Given the U.S. fiscal situation, should military spending change (how much?)

[Gumby]

How is the act of corps obtaining foreign currency to do business overseas the equivalent of our gov't having foreign-denominated debt?

This makes no sense to me.

Currently, we pay for goods in dollars. And since we can never run out of dollars, there isn't a solvency issue.

But, if corporations couldn't pay for goods in dollars anymore, the demand for dollars would drop considerably — and that would make it harder and harder to buy foreign goods/oil.

Many of our deficit dollars become foreign exchange reserves (held at the Fed). But, if foreign countries won't accept our dollars anymore, then there won't be very many buyers of dollars in the FOREX markets. US corporations would become more and more bankrupt as they exchange more and more dollars for foreign currencies (which are in higher demand). Corporations would go into foreign-denominated debt — owing foreign-denominated interest as well.

The end result is that the government would have to print a massive amount of dollars to provide the liquidity needed to help corporations buy the foreign denominated currencies necessary to fulfill their purchases. The more the government does this, the more worthless the dollar would become and the more dollars companies would need in order to purchase goods. It would become an endless hyperinflation loop.

I'm oversimplifying here, but since we have such an enormous trade deficit, the world is less likely to fall apart if everyone just agrees to accept US dollars as payment.

[Gumby]

I don't understand why it's so imperative for the U.S. dollar to remain the world's reserve currency, but it probably has nothing to do with the well-being of the average American citizen.

It's about avoiding owing foreign denominated debt. If the US owed foreign denominated debt (in exchange for oil/resources), we'd be in big, big trouble.

I guess Ron Paul wasn't implying that the USA would go into debt to buy oil but rather use exports of goods and services made in the USA (creating US jobs) as a way to buy oil. That is what Stiglitz advocates. He says that for most Americans it would make them better off. Have you seen his stuff about using SDRs for global trade?

Easier said than done. Extremely cheap labor (and a Chinese currency peg to the US dollar) made this extremely difficult over the past few decades. The trend decimated American exports. Now, the manufacturing jobs, technological skills and industry no longer exist in the United States for us to export at that level.

I suppose the ideas is that we would be in a position to be more service oriented (providing Facebook-type companies to the world). But, 8.5% unemployment still reigns, so we're in a pickle for now.

Oddly enough, the US seems to be a bright spot in world's economy right now. Pretty strange.

[stone]

Gumby, the Chinese want the SDR type system as advocated by Stiglitz (and unsuccessfully by Keynes in the Bretton Woods summit). My guess is that they would stop the USD peg if a system was put in place that was acceptable by the BRICs etc.

The hyperinflation scenario you describe hasn't hit the other countries that don't have global reserve currency status (eg Canada, UK, Sweden, Switzerland, Japan etc etc).

[moda0306]

So basically this is all for Globocorps??

I was under the impression tha the GOVERNMENT avoids foreign-denominated debt for the PEOPLE and domestic businesses using the currency, not that the GOVERNMENT tries to avoid GLOBOCORPS' need for foreign-denominated debt because it makes it harder to bail them out!!!

[Gumby]

The hyperinflation scenario you describe hasn't hit the other countries that don't have global reserve currency status (eg Canada, UK, Sweden, Switzerland, Japan etc etc).

Those other countries don't have our massive trade deficit

http://en.wikipedia.org/wiki/List_of_so ... nt_balance

(Hint... look at the bottom of the list)

[stone]

http://www.project-syndicate.org/commen ... o8/English
"BEIJING – In March, at a meeting in Beijing organized by Columbia University’s Initiative for Policy Dialogue and China’s Central University of Finance and Economics, scholars and policymakers discussed how to reform the international monetary system. After all, even if the system did not directly cause the recent imbalances and instability in the global economy, it proved ineffective in addressing them.

Reform will, of course, require extensive discussion and deliberation. But the consensus in Beijing was that the G-20 should adopt a modest proposal this year: a limited expansion of the International Monetary Fund’s current system of Special Drawing Rights (SDRs). This proposal, while limited in scope, could play an important role in initiating discussion of deeper reforms while helping to restore the fragile world economy to health and achieve the aim expressed in the G-20’s Pittsburgh declaration: strong, sustainable, and balanced growth.

We suggest that SDRs’ role be expanded through new issues and by increasing their use in IMF lending. Doing so would build on the enlightened suggestion made at the G-20’s London meeting in April 2009 to issue SDRs equivalent to $250 billion, which was then quickly implemented. The G-20 could suggest that the IMF issue a significant volume of SDRs over the next three years. We would suggest, for example, an issue of SDR150-250 billion annually (approximately $240-390 billion at current exchange rates).

Such a measure would have several positive effects. First, it would reduce the recessionary bias in the world economy, especially during crises and in their aftermath. Many countries continue to accumulate high levels of precautionary reserves, especially to avoid future crises stemming from reversals on their capital and trade accounts. Recent financial crises have taught countries that those with large reserves are better able to weather the vicissitudes of international financial markets.

