Friday, February 28, 2014

Flexible Exchange Rates, MMT, and the Ruble Crises of MMT

Ramanan continues on his MMT critique focusing on Forex. sovereignty, and flexible exchange rates. The standard MMT position around "currency sovereignty" is simply that a state has the ability to issue its own currency and thus is "sovereign" in it's matter. State obligations, in its own currency, are easily extinguished by it issuing more, and moreover, were initially funded by it issueng currency.

A simple thought experiment: if I was to establish winterspeak-land tomorrow, no one could pay a tax denominated in winterspeak-bucks because none would exist, nor could anyone buy a winterspeak-bond because they would have no winterspeak-bucks to do so with. The original winterspeak-buck would need to come from somewhere, and that somewhere would be me (else it would be counterfeit).

This is in some ways the most intuitive part of MMT, and yet it seems to cause problems when you have higher level discussions on more technical points. Regardless, let's turn to the real world and see just what the limits are to currency sovereignity, what the real world policy space is re: floating exchange rates, and what a countries' Forex obligations actually are.

First, let's establish that any goods and services that a state can generate and provider for itself can be entirely managed in its own currency. However, most states need some imports, and those imports may or may not be available in the state's own currency. In those cases, the state will need to either export real goods and services to get the required currency, or will need to be able to swap it's currency for the target currency on a forex market.

In the currency swap scenario, the state can either let the currency float freely, or it can attach it to some sort of peg. If the currency floats freely, then currency sovereignty it maintained. If there's a peg, then sovereignty is compromised as the state will be obligated to maintain that peg, or default.

In practice, most countries operate on what I called a "mixed currency regime" where the citizens use a mix of local and foreign currencies. This is certainly true in third world countries, and this mixed regime reflects how sovereignty in those countries is also weak -- there is usually limited law enforcement, corruption, weak property rights, etc. As the sovereignty of the state increases, you find mixed currency regimes becoming less mixed, and if the state is hyper-sovereign, ie. has the ability to dictate, or at least strongly influence the affairs of other states, then you find its currency beginning to dominate in those other countries as well. The US$ is exhibit A.

Ramanan writes:
Now, it is clear from the above quote that Mitchell admits that nations with government have a constraint on fiscal policy. But the more troublesome fact is that he presents it as if the government doing this had some full volition to not have been indebted in foreign currency.
It depends on how much the country wants to import. Free trade has costs instead of benefits, and a country can easily develop internal auto industries, for exmaple, if it wants to. The cars won't be as good as if they came from Japan, but it could do it. Aside from certain commodities, countries do have the option to trade less, and this become less indebted in a foreign currency, although that also has costs.

He continues:
So the Neochartalist story that somehow the government shouldn’t borrow in foreign currencies is vacuous. Only a few nations have the ability to attract investors to purchase their debt in domestic currency and typically these nations are successful in international trade. But this by no means guarantees continued success – if net indebtedness to foreigners keeps rising relative to output because trade in international markets for goods and services turns weak, then output gives in. And a shift in investors’ portfolio preferences also can lead to the original sin, even if one starts with zero government debt in foreign currency.
I don't agree that the MMT story is vacuous, I think it highlights another real cost and risk to free trade. He ends on what I consider another non-sequitor:
Now the backfire effect: in the “modern monetary theory” blogs, examples such as those of Pakistan are presented as if it was Pakistan’s policy makers huge error to have borrowed in foreign currency and to their fans this appears to strengthen the view that in the supposed world which the Neochartalists fantasize, there is no balance-of-payments constraint. And the error is the failure to recognize that “money” has an international aspect in addition to what it has to do with the government and banks.
At present, the solution is for the world leaders to provide a coordinated fiscal expansion and induce the creditor nations to increase domestic demand and hence increase latter’s level of imports. But the long term solution is to move away from a system of free trade. And that is far from the “MMT” overkill description of the world and overly simplified solutions.
I'm very familiar with Pakistan, and borrowing in dollars with a peg certainly constrains Pakistan's ability to use fiscal policy to boost domestic demand if that's what necessary. Honestly though, Pakistan's bigger problem is it's inability to generate savings demand for rupees from it's domestic population because it has very weak tax collection. Stronger tax collection would mean a bigger sink for rupees, reducing inflationary pressure, and letting it run higher deficits. Pakistan's need to borrow in foreign currency stems directly from it being unable to tax in it's own, although I do not want to imply that if it could tax in rupees that would fund it's ability to spend in rupees. The mechanism isn't a causal funding mechanism. The Pakistani government is a limited sovereign.

