AX has an ageing population, and it has social programs to finance. So BX goes on its merry way of borrowing.
Master headquarters won’t help too, as it won’t ‘print’ more of X just to help BX, because doing so would be detrimental to AX. (There are also other countries, CX, DX, EX, who will also be adversely affected) So BX is in a bind.
How long before BX goes down and drags the entire X currency with it? But then if X goes down, that solves BX's unaffordability problem.
P.S. I just thought of this. When AX incurs its surpluses, doesn't master headquarters print more X, so other countries will have the currency to buy AX's goods? Implication is that for as long as BX is part of currency union X, and AX continues its surpluses, then BX will never run out X to borrow. But if master headquarters is actually a central bank and not a sovereign country, then it 'prints money' by actually printing money, not via government spending. So no jobs are actually created by its printing. Jobs are only created at AX because of AX's productivity, and the printing is merely a result of that. It's not printing in the same vein as that by country A in the previous post. Have I missed something else?
Saturday, February 6, 2010
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4 comments:
Bill MItchell investigates this from the perspective of MMT in Exiting the Euro?, which contains links to several of his other posts that are pertinent. The fundamental point is that it is foolhardy for a monetarily sovereign nation to give up monetary sovereignty in a system over which it has no control. It's a recipe for disaster, especially when the dominant "partner" (Germany) is inflation-phobic and very fiscally conservative, and the subordinate partners have much lower productivity in comparison. Their only recourse is either massive unemployment or default, and probably both if a crisis is lasting.
Well said, Tom.
Rogue . . . you've got a nice blog going here. Thanks for the honest effort to understand our stuff. Much appreciated.
Thanks Scott, Tom. Your perspective is very new to me, but it's like seeing the glass as half full when I've always seen it half empty before.
Your perspective on the flow of bank activities sounds commonsensical and easy to accept for me, though I admittedly still have to get around my inflation reflexes when I get to thinking that government spending is only demand-constrained.
I think you should come out with a comprehensive outline in book form of your ideas, from the beginning right to its important implications, and not just separate posts addressing mistakes of specific articles. If we can see that master outline, we'd know it ourselves when we see something erroneous written by conventional writers. Best.
You're right Rogue.
This is so foreign to most people that attacking the misperceptions in bits and pieces is very difficult.
A comprehensive book would be helpful and I think Bill is working on one.
What I find the most interesting right now, is how many people, when reading what Randall Wray has to say for instance here
http://www.huffingtonpost.com/l-randall-wray/the-federal-budget-is-not_b_457404.html
(which he cross posted at Naked Capitalism) can respond with "yeah but so what". None of these people would have been able to articulate in any way shape or form how a household and govt budget differed prior to reading his article yet they act as if its no big deal. The man has just told you that the budget world is pretty much 180 degrees from what you thought and you can just say SO WHAT! I think this is the most staggering thing to me. I know when I started contemplating this stuff, mostly after I read a Winterspeak post called "Why Tax", it BLEW MY MIND! My reaction was" wait, wait, wait , taxes ARENT used for govt spending, there is NO relation??!!" Now I didnt make the complete paradigm shift for a few weeks but that nugget of information was very transformative.
I also didnt simply accept it right off but when I realized that we had pretty much NEVER in our history matched spending to tax revenue it became obvious to me. How could something so "essential" be ignored for so long? Either it wasnt essential or the peril was in the future. I went with the "Isnt essential" line of reasoning once I understood that the "future" as they painted it never had to come.
We never have to forgo consumption today so we can pay back something to the past. We only forgo present consumption so we can have something for the future. The story we are told is really the opposite, "We're gonna have to pay this back later"
The mountain to climb is high but the first step is making sure people realize the consequences of the new understanding. It is NOT trivial that the govt and household budgets do not have the same constraints. This is different than saying that a govt budget has NO constraints, it only means they do not have to secure funds before they spend. The oly questions they have to ask is 1) Can I buy this without driving prices up? 2) Is it available here or do I need to import it? 3) Can I put Americans to work developing it? 4) Is this a necessary expenditure? The question is NEVER can I afford it.
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