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Modern Monetary Theory - Fraud 5 - Trade deficits
This is the fifth part of a critique of some of the thoughts expressed by Warren Mosler in his booklet "Seven Deadly Innocent Frauds of Economic Policy"
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Deadly Innocent Fraud #5: The trade deficit is an unsustainable imbalance that takes away jobs and output. Facts: Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.
Issues raised in respect of international trade can be judged in part by considering whether an argument holds if the logic is expressed in terms of a city rather than nation-state. If the argument does not hold for the city or smaller community, then odds are the basis is one of nationalism or false patriotism. Similarly, if a proposed trade policy is conceived in terms of all trades or industries, and not just the one that might be given in example, then at least it does not fall subject to special pleading in support of some favorite group.
It is gratifying to find neither of these problems in Mosler's take on trade, although I could quibble about the expression "The real wealth of a nation is all it produces and keeps for itself, plus all it imports, minus what it must export" (p. 59). The term "all it produces and keeps for itself" already accounts for "what it must export", so there is no reason to subtract it a second time.
I agree that the trade imbalance is not very well understood; a trade deficit on the one hand represents on the other hand a surplus in the current accounts balance - our trading partners are collecting dollars, most of which go to investments in dollar-denominated assets (no doubt a fraction is kept in cash). Those dollars bid up asset prices, contributing in part to lower interest rates and higher stock prices. Eventually those investments are converted to consumer goods (in one or many stages). In a specie money environment these flows equilibrate with changes in the price ratio of imports and exports; fiat currency just makes it harder for people to understand the true price conditions.
The problem is not that there is a trade deficit, per se, but that the government is able to increment the currency unit account balances and claim that all will be well. The government can not just "keep American spending power high enough" (p. 61) in this way, because the true value of trade is in the receipt of other goods and services, a point which Mosler acknowledges (p. 57) but neglects the related ramifications.
Mosler's points about international trade (p. 61-62) apply equally to trade at any level - the parties to exchange each hope to benefit from the exchange, with any intermediate lenders also part of the process.
Where I take issue is the implication that we are doing foreigners a favor by having a fiat currency ("Domestic credit creation is funding foreign savings"). It is a point of national policy to impose legal tender laws that forbid use of other assets for payment of debts (particularly taxes). Add to that the international treaties, Bretton Woods, particularly, that imposed a US domination of currencies of other nations, which was followed eventually (and formally in ~1972) with the complete removal of any commodity backing to dollars, replacing the world's unit of exchange with the full faith and credit of the United States. The progressive devaluation of the dollar's purchasing power is broadly acknowledged, such as captured in wikipedia - as retreived from MeasuringWorth.com. As a related point, Shadowstats has a pessimistic view of where this is headed.
But in spite of that devaluation (other currencies going down as fast or faster, for the most part), the US dollar remains the reserve currency - it is relatively liquid, stable and secure (the tallest pygmy, so to speak). In such an environment it is no wonder that foreigners choose to denominate their savings in dollars, and put their excess dollar holdings in US Treasury securities. The fact that foreigners buy those securities does not ameliorate the issues with fiat currency, except maybe to put off the inevitable accounting.
I guess that here is the place to bring up a point about the US dollar being the world's reserve currency. Would we be in as good a position were some other nation's currency to be the world's reserve, and the US dollar was then subject to the deteriorating value of the Ruble, Euro, Yen or Renminbi? I suspect the answer is no, which causes me to further question the validity of economic theory that subjugates the world to the currency manipulations of the United States - the theory fails the test of universal applicability.
The recent situation in Iceland might serve as illustration of these problems. They don't have the advantage of being responsible for the world's reserve currency, but one can imagine the inflationary consequences if they were able to use those accounts to bail out their bankrupt banks. The effect of US bailouts have had a smaller observable effect due to the substantially larger size of the underlying US economy, but the pernicious effects remain, among the most damaging of which has been the continuation of the very banks whose risky behavior contributed so much to the crisis.
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For more of this discussion, see the following posts concerning the other frauds