While such reserve accumulations help protect countries, in certain periods they reduce global aggregate demand. Given its relatively small scale, the annual issue of SDRs would only partly offset these deficiencies, but it would nonetheless help sustain and accelerate global recovery without causing inflationary pressure. Moreover, reducing the need for countries to set aside funds for reserves would also facilitate some reduction of global imbalances.

Ideally, additional issuance of SDRs would be accompanied by further measures to increase their effectiveness. For example, countries’ unused SDRs could be held as “deposits”? by the IMF, which the Fund could then use to finance its lending programs. This should be understood as the first step toward integrating “general resource”? and “SDR”? accounts into a single IMF account, and to increase the SDR’s role in IMF transactions so that it eventually becomes the main – or even only – mechanism for IMF financing. During a declared crisis, IMF lending should be financed entirely by new SDR issues in unlimited amounts."

[stone]

The hyperinflation scenario you describe hasn't hit the other countries that don't have global reserve currency status (eg Canada, UK, Sweden, Switzerland, Japan etc etc).

Those other countries don't have our massive trade deficit

http://en.wikipedia.org/wiki/List_of_so ... nt_balance

(Hint... look at the bottom of the list)

But Gumby, it is just a chicken and egg thing. The US military spending is what the trade deficit buys. The jobs created by the US military are the jobs lost due to the trade deficit. Americans are great people at least as capable of holding their own in world trade as any other country.

[Gumby]

I dunno Stone. Sounds interesting. But then again, the Euro sounded interesting a few decades ago too. You seem to want to focus on the hypotheticals more than the current realities. I'm probably not going to comment on something that I know very little about and is unlikely to happen in the near term. Like the Euro, there are too many variables to know how it would really work in practice.

So basically this is all for Globocorps??

I was under the impression tha the GOVERNMENT avoids foreign-denominated debt for the PEOPLE and domestic businesses using the currency, not that the GOVERNMENT tries to avoid GLOBOCORPS' need for foreign-denominated debt because it makes it harder to bail them out!!!

Moda, I'm still learning this as well, so bear with me. I believe the answer lies in (MMR's) sectoral balances. We always think of the public and private sector deficits/surpluses. But, we often don't talk about the other component.... the Capital Account:

http://en.wikipedia.org/wiki/Capital_account
http://en.wikipedia.org/wiki/Current_account

It's all related. If those companies were buying things that we didn't need (maybe Vuvuzelas) then the government wouldn't worry about bailing out Vuvuzela-selling companies. But, when those companies are buying things we need to survive (like oil), and those companies are passing the costs on to the people... the government tends to keep an eye on that sort of thing.

Basically, all you need to know is that there are people in the government who do everything they can to make sure we can spend like crazy in dollars anywhere we want to. It provides us much more freedom to maintain our status as a superpower.

I'm not saying any of this is a good thing. It's just the way it is.

Anyway, I think our answer lies in the Capital Account and how it fits into the MMR Sectoral Balances. (I don't have time to really get into it today, so I think we'll need to do some more research on those).

[Gumby]

The hyperinflation scenario you describe hasn't hit the other countries that don't have global reserve currency status (eg Canada, UK, Sweden, Switzerland, Japan etc etc).

Those other countries don't have our massive trade deficit

http://en.wikipedia.org/wiki/List_of_so ... nt_balance

(Hint... look at the bottom of the list)

But Gumby, it is just a chicken and egg thing. The US military spending is what the trade deficit buys. The jobs created by the US military are the jobs lost due to the trade deficit. Americans are great people at least as capable of holding their own in world trade as any other country.

If you want to maintain superpower status, you need a "blue-water navy," Stone. No way around that.

The United States Navy maintains eleven Carrier Strike Groups (one centered on USS Enterprise, the remainder on Nimitz-class carriers), of which six are deployed or ready for deployment within 30 days, and two ready for deployment within 90 days under the Fleet Response Plan (FRP). The US Navy also maintains a posture of Continuous At Sea Deterrence (CASD) through the Trident submarine-launched ballistic missiles on Ohio-class submarines. It also maintains a continuous deployment of Expeditionary Strike Groups that embark a Marine Expeditionary Unit with an Aviation Combat Element of Landing Helicopter Docks and Landing Helicopter Assault.
Source: http://en.wikipedia.org/wiki/Blue-water_navy

Yikes!

[moda0306]

So my If/then equation goes even deeper:

If you don't understand the bond market, then you probably don't understand the stock market.

If you don't understand macroeconomics & currency, then you probably don't understand the bond market.

...now...

If you don't understand the military industrial complex and international security affairs, then you probably don't understand macroeconomics and currency.

I'm f*ked. 

