The myth of monetary sovereignty

How many countries can really claim to have full monetary sovereignty?

The simplistic answer is "any country which issues its own currency, has free movement of capital and a floating exchange rate." I have seen this trotted out MANY times, particularly by non-economists of the MMT persuasion. It is, unfortunately, wrong

This is a more complex definition from a prominent MMT economist:

1. Issues its own currency exclusively
2. Requires all taxes and related obligations to be extinguished in that currency
3. Can purchase anything that is for sale in that currency at any time it chooses, without financial constraints. That includes all idle labour
4. Its central bank sets the interest rate
5. The currency floats
6. The Government does not borrow in any currency other than its own.

This appears solid. But in fact, it too is wrong.  

The big hole in this is the external borrowing constraint - item 6 in the list. If a government genuinely could purchase everything the country needed in its own currency, then it would indeed be monetarily sovereign. But no country is self-sufficient. All countries need imports. So item 3 on the list is a red herring. A government may be able to buy anything that is for sale in its own currency, but that doesn't include oil, or gas, or raw materials for industrial production, or basic foodstuffs. To buy those, you need US dollars. Indeed, these days, you need dollars for most imports. Most global trade is conducted in US dollars. 

The only country in the world that can always buy everything the country needs in its own currency, and therefore never needs to borrow in another currency, is the United States, because it is the sole issuer of the US dollar. This is another way of expressing what is known as its "exorbitant privilege".

However, the dark side of this is that the US is obliged to run wide current account and fiscal deficits, because global demand for the dollar far exceeds US production. When it attempts to close these deficits, global trade and investment shrinks, causing market crashes and triggering recessions around the world. Sometimes, there is even a recession in the US itself. The US's last attempt to run a fiscal surplus ended in the 2001 market crash and recession:

MMT adherents like to cite this as evidence that eliminating the government deficit in any country will result in a recession. But this is stretching things considerably. FRED shows us that even in the U.S., only one recession in the last century has been preceded by a government surplus.

Of course, many developed countries do in practice pay for imports in their own currencies. Governments, banks and corporations meet dollar funding requirements by borrowing in their own currency and swapping into dollars in the financial markets. This diminishes the need for dollar-denominated borrowing, either by government or the private sector. These countries therefore have a considerable degree of monetary sovereignty. But it is not absolute as it is in the United States. It crucially depends on the stability of their currencies and the creditworthiness of their borrowers, both of which are a matter of market confidence.

For most countries, the need for external borrowing crucially depends on the external balance. If the current account is balanced or in surplus, then they will earn the dollars they need to pay for essential imports. But any country that runs a current account deficit inevitably borrows dollars. 

This doesn't necessarily mean that the government borrows dollars. Borrowing may be largely confined to the private sector, as (for example) it is in Turkey. But private sector FX borrowing is subject to the vagaries of capital markets. If the local currency depreciates significantly (see item 5 in the list), local banks and corporations can find themselves unable to service dollar debts, because dollars become far more expensive.

If banks stop lending cross-border, as they did in 2008, local banks and corporations can find themselves unable to refinance dollar debts. The world is littered with examples of countries that have had to run down public sector FX reserves to provide dollar liquidity to local banks and corporations after they are effectively shut out of global markets by local currency depreciation. If the public sector doesn't have sufficient dollar reserves, it must borrow them, or face financial crisis, widespread debt defaults and economic recession. In an FX crisis, private sector external debt becomes public sector external debt. 

Thus, when currencies are allowed to float freely (item 5), no government that runs a current account deficit can possibly guarantee that it will never borrow in any currency other than its own (item 6). The list therefore contains an internal contradiction. 

This could be resolved by adding another clause to the list:

7. The current account is maintained in balance or surplus at all times.  

Of course, not all countries can maintain the current account in surplus. We do not trade with Mars. So there will always be countries that lack monetary sovereignty even though they issue their own currency, have free movement of capital and a (theoretically) floating exchange rate. In particular, developing countries that have current account deficits and little access to dollar funding markets cannot afford to allow their currencies to collapse. For these countries, item 4 in the list may be true, but it will in practice be determined by the need to support the exchange rate. 

Additionally, many countries that maintain the current account, or at least the trade balance, in surplus are major exporters of commodities. The currency exchange rates of these countries typically track the global price of their primary export. The central bank may set the interest rate, but this tends to have little effect on the movement of funds in and out of the country. These countries do not have full monetary sovereignty. 

To explain why, consider what happens if the global price of the primary export falls. Commodity price collapses quickly wipe out the current account surpluses of commodity-exporting countries, forcing them to draw on FX reserves to pay for imports. Additionally, since a current account surplus does not mean there is no dollar debt, the public sector may need to provide dollar liquidity to distressed banks and corporations. Typically, the currency exchange rate collapses at the same rate as the primary export price. So the country has to run down FX reserves, and may need to borrow or buy more, just when dollars are becoming considerably more expensive. This way lies FX crisis. 

Admittedly, FX crisis arrives much more quickly for commodity exporters if the exchange rate is fixed. They can quickly burn through their FX reserves propping up the exchange rate and then, when the exchange rate inevitably crashes, find themselves shut out of dollar markets. But floating exchange rates are not a panacea. Falling exchange rates make dollars much more expensive. 

Some say that since a currency-issuing government can always print more of its own currency, it can always buy dollars, however low the exchange rate falls. This is the assumption behind items 1 and 5 in the list. It is, unfortunately, a fallacy. Printing more dollars simply hastens the exchange rate collapse. After all, for you to buy dollars, someone has to be willing to buy your currency. And who in their right minds would buy a currency whose value in dollars was falling through the floor?