The ruble example of 98 is interesting because there, Russia defaulted on ruble denominated debt, which it could theoretically have honored. The contagion mechanism there was actually first world hedge funds, who were forced to sell other positions because their foreign debt portfolios were being squeezed.

One of the more interesting MMT insights, as stated by Mosler, is "exports are a cost, imports are a benefit", which is the opposite of the usual narrative where export driven economies, like Japan, are hailed while import driven economies, like the US, are said to be more vulnerable. When you look at straight goods and consumption, it's obvious that a country wants goods (which are hard to produce) more than it wants it's own currency (which is trivial, the trick is in getting it accepted). There are other reasons why an import heavy economy generates it's own costs, but if you had to choose between beads or the island of Manhattan, I hope the choice is clear even if you aren't conversant in MMT.


Blogger Ramanan said...

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1:29 PM  
Blogger Ramanan said...

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1:30 PM  
Blogger Ramanan said...


First, Pakistan is "Floating/Other" as per this IMF annual document:

Table 1.

It is true it had pegged regimes but now it is freely floating. If you want to argue history matters, my point too.

My argument is that international investors' portfolio choice forces the government's hand in intervening and thereby picking up debt in foreign currency.

You present it as a "choice" - as if a government has commited a sin by doing so. Funnily the name "Original Sin"!

But the arguments of the originators of the hypothesis is that it is not a choice. If things were so simple, a government indebted in foreign currency can simply exchange the debt for local currency in the foreign exchange markets and the currency will just adjust and things will be fine which is not what happens.

Look the examples you present are a few rich nations who have become rich via a historic process of competitiveness in international trade. Try to find countries whose domestic demand is completely out of match with exports. The fixed versus floating debate just obfuscates the debate. As Tobin once said "Debate on the regime evades and obscures the essential problem."

1:32 PM  
Blogger winterspeak said...



The IMF document does not fully capture the currency system in Pakistan. Much of the wealth in that country exists in other currencies, as well as gold, and it is not uncommon to have even street level transactions take place in something other than the rupee. Most Pakistanis with money, including Government officials, have material deposits in foreign currency and so they do keep an eye on exchange rates. It's a mixed regime.

And I didn't present it as a "choice" in a platonic sense, I looked at very real world effects and consequences. If you are indebted in a foreign currency, and you force a swap, then you will be in default and you will suffer the consequences of a default. Having looked at what these are close-up, I would argue that on a day-to-day basis default only really effects imports, and the consequence to the man on the street depends on what the country imports (if it's oil, things will hurt, if it's things with more substitutes, then it's not that big a deal).

Default does wipe out capital at banks and other highly-leveraged financial entities, such as hedge funds, who have to sell to make margin calls, which drives down asset prices further, which require further selling. The news media will scream armagedon and you will see indices plunge. This causes a credit crunch which robust fiscal could counter were anyone willing to go there, and is the MMT remedy. But without it, banks hold us hostage.

I take a different lense to the situation, which is for a nation to develop it's local capital pool (including labor) as much as possible. Managing AD via fiscal helps, and so might trade restrictions and other controls of inflow and outflow of people and material. Let the currency float to give you the ability to manage this, and import the least that you must in forex, and as much as you can get away with in your currency.

2:50 PM  
Blogger Dan Lynch said...

