Category: Economics
Sovereign Currency and Government Policy in an Open Economy
While the usual assumption is that current account deficits lead more-or-less directly to currency depreciation, the evidence for this effect is not clear-cut. Implications of this depend on the currency regime. According to the well-known trilemma, government can choose only two out of the following three: independent domestic policy (usually described as an interest rate peg), fixed exchange rate, and free capital flows. A country that floats its exchange rate can enjoy domestic policy independence and free capital flows. A country that pegs its exchange rate must choose to regulate capital flows or must abandon domestic policy independence. If a country wants to be able to use domestic policy to achieve full employment (through, for example, interest rate policy and by running budget deficits), and if this results in a current account deficit, then it must either control capital flows or it must drop its exchange rate peg
National Solvency and the Special Case of the US Dollar
The US can run budget deficits that help to fuel current account deficits without worry about government or national insolvency precisely because the rest of the world wants Dollars. But surely that cannot be true of any other nation. Today, the US Dollar is the international reserve currency—making the US special. Isn’t the US special? Let us examine this argument
What if foreigners dump government bonds?
when government deficit spends, some of the claims on government will end up in the hands of foreigners. Does this matter
The money scoreboard
This post is intended to be a hopefully brief synopsis of how the monetary system works using an Austrian framing with MMT terminology. If you don’t know what that means, you’ll see what I mean as I proceed. MMTers like to say that money is like points and the government is just a scorekeeper. I
Reserves, Governement Bond Sales, and Savings
Last week we showed that government deficits lead to an equivalent amount of nongovernment savings. The nongovernment savings created will be held in claims on government. Normally, the nongovernment sector prefers to hold that much of that savings in government IOUs that promise interest, rather than in nonearning IOUs like cash. This week we will look at this in more detail
The two-step process of saving
Recipients of government spending can hold receipts in the form of a bank deposit, can withdraw cash, or can use the deposit to spend on goods, services, or assets. In the first case, no further portfolio effects occur. In the second case, bank reserves and deposit liabilities are reduced by the same amount. In the third case, the deposits shift to the sellers (of goods, services or assets). Only cash withdrawals or repayment of loans can reduce the quantity of bank deposits—otherwise only the names of the account holders change. These processes can affect prices—of goods, services, and most importantly of assets
Effects of Sovereign Government Budget Deficits on Saving, Reserves and Interest Rates
Each time the treasury spends or taxes, a complex series of steps is required that involve the treasury, the central bank and private banks. The central bank and the treasury develop such procedures to ensure that government is able to spend, that taxpayer payments to treasury do not lead to bounced checks, and—most importantly—that undesired effects on banking system reserves do not occur. While, the end result is that the treasury spending leads to bank credits, taxes lead to debits, and budget deficits mean net credits to both demand deposits and bank reserves, it is more complicated
Paul Davidson: The State of Economics (wonkish)
Paul Davidson argues that a theory is the way humans describe real world observations on the basis of a model that starts with a few axioms. An axiom is an assumption accepted as a universal truth that does not need to be proved. From this axiomatic foundation, the theorist uses the laws of logic to deduce conclusions that explains what we observe in the world of experience. All theories are generally accepted in some tentative fashion. Theories are not ever conclusively established and can be replaced when events are observed that are deviations from the current existing theory. Thus, the financial crisis of 2007-2009 should have been sufficient empirical evidence to indicate that the axiomatic basis of the mainstream theory needs to be replaced
Will internal devaluation work?
My friend Rob Parenteau doesn’t think it will. His argument against it is similar to the one I have been making about the origins of this crisis. Here’s what I said
Currency Sovereignty
This week we will begin to examine our next topic: government spending, taxing, interest rate setting, and bond issue. We will examine fiscal and monetary policy formation by a government that issues its own currency. We will bear in mind that the exchange rate regime chosen does have implications for the operation of domestic policy. We will distinguish between operational procedures and constraints that apply to all currency-issuing governments and those that apply only to governments that allow their currency to float
Currency Revulsion
All US government obligations are substantially identical promises to repay a specific amount of the currency unit of account backed by nothing but taxing authority. So, Treasury bonds don’t ‘fund’ anything. If the Treasury were allowed to run overdrafts at the central bank, the US government could stop issuing bonds altogether and credit bank accounts with keystrokes. But what about currency revulsion, you ask? What if government deficit spends out of control
Here’s why inverted yield curves are a leading indicator of recession
Just following up on my last post about the expectations theory of interest rates, I wanted to explain why yield curve inversion signals recession – and why it hasn’t this go round in the