Printing money to fund an external deficit in a foreign currency always ends with the country shut out of markets and facing a painful choice between an IMF programme and debt default, possibly accompanied by hyperinflation. This has just happened to Argentina. Argentina, a country which issues its own currency, has free movement of capital and a floating exchange rate, does not have monetary sovereignty

Monetary sovereignty is perhaps best regarded as a spectrum. No country on earth is completely monetarily sovereign: the closest is the US, because of its "exorbitant privilege", but even the US cannot completely ignore the effect of its government's policies on international demand for its currency and its debt. 

In general, the major reserve currency issuers tend to have more monetary sovereignty than other countries, because there is international demand for their currencies and their debt. The primary reserve currency issuer is the US, but the Eurozone (for which Germany is the primary safe asset issuer), the UK, Japan, Switzerland, Canada, and - now - China, all fall into this category.

However, there is a hierarchy even among reserve currency issuers. High on the list comes Japan, because its debt is held almost exclusively by its own citizens (and its central bank), and investors regard it as a "safe haven" in troubled times. But the ostensibly similar Switzerland has less monetary sovereignty than Japan, because it has extensive trade and financial ties to its much larger neighbour the Eurozone.

The Eurozone countries have relinquished their monetary sovereignty in the interests of developing ever-closer links. However, the Eurozone as a bloc has a high degree of monetary sovereignty, because its currency is the second most widely used currency for trade after the dollar.

Commodity exporting countries that maintain a diversified economy and don't let their fiscal finances become dependent on commodity prices also retain monetary sovereignty. Norway is perhaps the best example: the sovereign wealth fund took a beating when oil prices crashed, but the country itself didn't suffer much. Sadly, Norway's prudence has not been reflected in other countries. 

North Korea also has a high degree of monetary sovereignty, because it is autarkic. The price it pays for this is extreme poverty. Losing some degree of monetary sovereignty is surely a small price to pay for the openness to trade that brings prosperity.

Outside this somewhat exclusive club, monetary sovereignty becomes much diluted.

Few developing countries allow their currencies to float freely, and with reason. A floating exchange rate can be actively damaging to an economy if it is thinly traded and volatile, because the value of imports and exports varies so much: this is why the US dollar, and to a lesser extent the Euro, are so widely used in trade involving developing countries. For many developing countries, pegging to a stronger currency, or even adopting it outright, is the only way of creating sufficient stability for trade to develop.

Free movement of capital can also be extremely harmful to countries that don't have well-developed capital markets and strong institutions. The damage done by hot money flows in and out of developing countries that have prematurely opened their capital accounts is well documented.

Small countries that have close trade and financial links with much larger ones do not have monetary sovereignty, even if their currencies are floating and they have free movement of capital. Perhaps the best example of this is Kazakhstan, which in 2014 was forced to float its currency after the Russian central bank floated the ruble. Kazakhstan's close links with Russia made pursuing an independent monetary policy impossible.

For various reasons, therefore, most countries are not monetarily sovereign, even if they issue their own currencies and have floating exchange rates and open capital accounts. Sadly, if MMT's policy recommendations rely on there being monetary sovereignty, it can never safely be used in more than a handful of countries. Monetary sovereignty is largely a myth.  

Related reading:
The Pain of Original Sin - Eichengreen, Hausmann & Panizza
Fear of Floating - Calvo & Reinhart

This post has been updated to remove the incorrect suggestion that Australia runs a current accounts surplus. It generally runs a current account deficit and a trade balance surplus. The difference is explained by a very large deficit on primary and secondary income, reflecting Australia's relatively high interest rates which themselves are linked to its extractive industry dominance. This is a whole subject in itself which deserves a separate post. 


  1. The finance sector appears to have convinced the global political establishment that anything other than unfettered movement of capital is a terrible thing. I'd like to believe this thinking could drop out of fashion.

    1. The big problem with that idea is that politicians, bureaucrats and economists then make the rules on capital movement. I'm not sure that the latter group of demonstrably incompetent individuals are better than free markets.

  2. “Eurozone as a bloc has a high degree of monetary sovereignty”
    As a block yes, but never that much so as to justify a 0% risk weighted capital requirement for banks on sovereign debt that is not de facto debt expressed in a true domestic (printable) currency.

  3. Very nice post.

    A few years ago I took a day off from my public service job in Ottawa to attend a post-keynesian conference. That day I had lunch with Randy Wray and Warren Mosler. Knowing their views differed on the "To Fix or To Float" question, I asked them to spar over it. I got to witness a lively debate. MMTers have a lot to offer. Post and old Keynesians too. Others too. A wise Old Keynesian (possibly the oldest still living one) once told me that there is no truth so we can't be too rigid in our thinking.

    1. It's easy. As E.F. Schumacher proposed to Keynes before this one attended the Bretton Woods, all foreign exchange, capital and goods, should be done in gold. (Central Banks will transfer the net outstanding in gold quarterly or yearly) Like this there will be a natural trade balance.
      This would curb excessive unilateral lending between countries.

  4. Professor Bill Mitchell and Thomas Fazi in their latest book

    Reclaiming the state dedicated a section of the book to balance of payments constraints Frances.

    1. Both the definitions of "monetary sovereignty" I cited came from recent pieces by prominent MMTers. The list is from a blogpost by Bill Mitchell posted this week.