Re: " if I was to establish winterspeak-land tomorrow, no one could pay a tax denominated in winterspeak-bucks because none would exist, nor could anyone buy a winterspeak-bond because they would have no winterspeak-bucks to do so with. The original winterspeak-buck would need to come from somewhere, and that somewhere would be me (else it would be counterfeit)."

Well, most money comes from private banks, not from the government, so the winterspeak-bucks might be created when a private bank makes a loan.

Re: "exports are a cost, imports are a benefit"

Mostly false. What is the real cost of exporting a copy of Microsoft Windoze?

When you export a knowledge product, you don't loose knowledge. To the contrary, the more knowledge product you make, the more knowledge you gain. You also gain market share and name recognition.

Ah, but that's software, you say. What about hardware?

If a US manufacturing plant with excess capacity manufactures some piece of hardware using metal that was imported from Korea, and then exports the hardware, is that a real cost to Korea, or a real cost to the US?

If the US produces a surplus of widgets, but nonetheless imports widgets from China, resulting in layoffs at US widget plants, how is that a real benefit to the US? How are the laid off widget workers better off? The laid off widget workers can no longer afford to buy widgets, so national widget consumption actually falls. If consumption falls, then how is the country better off.

One way to look at "real" costs is by the opportunity cost. What is the opportunity cost of making widgets in the US, if the widget is mostly value-added and if there is excess widget-making capacity?

If the economy was operating at full employment, then the opportunity cost of making widgets would be whatever you could make if you redeployed widget workers elsewhere.

But the US economy has not experienced full employment since WWII. If the widget factory shuts down due to foreign competition, the unemployed widget workers may not be redeployed. If that is the case, then the opportunity cost of making additional widgets in the US is zero, and the imported widgets impose real costs on Americans.

MMT's trade policy would only be true if trade were limited to scarce natural resources, like oil. It's not true with regards to knowledge products -- and the majority of products are knowledge products.

7:42 PM  
Blogger Dan Lynch said...

Note: my previous comment did not directly address the MMT position on flexible exchange rates. I have no beef with flexible exchange rates. However since you brought up these other MMT policies, they're fair game for comments.

7:45 PM  
Blogger Neil Wilson said...

"However, most states need some imports, and those imports may or may not be available in the state's own currency. "

For me that's the wrong way to look at it.

All other states in the world need to export, and they will want your business if you open up your country.

Therefore you say to them that they *must* accept your currency if they want permission to trade with you. They then have to lobby their own government or banking system to setup the necessary 'liquidity operations' to allow that to happen. .

The big failure of economics is to model the 'Rest of the World' as one big amorphous blob that acts in unison. That is the wrong view.

The correct view is to see the Rest of the World as a set of competing entities desperate for your business. Particularly the export-led ones.

So in the above scenario you talk to all those exporters and their nations trade representatives and say you will favour those that take your scrip. Then see how fast your money gets accepted for 'needed' imports.

Of course those exporters will try and force you to use their currency, because then they have you by the short and curlies. The MMT advised developing nation would take a different negotiating line and refuse to do that - threatening to talk to some other nation that is more 'friendly' to their position.

You would also set up a banking system that had the transaction accounts outside and separate from the lending and funding operations. That way if a bank gets into trouble borrowing in foreign currencies you just let it go bust in the usual fashion, and resolve the lending operations of the bank via the insolvency process. Transaction processes then carry on as usual.

11:33 PM  
Blogger Nick Edmonds said...


When you say:

"Therefore you say to them that they *must* accept your currency if they want permission to trade with you."

what have you got in mind there? Is that some kind of exchange control?

1:46 AM  
Blogger Ramanan said...


I know that a lot of Pakistani citizens keep their assets abroad and it is the same with many countries. I don't know how it supports your argument and not mine.

So capital controls - which don't work as perfectly. In fact poor nations also have issues with outward FDIs - although these are potentially beneficial in the long term, in short term it creates balance of payments problems.

About paying debt in foreign currency: what I meant was that if things were really so simple, the government can purchase foreign currency when it needs to make coupon and principal payments - which is of course not the case. That's because the investors will reallocate their portfolios subsequent to the transaction. And for this reason governments go into debt in foreign currency in the first place.

