A version of this post appeared on Pieria in December 2013.
In my post “The desert of plenty”, I described a world in which goods and services are so cheap to
produce that less and less capital is required for investment , and so easy to
produce that less and less labour is required to produce them. Prices therefore
go into freefall and there is a glut of both capital and labour. This is
There are two kinds of deflation. There is the “bad” kind,
where asset prices go into a tailspin and banks and businesses fail in droves,
bankrupting households and governments and resulting in massive unemployment,
poverty and social collapse. America experienced this in the Great
Depression and narrowly avoided it in the Great Recession. More recently, at least one European country has felt the effects of this catastrophe.
But there is also another kind. This is where falling costs
and increasing efficiency of production create a glut of consumer goods and
services. In other words, supp…
For over a century now, the world has lacked a genuinely international means of payment. This is partly due to decisions made at the Bretton Woods conference in 1944, when the US dollar was adopted as the principal international settlement currency, rather than John Maynard Keynes's suggestion of an independent global currency that he called "bancor". Although the Bretton Woods gold-backed structure ended in 1971, the US dollar became ever more dominant.
In 2008, the dollar's global reach enabled an American financial crisis to spread to the entire world, causing a deep recession and long-lasting malaise. Ever since, there has been a deep longing for a more stable international financial system, one which didn't depend on debt, wasn't dominated by the US and was immune to political whims. Some have called for a new Bretton Woods, or even for the return of the classical gold standard.
Bitcoin emerged from the financial crisis as a fledgling international dig…
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 co…