    2. But Francis, you've set up a strawperson here by saying Bill Mitchell's third point is a 'red herring', he was simply referring to anything available in THAT currency so why did you then take to mean anything available in other currencies as well?

      That third point specifically relates to a countries possibility of creating full employment.

      You also make a questionable assertion about MMT when you write:' MMT adherents like to cite this as evidence that eliminating the government deficit in any country will result in a recession.'

      I've never come across MMT saying this. There are situations when a surplus is necessary as in the case of a current account surplus. If the current account surplus is higher than the fiscal surplus then the private sector can net save, otherwise it goes into debt.

      You post sets up a definition of monetary sovereignty which actually means global sovereignty. That's not at all what MMT is saying. Bill Mitchell advocates 'reclaining the state' not reclaiming the entire world!

      If you look at the MMT literature, you will find that MMT economists do indeed deal with the complex interaction of foreign exchange, including resource poor developing countries and the particular issues they face.

      Setting up your own definition of what 'sovereignty means' and then claiming MMT has got it wrong is a bit of a below the belter!

    3. 1. Point 3 is a complete red herring. I remind you that this post is about monetary sovereignty, which fundamentally concerns a country's relationship with the rest of the world. Yes, point 3 says "including idle labour." But if a country is not self-sufficient in basic foodstuffs - and many are not, for a variety of reasons - then employing all unemployed people and paying them in the local currency cannot provide them with food. The country must import the food that its workers need, and to do so, it must acquire foreign currency. If it doesn't have enough real resources to earn the foreign currency it needs by exporting, then it is obliged either to borrow the necessary foreign currency or let its workers starve. It does not meaningfully have monetary sovereignty if it cannot feed its workforce without using someone else's money.

      2. Stephanie Kelton claims in this presentation that the Clinton surpluses caused a private sector debt bubble which ended in recession.

      3. My post is about the fact that monetary sovereignty is determined by individual countries' circumstances. Underlying it is a deeper point, which is that monetary sovereignty concerns how the outside world views the country, not how the country views itself. For example, the value of the currency is determined by FX markets, which are external o the country. Traders, investors and firms make currency buying and selling decisions on the basis of their view of the country's prospects and its government's policies. A floating exchange rate therefore reflects the world's view, not the view of the government of the country. There may be quite a gap between these two views, but it is always the external view that matters.

      I find MMT literature on the problems faced by resource-poor developing countries with minority currencies and poor creditworthiness extremely thin.

      I have

  5. Footsoldier, I have deleted your first comment because of sustained ad hominem attacks and downright rudeness.

    The rules of this blog are clearly stated on the About This Blog page:
    - be polite, and refrain from personal attacks on me or anyone else
    - stick to the topic.

    Please observe these rules in future. I will delete any posts that in my view break these rules.

  6. As an MMT layperson, I appreciate your patience and efforts to communicate. Your scenarios concerning the dollar seem quite credible to me, however I doubt that the MMT academics haven't thought along similar lines, and look forward to any responses from them.

    Unfortunately, it just confirms my belief that economics is more opinion than science, and claims of theoretical certainty are usually tied to some political or personal reason, usually to make rich people richer!

  7. Francis, you write:

    'However, there is a hierarchy even among reserve currency issuers. High on the list comes Japan, because its debt is held almost exclusively by its own citizens (and its central bank), and investors regard it as a "safe haven" in troubled times. '

    You seem to be buying in to to the oft cited 'myth' that despite its 250%(?) Debt/GDP Japan is different because much of its debt is owned domestically. Economist Peter Martin makes some interesting points about this:

    'It is usually pointed out by supporters of the neo-liberal orthodoxy that Japan manages to have such a high state debt by also having lots of savers who lend the money to the government. It is, therefore, not external debt and so is a lesser problem True, Japan usually has a trade surplus and “pays its way” abroad.

    However, internal debt can be more destabilising than external debt. If Japanese savers get spooked about a potential inflation they would all start over-spending simultaneously which could set off the problem they most fear. It would be politically very difficult for the Japanese government to control that by applying taxes on its own citizens. So whereas the debt isn’t at all a direct problem for the Japanese Government, the ownership of too many financial assets by the Japanese population could give them one.

    On the other hand, if their debt were owned by a foreign country, say in the form of Japanese treasury bonds, it would be somewhat different. All that country could do , if it wanted to spend its Japanese Yen, would be to give large orders for real goods and services to Japanese industrial companies. It would boost Japanese exports tremendously. That too could be inflationary, but the situation would be more manageable. The Japanese government would be able to negotiate with its foreign creditors to spend at an agreed rate. As a last resort it could even impose a tax on its own exports.

    That’s essentially the position the USA is in with regard to its Chinese creditors. If there is really a problem with debts, it is China who has the bigger one than the USA. Japan has a bigger problem too. Not so much because it has a larger debt but because it is, rather than isn’t, largely owned by its own citizen.'

    1. I think the demographics of Japan make the chance of Japanese savers suddenly losing confidence in the yen and triggering a hyperinflationary spiral vanishingly small. The median age in Japan is 42 and rising. These are their life savings. If they dump them, what will they live on in their old age? No Japanese saver would take that risk.

      You are also completely wrong about how external holders of Japanese bonds can dump them. They don't need to buy anything from Japan. They can just sell their bonds on world markets. If they all did so at the same time, the price would crash. This is in fact what happens when there is a run on government debt. If there is also a run on the currency itself, which is typically the case since government debt is simply a claim on future currency, then the falling exchange rate might boost exports, but I have found that "sudden stops" do so much damage that both imports and exports usually collapse in the short term.