I am toward the side of putting controls but I don't know why that is consistent with the slogan "imports are a benefit and exports are a cost". In fact the more successful producers are in international markets, the better the nation does and this process leads to polarization instead of the promised convergence of neoclassical economists! Do you not know this empirical fact? Moreover, imports are beneficial only if there is full employment which is rarely the case and since imports drain demand and hence output, they are negative for employment.

5:35 AM  
Blogger winterspeak said...

Dan: Yes, most money does come from private credit extension, but what makes a winterspeak-bank extending credit different from a winterspeak-citizen printing currency on his laserjet printer when it comes to the legitimacy of their winterspeak-buck?

While I fully accept the importance of private credit extension, it's not as if the Govt is not central to that as well, just less directly.

Neil: Why do you assert all other states want to export? If a state could produce all it desired to consume internally, why would it want to export?

Ramanan: We are agreed re: Pakistani's keeping US$ overseas, but I was actually talking about actual dollar transactions on the streets in Pakistan. It's a mixed currency economy at a deeper level than just rich people protecting their nominal wealth from inflation by parking US$ in Dubai.

And I don't see how portfolio rebalancing causes Governments to take on foreign debt. Why does China wanting to maintain a US$/remimbi peg mean the UK takes out a loan in Euros?

I think government take on foreign debt simply because they need that currency, and they need that currency because the transaction they want cannot happen, or happens at too high a cost, in a currency they control themselves.

I don't follow the logic your import/export argument. I think imports are beneficial regardless of whether you have full employment or not, but of course if a Government denies domestic means of achieving full employment and limits itself only to exporting, then yes, they carry a cost. The first best solution of course would be for the Government to stop denying themselves those tools.

Regardless, while abstractly I think the statement is true, practically speaking Governments have populations to deal with and I can see sector specific requirements those populations may create that would call for some kind of robust industrial policy and protectionism. None of this changes the key insight is that if you give me a BMW and are willing to take a winterspeak-buck in exchange, I will print some up and make the trade.

1:52 PM  
Blogger Ramanan said...

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10:43 PM  
Blogger Ramanan said...


Difficult to convince in one comment thread - although you will also feel the same, the other way round but for now a simple question:

If things were so simple, a government indebted in foreign currency can pay off the bond coupons and the principal when they come due or offer to repurchase its the whole debt at a slightly higher price than current market price by doing fx transactions. Or not? Maybe sometimes but is it always so easy?

And it is related to the claim that governments get into debt in foreign currency because of balance of payments difficulties. All markets require a stabilizing speculator and for nations which have government debt in foreign currency, the government end up taking positions in foreign currency to stabilize the exchange rate, fixed or floating.

(China is not a good example because it has a supreme external position and about Pakistan you yourself are saying the government is constrained in using fiscal policy to increase output).

11:57 PM  
Blogger winterspeak said...


My apologies if I inadvertently claimed that things were simple -- I certainly do not believe that is true! Nevertheless, to answer your questions:

- Sometimes a government can rollover forex-debt, and sometimes it cannot, or can only do so at usurious rates. These crises are well documented, and cause a ripple effect via the portfolios of investors who are long Forex-sovereign debt (ie. hedge funds).

Debt in domestically originated currency can always be rolled over.

- I would be more specific than saying "balance of payments difficulties" and say that the country wants imports which it cannot buy in it's own currency. At that point the country has surrendered some monetary sovereignty, and either needs to meet it's obligation or default, and certainly needs to manage the exchange rate as you say.

The difference, in this scenario, between fixed and floating is that in a fixed regime a country can potentially be outgunned by a deep pocketed speculator and be forced into a default position, while in a floating regime (in theory) a country need never default, but it may be forced into a disadvantageous trading position via the exchange rate channel. In practice, the two are not so distinct -- fixed rate regimes frequently reset, so they are not so fixed, and floating regimes have interventions so they are not so free-floating. Either way, floating preserves more currency sovereignty than fixed, which is why I (and MMT) would argue it is best, while acknowledging it's limitations.