Now we just need a poli-sci major in here that knows this stuff like the back of their hand and we'll be set... unless...

... If you don't understand the equity securities markets, then you probably don't understand the military industrial complex...

Uh oh.

[Gumby]

Yep.. It's complicated. I certainly don't want to pretend that I understand it all.

Moda, Here is one MMRer's explanation of the Capital Account:

Sectoral Balances are an important part to understanding MMT. The capital account ‘represents’ the flow of money to the ‘foreign sector’. The important part of understanding this in terms of MMT has to do with government spending and the following-

The Private Sector + Capital Account = -(Government Balance)

This is an accounting identity, it absolutely true to the smallest increment. The reason it is important to understand is 2 fold. It helps illustrate that the Government must sepnd (hence the negative %) money into the private sector for that money to exist. Also, it shows that if you ‘reduce’ the negative Government balance (like cutting spending or raising taxes) you will reduce the positive Domestic Private sector balance (and Foreign Sector Balance, or Capital Account).
Source: http://pragcap.com/macro-minute-3/comme ... ment-70182

EDIT: The fact that the Capital Account is quite large is what absorbs a lot of the private sector spending. Of course, once a government holds foreign-denominated debt, the rules of MMT/MMR no longer apply. Obviously the corporations are not the exact equivalent of a government holding foreign-denominated debt. But, I think the point is somewhat moot because if corporations needed to pay for oil in dollars, then it would seem that the US government would likely also need to owe foreign-denominated debt to fill up its Strategic Oil Reserve.

[moda0306]

Gumby,

Why does MMT (or MMR) often refer to the trade deficit instead of the "capital account"?  Is it just a simple measure to look at?

[cabronjames]

I wonder what a ballpark (to nearest Million) US nonfarm private sector jobs would be created, by balancing the trade deficit?

imho not solving the Trade Deficit is a matter of US elite's political will.  There are multiple methods of balancing the Trade Deficit.  Old school tariffs worked in the past.  Warren Buffet's Import Certificates idea could work.  Monetary policy might work, but might just trigger "competitive devaluation" back & forth.

Of course China would cry "trade war", but the reality is that China, Germany engage in policy to protect their exporters.  For that matter, the US has protectionist policies as well, just for the wrong industries, the ones that don't have peaceful productive exports (Wall $reet, military contractors, domestic healthcare cartels, entertainment/copyright industry, etc).

economist Adam Smith theory of trade assumed balanced trade for each nation.  Not persistent decade+ trade deficits like the US or Italy, nor trade suprluses like China or Germany.

Economics is kind of like the Bible or the Constitution.  Non-honest misleading advocates praise the parts they like (that serve their agenda), & how they are faithful to these parts, then conveniently ignore the parts of their precious document they do not support.

[Gumby]

Gumby,

Why does MMT (or MMR) often refer to the trade deficit instead of the "capital account"?  Is it just a simple measure to look at?

I guess it's semantics. I suppose "Capital Accounts" refers to net-financial assets that have moved into the foreign sector. Where as trade deficit refers to the literal balance of trade.

[moda0306]

cabronjames,

I think a better way to look at what you are asking is to look at what the government can control, rather than the trade deficit itself.

The trade deficit is something I look at as "us buying goods from other countries with our money, and other countries buying our savings with their goods."  This drains our domestic sector of medium-of-exchange, and can cause lots of problems even if responsible levels of debts need to be serviced at the time of a crash.

One way to increase payrolls, IMO, is to simply lower taxes and increase spending... so we can get fiat purchasing power into the hands of cash-strapped players in the market, as well as make our medium of exchange look less attractive to foreign currency buyers.  The trade deficit will hopefully lower on its own.

[stone]

Gumby,

Why does MMT (or MMR) often refer to the trade deficit instead of the "capital account"?  Is it just a simple measure to look at?

I guess it's semantics. I suppose "Capital Accounts" refers to net-financial assets that have moved into the foreign sector. Where as trade deficit refers to the literal balance of trade.

The UK gets a large chunk of its capital account from foreign dividends etc rather than from exports I think (I hope I'm not in a muddle about this).

[moda0306]

Gumby,

Why does MMT (or MMR) often refer to the trade deficit instead of the "capital account"?  Is it just a simple measure to look at?

I guess it's semantics. I suppose "Capital Accounts" refers to net-financial assets that have moved into the foreign sector. Where as trade deficit refers to the literal balance of trade.

It'd be interesting (eventually, once I get over this economics hangover I'm suffering from all the reading I'm doing trying to understand this stuff) to really look into whether that DOES matter.  For instance, if a US investor uses dollars to invest in a foreign factory, vs a US consumer using the same number of dollars to buy a Japanese car, one would think there is a difference there that could manifest itself in different ways, and that MMT should probably make that distinction.