      So I'm afraid I completely disagree with you. Foreign holders of government debt and/or currency exercise more coercive power over the government than domestic holders do, simply because it is not in domestic holders' interests to exercise their right to dump the currency.

    2. Thanks for responses Frances-I'm still a novice in all of this so good to get your views -I always find with economics that 'there is always another 'angle' (aside form the uncontested mathematical bits).

    3. Economics is fundamentally about human behaviour. Incentives are all-important.

    4. I agree, but at present we have a bizarre set up where the exchange value tail wags the real resources dog. Only answer seems to be some supra-national regulator of a saintly disposition while the population of the whole planet undergoes a simultaneous sea change into entirely rational beings, freed from self-seeking and power urges.

    5. "All watched over by machines of loving grace"

    6. Worth noting on Japan is that their pension system is fully funded - as opposed to the UK and most other countries. This is part of the reason their Debt/GDP ratio is so high.

      If the UK or US unfunded pension liabilities were included in the debt/GDP ratio they would both look very similar to Japan - so in many ways the difference is just a matter of accounting.

  8. Nice thoughtful article that by Frances. As an MMT supporter, I agree MMTers do sometimes over-state their case.

    Re No.3 - “Can purchase anything that is for sale in that currency at any time it chooses….” – clearly that’s an absurd claim. However, I’m not sure that a large proportion of MMTers accept that idea. One reason is that it clashes with the point accepted by MMTers (and indeed EVERY economist) that inflation places a constraint on how far demand can be raised. I.e. even when demand is as high as possible, there still billions of dollars worth of stuff that still has not been sold.

    Re the idea that every country apart from the US needs to borrow a large amount of dollars in order to engage in international trade I don’t see why. Certainly where a country’s balance of payments is in equilibrium, dollars will flow into the country as quickly as they flow out, so there is no need to borrow loads of dollars there.

    In contrast, where a country implements stimulus, its balance of payments will initially deteriorate, thus it will need to borrow dollars. But if such a country simply limits stimulus to enough to maintain full employment, which is the objective that MMTers and everyone else seeks, then I don’t see that the need to borrow extra dollars will be a big problem.

    But I agree with Frances’s point that small countries have a very limited degree of monetary sovereignty.

  9. This comment has been removed by a blog administrator.

    1. I have not misrepresented anything. I have a different view, that is all.

      Mitchell unfortunately fails to notice that a freely floating exchange rate is impossible with capital controls, since the movement of money in and out of the country determines the exchange rate, and capital controls by design impede that movement. This is not necessarily a bad thing: I have now (after a journey of some years) reached the conclusion that capital controls are essential for developing countries with thinly traded currencies and weak institutions. But it is simply inconsistent simultaneously to recommend capital controls AND claim that the currency should float freely.

  10. Of course what you forget in the case of Japan in your analysis.

    If Foreigners decide to dump their Japense debt with a floating exchnage rate you need a buyer and a seller or the transaction won't take place.

    So you would need others around the world wanting to buy Yen or those trying to dump them won't be able to get rid of them.

    I really don't understand why you 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.

    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 MMT economists have said for a decade, 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.

    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.

    1. As my day job is writing about the dynamics of floating exchange rate systems, clearly I "get it". You, it seems, don't.

      There is always a market for debt - at a price. There is always a market for a currency - at a price. When a large amount of yen, and/or yen-denominated debt hits the market, the price falls. This is simple supply and demand which is the basis of floating exchange rates.

      "There isn't really such a thing as a balance of payments crisis in a floating rate exchange system". This is such rubbish that I am not even going to bother to debunk it. I gave an example IN THE POST of a country that is currently experiencing a balance of payments crisis despite having a floating exchange rate. It is not the only one.

      I've said nothing about surging imports. I have said that if a country cannot earn the FX required to pay for the essential imports it needs, it must borrow or buy it. Ultimately this is not sustainable and countries that persistently borrow FX, or print money to buy FX, end up in FX crisis. This is always the case, whether or not the exchange rate floats. It just happens faster if the exchange rate is fixed, because the country runs out of FX reserves more quickly.

      Exporters can, and do, refuse to sell to countries whose exchange rate is very unstable.

      You don't seem to understand markets. At all.

    2. 1. Foreign holdings of JGBs are quite small:

      2. The BOJ would be happy to see foreign sellers of JGBs if it weakened the yen and helped them towards their long term inflation targets.

      But Frances is right - there is always a price for debt and a currency. It would require a major liquidation of foreign JGB holders to cause any issue for Japan. At which point the local holders of foreign currency or Samurai bonds (massive pension holders of such things) would simply sway those bonds back into JGBs.

  11. 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.

  12. 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 as all MMT economists say 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.

  13. Which ties into the myth of

    "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.

    1. The FX system does not trade all currencies equally. Markets for some currencies are extremely thin, which makes exchange rates volatile. Exporters do not like doing business with countries that have unstable exchange rates. They prefer to develop business links with countries that have more developed FX markets and stronger institutions. There is ample empirical evidence for this.

      I also prefer to deal with reality, rather than fantasy. "You can't use economies that are operating under neo-classical rules" - that is ALL economies, currently. Let's deal with where we are, rather than waving a magic wand in the hopes of being transported over the rainbow.