As for Pakistan, I would say that the Government is constrained in fiscal policy to increase output because its limited sovereignty means it cannot tax -- a key mechanism by which fiscal spending does not generate inflation. So the concomitant inflation risk in fiscal is higher there than in stronger sovereigns more able to tax.

8:53 AM  
Blogger Ramanan said...


About Pakistan: Whether the citizens honestly pay taxes or not is a slightly different question. They may pay it honestly but still decide to store their wealth in foreign financial assets. So even if the Pakistan government were to recover taxes, it still has the task to induce its citizens to hold their wealth in domestic currency.

My point about government debt in foreign currency was something like this:

1. You acknowledge it is a problem.

2. But at the same time you say that borrowing in domestic currency is not problematic.

But these two are inconsistent: because if 2 is true, the government can borrow in domestic currency and exchange the funds for foreign currency to pay off the debt in foreign currency, contrary to 1.

The only way out of the paradoxes is the conjecture that government debt in foreign currency is not fully volitional.

These problems arise for countries with unsustainable cumulative current account deficits and they end up with government debt in foreign currency and a deflationary bias to growth. Hence it is not the case that imports are benefits and exports are costs. Countries without these problems are by good in their export sector and the international investor community accepts debts in their domestic currencies.

Imports are good in the sense that globalization is good but it's not that it only has positive things. In fact, it puts a tight reign on fiscal policy because a fiscal expansion while increases output brings in an income-induced rise in imports. Only a few superior competitive countries can enjoy fiscal expansion without worrying about trade deficits.

My point of writing the post you refer in the main post is that if someone points out to an MMTer that: look country X has problems, he is pointed out that it has debt in foreign currency, why on earth did the government do such a silly thing. The Original Sin hypothesis discoverers knew about this beforehand and have presented it with an almost opposite perspective - which I think is more or less right.

11:41 PM  
Blogger winterspeak said...


Thanks so much for your note. I don't feel that the ability of the Pakistani government to enforce tax collection is quite as orthogonal to the Pakistani government's ability to induce it's citizen's to hold their wealth in the domestic currency as you seem to be suggesting, but I do agree that the two are not technically the same. I would argue that the same problems hold both back, and if the Government were honest and strong enough to enforce taxes, the citizens would also feel better about the rupee. Regardless, I think we can both agree that sovereignty is a sliding scale and the Pakistani Govt is at the lower end of that scale.

I also don't see the inconsistency that you point out. The issue with foreign indebtedness for a country is that the ability to exchange domestic funds for foreign funds is fickle, and certainly not around when you need it most. That said, we both agree that a Govt may have no choice, but I don't think there is any problem with acknowledging the practical limitations of sovereignty for most countries. But again, "no choice" is a strong position and how much would it really hurt America if it's citizens were limited to GM, Ford, and Chrysler and they had to give up their Toyota's and BMWs? In areas such as oil it's more clear cut, but a lot of trade is in "nice to haves" so claiming it's coerced is perhaps going too far.

I also am not sure that you capture the MMT context quite accurately here. The MMT position is that a government need never default on debt denominated in it's own currency, and when people raise examples to the contrary, invariable the default was on a debt in some foreign currency, or it was a optional default as in the case of the ruble in 98. It isn't a matter of the Government being silly, it's a matter of highlighting how the details of the default condition matter.

9:40 PM  
Blogger Ramanan said...


I am not sure what exactly you meant when you used the phrase "coerced" but free trade agreements are usually imposed on poor nations and the are bound by it to not raise tariffs on imports despite their protests.

There's a pitfalls in thinking here. Raising tariffs do not necessarily reduce imports but it works via raising output as domestic producer produce more and hence more national income and more imports and so on.

About imports cars: yes offers better quality of life to the rich and even the middle class but it is deflationary and hence the poor suffer. Shortage of exports over imports is a drain on demand and hence output and hence employment. The solution to create more demand by fiscal expansion doesn't work because it comes with more imports.