[moda0306]

Gumby,

We should probably issue a forum-wide apology for turning half the threads in here into MMT threads.

[stone]

Cabron James, my guess is that a lot of US jobs would be created by not having a trade deficit and that it wouldn't take a big effort it would simply take less of an effort being expended to maintain the USD as the global reserve currency. It might mean that the USA might no longer be able to have such a huge military. I guess it all boils down to whether being citizens of a superpower actually provides American's with any benefit. It might be said that America was doing fine when it wasn't trying to control the world.

[MediumTex]

A useful way of incorporating the political dimension into economics and monetary policy is to understand that what happened in the 1970s is the U.S. went off the gold standard and went onto the "oil standard".

When you are on an oil standard, the value of your currency is derived, in part, by your ability to provide stability to world oil supplies.  Your ability to provide such stability is, in turn, a function of your ability (and resolve) to periodically engage in military action to achieve the desired world oil market conditions.

This theory matches up pretty well with U.S. foreign policy in recent decades, with the exception of the Carter administration, which seemed more interested in not getting anyone killed than in meeting the U.S.'s oil standard commitments.

Unfortunately, part of maintaining an oil standard means that you have to maintain an enormous military capability.

[stone]

Medium Tex, have you seen that SDR idea? Oil would be bought using SDRs (a basket of all of the currencies of all of the countries). So Triffin's dilemma would equal out around all countries and no one country would get the double edged consequence that the USA gets from petro-dollars.

[Gumby]

Gumby,

We should probably issue a forum-wide apology for turning half the threads in here into MMT threads.

I know. Sorry everybody!

But, at least we can bring some possible explanation and understanding to the madness of why government spending seems like it's out of control. We can at least examine why military spending probably helps prop up our currency.

Again... not saying it's a good thing. Just saying it's an explanation for why we do things the way we do them. My sense is that much of our government spending comes from corporations/lobbyists demanding it to keep the world running smoothly enough to run their businesses.

If we were to ignore our fiat reality, we would probably just go insane wondering when the spending was going to stop.

A useful way of incorporating the political dimension into economics and monetary policy is to understand that what happened in the 1970s is the U.S. went off the gold standard and went onto the "oil standard".

When you are on an oil standard, the value of your currency is derived, in part, by your ability to provide stability to world oil supplies.  Your ability to provide such stability is, in turn, a function of your ability (and resolve) to periodically engage in military action to achieve the desired world oil market conditions.

This theory matches up pretty well with U.S. foreign policy in recent decades, with the exception of the Carter administration, which seemed more interested in not getting anyone killed than in meeting the U.S.'s oil standard commitments.

Unfortunately, part of maintaining an oil standard means that you have to maintain an enormous military capability.

Well said, MT.

[Gumby]

Medium Tex, have you seen that SDR idea? Oil would be bought using SDRs (a basket of all of the currencies of all of the countries). So Triffin's dilemma would equal out around all countries and no one country would get the double edged consequence that the USA gets from petro-dollars.

Just curious, but why exactly would US politicians want to do this, when they can just print up dollars instead? Wouldn't the US just try to undermine any policy that supported this idea?

[stone]

Medium Tex, have you seen that SDR idea? Oil would be bought using SDRs (a basket of all of the currencies of all of the countries). So Triffin's dilemma would equal out around all countries and no one country would get the double edged consequence that the USA gets from petro-dollars.

Just curious, but why exactly would US politicians want to do this, when they can just print up dollars instead? Wouldn't the US just try to undermine any policy that supported this idea?

Because US citizens wanted jobs. Didn't want to be targets for terrorists. Didn't want to be killed fighting dubious wars etc etc. Perhaps even wanted to be seen to be engaging in honest trade and be respected as such.

I'd love it if the UK was seen internationally as a country that engaged in honest trade rather than being a financial leech.

[Gumby]

Medium Tex, have you seen that SDR idea? Oil would be bought using SDRs (a basket of all of the currencies of all of the countries). So Triffin's dilemma would equal out around all countries and no one country would get the double edged consequence that the USA gets from petro-dollars.

Just curious, but why exactly would US politicians want to do this, when they can just print up dollars instead? Wouldn't the US just try to undermine any policy that supported this idea?

Because US citizens wanted jobs. Didn't want to be targets for terrorists. Didn't want to be killed fighting dubious wars etc etc. Perhaps even wanted to be seen to be engaging in honest trade and be respected as such.

I'd love it if the UK was seen internationally as a country that engaged in honest trade rather than being a financial leech.

It's a bit naive to think that those things would be fixed by SDRs.

Anyway, Warren Mosler has discussed the operations behind SDRs a fair amount:

http://moslereconomics.com/2010/05/07/c ... perations/
http://moslereconomics.com/2010/05/07/i ... t-on-sdrs/

Doesn't sound like anything the US will be advocating for oil any time soon.