      I have never argued against floating rate systems. I spend my life writing about them, and am generally in favour of them. However, unlike you, I am aware of their limitations. Floating exchange rates are not a panacea.

    2. @ Footsoldier

      "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."

      I've never read as much garbage about the FX system and cross border trade in my life, to be blunt.

      Exporters earning foreign currency will immediately tend to sell it for a reserve currency or their own native currency. Foreign currency doesn't "sit in drawers".

      None of them, and I mean NONE of them will just hold onto foreign currency they have no use for. I've only been on the coal face of the FX and rates funding markets for 20 years, and various major global banks, so I might have missed one who doesn't clean out all their FX positions regularly, but I doubt it.

  14. Post Keynesians still don't seem to get the issue with savings desires of the foreign sector and are hell bent on staying with the debunked Kaldorian views. Stuck in a fixed exchange rate analysis that they can't escape from.

    1. I will delete any more posts from you that repeat this straw man. This post is not about fixed exchange rates.

  15. Nice post, but I think that you are far too lenient on the implications of Point 3. MMT effectively hinges on this assertion that monetary sovereigns can purchase any good or service available in their own currency. However, the theory readily acknowledges that most goods, especially commodities and manufactured goods, are sold on global markets and, therefore, cannot be purchased with nominal value. The only item that can be purchased for nominal value is "(idle) labor". This conclusion, while not strictly incorrect, conveniently fails to explain why labor is the one exception to this rule: it is assumed that the monetary sovereign has restricted the sale of domestic labor to within its jurisdiction and denominated in its currency. As an American, I am free to work in the United States for USD, but I am pretty severely restricted from working anywhere else for any other currency. The disparity between the ease with which oil can be traded globally compared to the difficulty with which labor can traded in the same system is what gives rise to the perceived purchasing power of sovereign entities. (In fact, the disparity between the ease with which capital gains can be acquired globally but wage income cannot is what drives much of our inequality problems.)

    This is why, for example, MMT policies would fail in an EU country like Greece, even it it remained on the drachma. If Greek citizens are able to sell their labor abroad for Euros, then they will be largely unwilling to trade their labor for nominal drachma. This will be increasingly true if the Greek issuer chronically or systematically dilutes the nominal value of the drachma through monetization.

    So, though the foundations of MMT are shaky at best, the justifications that cement those foundations are chillingly authoritarian.

  16. Brian Romanchuk has explained it beautifully

    1. Brian Romanchuk has demolished a straw man.

    2. Oh, and Romanchuk's conclusion pretty much says "who gives a stuff about developing countries anyway." This simply confirms the main point of my post, which is that MMT has little to offer to developing countries with thinly-traded currencies, poor creditworthiness, weak institutions and an underdeveloped supply side.

      Of course this doesn't mean MMT is wrong, but then I never said it was. It does mean it is inadequate, since - as Romanchuk makes clear - it really only works for currency-issuing developed countries. This has implications for MMT economists' ambition for world dominance. I am struggling to see why an economic paradigm that only works for the rich club should replace the existing neoliberal economic paradigm (which of course also only works for the rich club). Let's have some development economics, please, and a realistic assessment of what measures are needed to increase prosperity in developing countries.

    3. This comment has been removed by the author.

  17. I know this blog is UK based, but of you want to debunk MMT based on the claims they make about the US monetary system see my video on YouTube called #MMT Debunked Nationalize the Fed! All source provided are peer reviewed academic articles, thanx

  18. Frances, I think many of the things you say are right, but that it is wrong to go and define monetary sovereignty in this way (because clear definitions are important), and it is very wrong to then flippantly conclude that "Sadly, if MMT's policy recommendations rely on there being monetary sovereignty, it can never safely be used in more than a handful of countries". As to the definition, having monetary sovereignty should mean having sovereignty over the currency itself, not having sovereignty over or access to the real resources held by other countries. You are absolutely right that certain nations will depend more on others and I expect that this dependency can have some or maybe all of the effects you describe. But that dependency is a matter of real resource access - it does not change the fact that the nation is *monetarily* sovereign, even if that sovereignty ought to be exercised with regard to the external dependencies.

    And of course, MMT would never say that the external dependencies should be ignored by a monetarily sovereign nation (as defined by MMT). To the contrary, MMT would argue that monetary sovereignty is a tool to be used responsibly to deal with these issues. As an academic I think to validly make your statement above attacking MMT, you have to critique its policy prescriptions (e.g. the Job Guarantee) which perhaps you could do in the context of the issues you raise - that would be far more constructive and interesting an exercise, but also much harder than fighting over a definition!

    1. My conclusion is not "flippant". I am deadly serious. Unless MMT comes up with something that addresses the real constraints facing developing countries, it can never safely be used by them. As it stands, MMT appears to apply only to the "rich club" of major currency reserve issuers.

      It is frankly ridiculous to hand-wave away dependence on external real resources. Many developing countries are dependent on imports for essentials such as basic foodstuffs. A Job Guarantee is pointless if the country cannot obtain the dollars it needs to pay for food imports. Workers can't eat the domestic currency, and they can't burn it to keep warm. If a country can't feed or clothe its workforce, or provide essential energy, without imports which must be paid for in a foreign currency, it is not monetarily sovereign, end of.

      No economic theory should ignore something as crucial as this. It amounts to saying "I don't give a stuff about developing countries." Which is uncomfortably close to what some MMT adherents do in fact say. Their argument amounts to "when developing countries become developed countries they can adopt MMT." Not much use to the government of a developing country that is trying to lift growth without raising inflation to the skies or triggering a run on the currency.