The default discussion is a bit of a sideshow. Nations typically end up with debt in foreign currency because of weakness in international trade. And troubles in the external sector forces the government to give in on fiscal policy.

One neglect of the orthodox Keynesian policies before the 60s and the 70s was the neglect of the importance of international trade. But in the 70s, some economists soon realized that the exorbitant claims of the people suggesting the advantage of floating didn't come true. The reason was that the changes in prices of goods traded across borders had less significance compared to other things. Prices are just one aspect of why people buy what they buy. In fact what's called the income elasticity effect had much more importance than price elasticity effects: in plain language it means if a nation's income grows fast, if the exports aren't growing fast enough, trade deficit will widen because of higher imports due to higher private income.

And economists also realized around that time that for most nations, there isn't a thing such as true float because governments do need to intervene in markets.

Naive solutions such as fiscal expansion do not do the trick - demand management has to be combined with policies promoting success in international trade.

Worst is that although some nations peg their currencies out of choice, it is not the case for others. They simply cannot truly float because of the financial instability it brings in. Many others who float, manage their float.

The fixed versus float just obfuscates the real issues.

Have a look at data: how many countries do see where GDP has risen quite independent of the growth in exports?

8:28 AM  
Blogger winterspeak said...


Not quite sure I follow your logic on how lower prices do not benefit the poor.

In any case, yes you can phrase it as "typically end up with debt in foreign currency because of weakness in international trade" but I would phrase it more as "weakness in domestic production". The two go hand-in-hand, as if you cannot produce something domestically, or cannot do it well, then you turn to the international market where, with one or two exceptions, you will need forex.

And I think you are too quick to dismiss "naive fiscal expansion" in favor of export driven growth, even if you ignore the case where that cannot possibly work as a global solution.

The mercantilist position, popular with Austrians, I think has some very wise points around the merits of industrial policy, but contradicts the simple MMT insight that you would rather have a bridge than some shiny beads. I think the two are complementary however -- certainly manage trade and exports to manage domestic labor demands and domestic industrial investment, but also manage the fiscal position to ensure the domestic labor market is entirely beholden to the finance industry, either domestically or abroad.

10:26 AM  
Blogger Ramanan said...


Go to Keynes' GT and look at what he had to say on Mercantilism. There's nothing Austrian about it. In fact Mercantilists were quick to understand that there is no market mechanism to resolve imbalances and active policy is needed. So Keynes agreed with that part. Of course it is also beggar-thy-neighbour, so it injures other nations but the point is that success in international trade is fairly an important thing for the success of a nation in a regime of free trade. The free traders too are somewhat Mercantilist - in that free trade works to their advantage and hence we see advanced nations parrot free trade but these just subtly gain Mercantilist advantages from others.

Yes global solution is what I think is needed (hence the name of my blog!) but it just means the solutions are not so easy.

Weakness in domestic production is also the result of weakness in international trade. As external imbalances are resolved by a deflationary bias on output, nations who do not produce much, fail to make progress. This is because lots of ideas come via the process of producing itself - ie learning by doing and since their output is lower, they remain stuck.

This can be understood if you take the Keynesian principle of effective demand seriously. For output to be higher, demand has to be higher but if balance of payments constrains demand, output will be lower. In other words, productive capacity is also endogenous - if demand is higher, production will be higher too and will bring in higher productive capacity.

About poor: price is not the only thing. Income is also. If for any reason incomes do not grow in the reach for full employment, what's the use of a cheap car - it only benefits some section of the population.

10:53 AM  
Blogger winterspeak said...

Keynes was writing under a gold standard. The genius of MMT is to take his insights around paradox of thrift and animal spirits and extend them through the broader policy space a fiat, or "modern" currency regime permits. Under gold standard conditions, both Keynes and the Austrians have much to agree on!

I think we can both agree that knowing how to build a bridge is better than buying bridges for colored beads, however, I think we can also both agree that if you could trade something valuable, like a bridge, for something that you can arbitrary produce at minimal cost, then you should make that trade.