      This piece is not "fighting over a definition". It is raising a serious point, namely that the distinction between "currency issuer" and "currency user" is not black and white, and that many currency issuers are effectively constrained in their fiscal policy by the need to obtain dollars. As MMT's core policy prescription is that currency issuers should use deficit spending to ensure full employment, clearly a country that is constrained in its fiscal expenditure by the need to maintain the external value of its currency in order to prevent FX crisis cannot possibly adopt MMT's core prescription without other measures to limit exchange rate movements, such as capital controls. Freely floating exchange rates can be extremely damaging for developing countries that are dependent on imports for essentials such as food.

      I have previously critiqued the Job Guarantee. I have serious reservations about it as the principal macroeconomic stabilizer. I am also concerned about the political economy implications of a general job guarantee.

      A Job Guarantee cannot guarantee GDP growth. It depends how the labour is deployed. In countries with an underdeveloped supply side and widespread corruption, I suspect many of the jobs would not contribute to GDP.

    2. Worth adding that Bill Mitchell has done extensive work as an economic adviser to developing countries. In particular, South Africa and Timor -Leste.

    3. Frances, why is it that every time I attempt to post a long list of Bill Mitchell's work on development economics it just disappears? Is there a technical fault or are you choosing to delete it?

    4. This comment has been removed by the author.

    5. Tried to post (again) a long list of Bill Mitchell's writings on developing countries, Jog Guarantees and exchange rate issues-but it keeps getting deleted. Innocent technical fault or something darker? Hopefully the former :-)

    6. I haven't deleted anything. However, Blogger regards comments with long lists of links as spam, so I imagine they have gone into my spam folder.

      That said, I will delete any attempt to post links to Mitchell's work on this site. Last week, he wrote a very unpleasant post attacking me and other people. That was the post that sparked this one, though I did not link to it or name Mitchell. I will not read anything by him ever again, and I refuse to allow my site to be used to promote his work.

    7. Simon, I've just looked. Your missing comments are indeed in my spam folder, placed there by Blogger.

      I'm not going to reinstate them, for the reason I gave above. I'm happy for you to provide links to pieces by Randall Wray or Warren Mosler - Wray, particularly, has written some insightful pieces on this subject. But please respect my decision not to link to anything by Mitchell. His blog will not be promoted on this site.

    8. Thanks for your response Frances. Of course I will respect your wishes. Although it should be pointed out to your readers that Bill Mitchell's work and writing on Development issues is extensive and addresses some of your criticisms.

      Apologies for filling your spam folder with numerous attempts to post that list!

      Shame you are not all talking, we need that more than ever. if neo-liberalism is to be properly challenged. But I appreciate your frankness and the fact that your post has set me off on a mission to improve my knowledge in this are.

    9. My readers can of course go and look for Mitchell's work on this for themselves. As it happens, I have read quite a lot of it, though not in the last week, obviously. I disagree with him on lots of things.

      It is interesting that one of the people Mitchell seems to hate most is Ann Pettifor. Mitchell has repeatedly attacked her for disagreeing with his policy prescriptions. Ann has extensive experience with developing economies and any reasonable person would take her views very seriously. I don't think Ann is correct to regard Mitchell's attacks as misogynistic, as the tweets Mitchell quotes in that blogpost suggest: I suspect Mitchell attacks her because he sees her as a threat. But whatever the reason, this is a dreadful way for a high-profile economist to behave.

      If anyone is to blame for this breakdown in communication between people who are basically on the same side, it is Mitchell.

    10. This comment has been removed by the author.

    11. Hi Frances,

      Thank you for your reply (5 Nov).

      To be clear no-one is trying to "hand-wave away dependence on external real resources" and I thought my original comment made that clear.

      Focussing on the JG, you say "A Job Guarantee is pointless if the country cannot obtain the dollars it needs to pay for food imports." Of course if the country cannot produce enough food it must find a way to get foreign currency to buy that food. I don't accept that the foreign currency has to be USD, e.g. if this country was bordering the EU they really would only need Euros, but I'm not sure that's an important point. The real question is: are you saying that a JG stops the country from getting that foreign currency? Well, I think the answer is yes if the JG is used to completely crowd out any employment of resources that produces things of value to the relevant foreigners, so for example you would not immediately raise the JG above the wages paid by foreign companies that have factories in said country without very careful consideration. But if 10 or 20% of the country is unemployed then you could employ those people at a wage rate below what said factories are paying, and that is likely to be beneficial as it increases distribution of resources and is likely to increase the production of the entire nation as those unemployed are brought into employment.
      Now you say that due to deployment of labour, supply side issues, and corruption, that country cannot do this because the jobs will not contribute to GDP. Corruption is definitely an issue on this point, there's no denying that. But corruption is an issue for *any* economic strategy, and the countries which implement neoliberal cost-cutting measures don't get less corrupt by virtue of doing so - I could say that where resources are scarce then corruption is more likely - I don't have time to look for helpful research right now but maybe you are aware of some? Otherwise, please tell me what strategy you propose that is economically superior to a carefully designed JG and why it would handle corruption better? Indeed, what strategy can "guarantee" GDP growth without addressing these concerns? The fact that these concerns exist does not invalidate the strategy.

      On the topic of the deployment of labour, I understand that there has been some substantial work done by the core MMT group on this. I agree this is worth discussing and looking into. For my own part, I always see the fundamental jobs being the facilitation of basic amenities which in a developing nation might be building and maintaining low-tech roads, wells, sewerage, improving shelter, and disaster-readiness where obvious deficiencies are identified. I've no doubt that most of the foreign-currency-getting factories/services would be built in places that already had solved these problems to an adequate degree, so it seems to me straightforward that this sort of work would lead to an increase in GDP.

      Another big point on the corruption issue: I think we can agree that any dramatic economic change has to be implemented slowly, to allow corruption to be picked up and ironed out. This would matter in any country, developed or otherwise.

      I think going into this level of detail is important, especially when alleging a whole body of work is defunct or partly useless. That is why I suggested your conclusion (as presented in the article) was flippant, I just didn't think you'd gone into enough detail to make that allegation. I still don't think you have but I hope you agree this dialogue is worthwhile regardless.

      Re your claim other adherents of MMT have said about not giving a stuff about developing nations - maybe some don't, but I suspect they just dodged the issue because it is hard and they didn’t know. In any event, thoughtful MMT adherents exist, and if you are right and keep elaborating then eventually they will come around and the others will follow.

    12. “But corruption is an issue for *any* economic strategy”

      No! An unconditional universal basic income stops the rent-seekers and the redistribution profiteers.

    13. Tony,

      Corruption is a very considerable problem in poor countries. Indeed we might say that for many of them, government corruption is one of the two principal reasons why they are poor, the other being war. What you are doing is a fine example of the hand-waving I was talking about. "Well, all countries are corrupt, so a JG would work even in a country which is extremely poor because its government is corrupt." No, just no. All a JG would do is create a slave labour army whose output would go straight to the corrupt dictator and be siphoned out of the country. And if you don't believe me, go and look at Equatorial Guinea (yes, I really do know about this one). The mere thought of a JG imposed by a government like that gives me the horrors. Rooting out corruption has to happen FIRST, otherwise a JG in such a country would simply be a form of modern slavery.

      It makes me extremely angry that you say - solely on the basis of this post - that I don't know what I'm talking about.This is a BLOGPOST, not an academic paper or a book. It is necessarily short. That doesn't mean that it is not underpinned by detailed knowledge. In fact I have studied and written about many developing countries, including the ones I discuss in this post.

      I don't think it is remotely useful for you to dismiss my work as inadequate and my conclusion as "flippant".

    14. Per, I completely agree. In developing countries a UBI is better able to lean against clientelism and cronyism than a JG.

    15. Frances, in developed nations too! JG would be just another source of distortion introduced by besserwissers, just like regulators introduced risk weighted capital requirements for banks that so dangerously distorts the allocation of credit to the real economy.

  19. Excellent post!
    You might be interested on this recent contribution on the subject‘Veil’%20.details?ID=708

  20. Nicholas, I have deleted both your comments because they were off topic. This post is not about Positive Money. Attacking it in these comments is wholly inappropriate.

    I am happy to post comments that discuss the substance of the post.

  21. Hi Frances,

    You appear to adopt a definition of monetary sovereignty that no MMT scholar has ever used. You imply that MMT scholars argue that real resource constraints and exchange rate vulnerabilities never affect monetarily sovereign nations. I’ve never read an MMT scholar describe monetary sovereignty in those terms and I’ve read a lot of their books, journal articles, and blog posts. In fact I’ve noticed that MMT scholars emphasise that being able to buy any unused resource that is for sale in your own currency does not necessarily mean that you are able to provision your population. If your nation has severe resource constraints caused by highly unfavourable geographical location, climate, topography, and natural resource endowments, you might not be able to produce enough food and energy and other necessities for your people, and you might not be able to produce exports that the rest of the world wants. A nation in that position needs foreign aid and perhaps an international financial institution that intervenes in foreign exchange markets to prop up the nation’s currency. MMT scholars address those issues in their work.

    MMT scholars do not claim that monetary sovereignty is a panacea.

    Also, having a floating exchange rate is completely compatible with using capital controls as needed to prevent speculative and destabilising inflows and / or outflows of capital.

    A willingness to use capital controls when necessary does not mean that a nation has adopted a fixed exchange rate.

    Best wishes


    1. The whole point of this post is that I think the MMT definition of monetary sovereignty is wrong.

    2. On capital controls: I will write a separate post about this, but you have misunderstood the point, sadly. I did not say that capital controls meant that the nation had adopted a fixed exchange rate. I actually said that it meant the nation had adopted a managed float.

      The MMT definition of floating exchange rates is as simplistic as the MMT definition of monetary sovereignty. Not having a freely floating exchange rate does not mean the exchange rate is fixed, any more than issuing your own currency means you have monetary sovereignty.

  22. Question: Why is a US fiscal deficit needed?
    Wouldn't issuing more bonds just soak up available dollars needed by the world to pay back their dollar debt?
    Right now the FRB is being criticized for unloading too much of their balance sheet, causing a shortage in the money markets.

    1. No, it wouldn't. It's hard to explain this without raising MMT hackles, but I will try.

      First, the uncontroversial bit. The world needs the US to run a sizeable current account deficit. This has been known since the 1960s, when the economist Robert Triffin pointed out that global demand for dollars would eventually force the US to abandon the peg to gold. The US abandoned the gold peg in 1971. Since then global demand for dollars, unconstrained by the need to maintain a gold peg, has far outstripped the US's ability to produce goods and services for export. Consequently the US has become a net exporter of dollars and dollar-denominated assets, which equates to a current account deficit.