A soverieign with control of its own currency can generate demand in certain conditions, like the one the US has here, and overcome whatever dampening effect the balance of payments conditions generate.

I will leave you to ponder what the use of something is that helps some people but not everyone, and I will ask you what you would like to trade for winterspeak-bucks! I will consider, and likely accept, most real goods and services : )

9:08 PM  
Blogger Ramanan said...


The trouble is the entire framework itself. Warren Mosler says money multiplier applies to the gold standard - how wrong can one be!

Winterspeak-bucks is not something institutionalized. Sorry there's no genius there. The difference between fixed exchange rates and floating is exaggerated and MMT exaggerates it even more. Didn't Turkey get into trouble recently? That is not to say one is better than the other but that evades the problem.

While it is true that the government can offset effects due to fluctuations in international trade, the notion of it completely removing the constraint is too exorbitant a claim - because no nation has done it so far.

The sad intuition around here is to see debts to foreigners as not debt really. Perhaps this is due to the experience of the United States which has its liabilities mainly in US dollars. But for other nations, debts become dollarized by a process of liability dollarization. As Tom Palley writes - it is funny MMTers like Minsky and somehow neglect financial instability in the external sector.

How this happens is highlighted here:

About Keynes versus Austrians - totally different sects. The Keynesian principle of effective demand holds in fixed exchange regimes too and in fact after the second World War, governments used demand management a lot till Friedman gained popularity and started making noises.

The best way to see the nature of the constraint is to actually see it in data and how if output grows faster than what exports allow it, net indebtedness to foreigners keeps rising which means output has to give in.

It's funny you talk of default and stuff ... while a caricature because history is complicated .. a nation with a float can be forced by the volatility of the markets to fix its currency and then surely it can default. Even otherwise it can because an international lender of the last resort such as the IMF can insist the government do a haircut on debts both domestic and foreign currency on its creditors.

12:56 AM  
Blogger winterspeak said...


I have to disagree strongly -- the winterspeak-buck is fully institutionalized by the winterspeak-bank and I stand ready and willing to entertain any and all offers of real goods and services for which I will gladly render payment in the aforementioned specie.

And it's funny you refer to the IMF as a "lender of last resort" given that given that most IMF loans are US$ denominated and that agency is reliant o the US Govt for it's money. Which sort of proves my point.

I agree that the real distinction is not "floating" vs "fixed" as it is a spectrum, I think the MMT genius is to distinguish between currency users and currency issuers. I don't quite think you make the point you think you are in your "liability dollarization" link because all you're describing there is an fx swap where you either had a fixed currency, or you had a floating currency which turned out to be fixed in extremis. Nobody thinks either is impossible, but it actually strengthens the MMT argument.

The question is, is there a material difference if a country has a loan due in a currency which it is sovereign over vs a currency when it is not sovereign over, and the answer is of course it does. Just as it matters to me when I have a loan due in US$ vs winterspeak-bucks.

There may be disorderly market conditions in both, but a debt due in a domestic currency need never be defaulted on (although it can be if you just want to stiff the creditor!)

The limits to a true free float are simply limits to a nation's sovereign power, and since MMT clearly ties fiat currency to sovereign power, which I think is what makes it unpopular in some circles, these positions are cogent and coherent with one another.

3:50 PM  
Blogger Ramanan said...


About your discussion of the IMF - just proves that lending to the US is strange especially since the US capitalizes it. But the same argument isn't true if the IMF is lending to some Asian country - lending foreign exchange.

Also IMF is not the only lender of the last resort. Just like they created the ESM in Europe, they can create a new fund.

Where's Winterspeak bank and which is the territory where Winterspeak is the domestic currency? Who is the dealer in foreign exchange? Is it quoted in the Reuters terminal? Is Winterspeak a member of the IMF and signs WTO agreements?

To describe economies one needs a mix of monetary and real. There's really no extremis in my liability dollarization story - nations' governments do incur debts in foreign currency. But the point is that you (MMT) present it as if the original sin is a choice.

11:42 PM  
Blogger winterspeak said...


Once again, you are quite correct. the winterspeak-buck is not on a Reuters terminal right now but I am hopeful for the future. And while a retail environment for his wonderful new currency gets developed, we will need to handle this via an OTC arrangement, which I am very comfortable with.

And I was thinking of the IMF lending to Asian countries in US$--the IMF is a currency user, just like those Asian countries, and therefore cannot be an actual lender of last resort as it's reliant on the currency issuer itself -- the US Gov.

I think you are being too black-and-white in your characterization of MMT and forex. "Original sin" is such a dramatic term! MMT's genius is to see the policy space that a sovereign, fiat currency affords. Nations do incur debts in a foreign currency, and they do have some discretion in how much they choose to do so (I think a handful of countries would be able to get away with it entirely). Choice is not a binary--all or nothing--decision, and I think every country could, if it was willing to pay the price, reduce the amount of foreign currency debt it incurs. If they understood MMT insights, they may be less likely to take on foreign debt, and I think they would certainly be more willing to default on that debt if they had to retain fiscal flexibility.

10:17 AM  
Blogger Ramanan said...

About the IMF, what I meant is the following:

The US government provides resources to the IMF so you can ask "what is the meaning of the IMF lending to the US government". I avoided the question to show that there is nothing strange about the IMF lending foreign exchange to an Asian government with balance of payments difficulties. Hell, the IMF may also ask the government to default on its debts in both domestic and foreign currency as a condition for lending foreign exchange.

About policy space: The genius is in recognizing the opposite of what MMT says and then see how to solve this! But we should continue it later!

Now to Winterspeak-bucks, if you read Davidson, one more important thing about something being a currency is a market-maker of the currency who stands ready to quote bid/ask. So which bank will quote USD/WSB?

7:58 AM  
Blogger winterspeak said...


If the IMF needs to get US$ from the US Govt in order to have any, then clearly it cannot be a "lender of last resort" as it can run out of US$.

The US Gov cannot run out of US$ because it can always make more! So I think the US Gov can be accurately called a "lender of last resort", at least in US$.

Anyone can lend something they have, but only a currency issuer can be a true lender of last resort for the currency that they alone can issue. This is the brilliant insight of MMT! (or at least one of them).

The bank of winterspeak will be happy to quote a bid/ask for USD/WSB. It's a floating rate though, I don't think fixed rates are a good idea.

Now that that's out the way, I stand ready to purchase and and all goods and services you offer in winterspeak-bucks!

9:41 AM  
Blogger Ramanan said...

"If the IMF needs to get US$ from the US Govt in order to have any, then clearly it cannot be a "lender of last resort" as it can run out of US$."

Well if the US government doesn't really want to lend a country US dollars, then the IMF would become the lender of the last resort from that particular nation's viewpoint.

I don't see why there is a distraction. LOLR or not LOLR, the IMF can ask a government to do a haircut on bonds as conditions for lending foreign exchange.

The bank of Winterspeak by quoting bid/ask risks exposure to foreign exchange which it may not eliminate and file for bankruptcy.

Markets in particular - foreign exchange markets are far from what textbooks make them out to be.

11:05 AM  
Blogger winterspeak said...


OK, that makes sense. The IMF can certainly be a lender of last resort conditional on every other candidate refusing to lend, but then we need also make it conditional on the IMF having the money to lend in the first place. And the IMF is a currency user, unlike the US Gov, so can absolutely out of US$ which the US Gov cannot (a key and brilliant MMT insight).

The bank of winterspeak has exposure to foreign exchange when it quotes bid/ask spreads, but it mitigates the risk essentially completely by floating the winterspeak-buck! Because of the float, the terms of trade will be more advantageous to you at some times than at others, which was the entire point of my post. This is another brilliant MMT insight and why, fully accepting the limitations which I think you have very accurately and perceptively highlighted, floating exchange rates are a key part of enabling a country to manage its domestic AD.

2:10 PM  

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