      I want to emphasis that the causation is that way round. Global demand for dollars and dollar assets causes the US's current account deficit, NOT unfair trade deals that disadvantage the US, as President Trump would have us believe. However, global demand for dollars tends to keep the dollar's exchange rate strong, which hampers US exporters.

      The US also needs to run a fiscal deficit, because global demand for dollars outstrips tax revenues from the US's tax base. Partly, this is because of US policies that have encouraged corporations to keep profits offshore. But it is also partly because the US is providing the world's principal reserve currency. The world wants the US's public debt. USTs lubricate global markets and enable the rest of the world - especially developing countries - to build dollar reserves to protect them from FX crises. If the US cuts its public deficit the world can suffer an economic contraction. In my view it is the desire of the US's external sector to accumulate dollar assets, not the US's domestic private sector, that causes the recent correlation between US fiscal consolidation and recession noted by Stephanie Kelton.

      Right now, the US Government is running a larger fiscal deficit because of tax cuts. That means there are more dollars in circulation than there would be with a smaller deficit. There is an increase in dollar holdings by the US private sector because the Treasury is draining fewer of them through tax. However, the Treasury is also issuing bonds, which the global private sector buys. Newly-issued Treasury bonds drain money in the same way as tax. Thus, Treasury has partly replaced a permanent money drain in the form of taxation with a temporary money drain in the form of bond issuance. The dollar effect is therefore a wash, temporarily.

      But it is not a wash in sectoral terms. The US economy now has more dollars in circulation - hence the economic boom. Simultaneously, the global economy has fewer dollars in circulation, because of dollar repatriation and Treasury bond issuance. Hence the EM crash and shortages of dollars on global markets. All of this makes for a stronger dollar and a wider current account deficit.

      That said, the increase in bonds, which are nearly all at the short end (T-bills), is providing additional liquidity to money markets because T-bills are used as collateral. Because of this, the US's larger fiscal deficit does have some stimulatory effect on global markets despite the monetary drain from bond issuance. You don't need more dollars in circulation to have a fiscal stimulus, you just need existing dollars to move more easily - which they do if there is more liquid collateral available.


    2. The FRB's quantitative tightening doesn't really affect this. What it does is influence the yield curve. When the FRB was actively reinvesting all maturing bonds, it was buying longer-dated bonds to replace those that rolled off. This flattened the yield curve. Now it is winding down its active reinvesting, the yield curve is steepening again because the FRB is not buying longer-dated bonds in the same quantity. A simplistic view sees this as monetary tightening because the quantity of reserves is shrinking, but it is actually loosening market conditions at the longer end, which benefits (among others) pension funds and insurance companies that need to invest in longer-term safe assets.

      However, the FRB's interest rate rises DO affect the quantity of money in circulation, because they make both bank lending and corporate bond issuance more expensive, which should reduce demand for both and hence reduce private sector money creation.

    3. Thank you for a thorough answer Frances, your insight is appreciated.

      I was wrong to think that the money pouring into bonds would stay out of circulation, of course it doesn't. On the other hand the current account deficit/Triffin dilemma is obvious and was never in question.

      So we have a US government who issues more debt, all short term, thereby increasing the money stock by the amount of interest it pays, plus there is a boost to the velocity of money caused by lesser taxes. The Treasury-paper is needed as collateral in moneymarkets, and to keep liquid foreign FX reserves (is the last because there is no permanent international swap agreements?)

      In your opinion, does increased US public borrowing and velocity of circulation make up for the slowdown in private sector borrowing? Are they partly the cause of it?

      Regarding the Fed reducing their re-investment of Treasury paper, how does the Fed get paid for the matured bonds and bills?
      Does the Treasury change dollars for FRB reserves with the banks, which it then transfers to its reserve-account with the Fed where they are cancelled?
      The Fed has reduced their balance sheet from 4.1 trillion to 3.75.
      If I remember right the banks sat two years ago on 2.6 trillions of reserves, if the above is true, then at this speed it will take about 7 years for the commercial banks to get back to pre crisis reserve levels. 2017 until 2024, at which time we would see a real recession I guess. What are your thoughts?

    4. Crikey. Answering all of this needs a blogpost.

  23. Simon Agonistes, I have deleted your comment as it contains personal attacks on me.

    I am happy for you to re-post your comment without the ad hominems. However, before you do, I suggest you read my replies to Nicholas, above.

  24. Rodger Malcolm Mitchell, you do not have my permission to promote your blog on this site. I have therefore deleted your comment.

  25. Haha, so because you couldn't address the substance of Mitchell's argument, which quite clearly dismantles your understanding of Monetary Sovereignty, you decide to express faux outrage. Pathetic.

    1. I do not have to allow people to use my site to promote their own sites. At the very least, Mitchell should have asked permission. He did not. Therefore, I deleted the link to his site.

      To be perfectly frank, Mitchell's post was so full of misunderstandings and ad hominems it was not worth my while debunking it.

  26. "To be perfectly frank, Mitchell's post was so full of misunderstandings and ad hominems it was not worth my while debunking it.".... The irony..... And Mitchell wasn't attempting to promote his site (ancillary if anything), his purpose was to show the world your ignorance of MS. Which he did successfully.

    1. No he really didn't. He just demonstrated his own ignorance.


Post a Comment

Popular posts from this blog

The sad story of Maplin Electronics

The Bitcoin Standard - a critical review

The misery of Mitie