Re: [A-List] Sabri's question

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Michael is right.
Sovereign credit does not automatically leads to domestic inflation. In
fact an excessivley tight sovereign credit policy creates domestic
deflation.  Sovereign credit shoulod never be used to finance foreign
trade; it should be used only to finance domestic development.  The
penalties listed by the Gang8 memeber only occur if the Washington
Consensus is applied to foreign trade based on dollar hegemony.  When a
trade deficit occurs, it means a country is importing too much. The cure
is to reduce imports, not to cut down on domestic development by
reducing sovereign credit, in order to continue to import more.  A
country should never import what it can itself produce, even for price
advantage.  Importing for price advantage is what is destroying the US
economy even when the US can force the exporting economies to finance
its trade deficit through dollar hegemony.  When a trade deficit leads
to currency depreciation, it is a natural exchange rate correction to
reduce a country's ability to import until current account is balanced.
Going into foreign currency debt to finance import of goods that can be
produced at home (even at a higher price) is a foolhardy arrangement.
Sovereign credit cannot be used to finance trade deficits denominated in
foreign currencies because no government can print foreign money.

Henry C.K. Liu

Hudsonmi@xxxxxxx wrote:

> Dear Sabri,
>       Here's Gunnar's answer to your Q's:
> Dear Michael,
>
> Here is my take on Sabri's two questions.
>
> 1) If governments can create money/credit at will, and I agree with this
> proposition, why do over-indebted countries such as Argentina, Turkey and
> the like not choose that path but continue to keep borrowing both
> domestically and internationally?
>
> Comment:
>
> The option to create money/credit at will is open to Argentina, Turkey
> etc. - at a price.
>
> That price is (a) domestic inflation, (b) balance of payments deficit,
> and (c) depreciation of the currency.
>
> Why?
>
> Because the rest of the world will not accept the currencies of
> Argentina, Turkey etc. in exchange for its supply of goods and
> services to Argentina, Turkey etc.
>
> 2) When government creates money at will and hence leads to an
> increase in
> the quantity of money, would there not be inflation unless the resulting
> excess demand is met by increased supply? Consequently, are there not
> limits
> to the amount of money the government can create?
>
> Comment:
>
> If the country in question is Argentina, Turkey etc., the limit to the
> amount of money the government can create is defined by the issuing
> government's threshhold of pain insofar as (a) domestic inflation, (b)
> balance of payments deficit, and (c) depreciation of the currency are
> concerned.
>
> If the Argentine, Turkish etc. governments go beyond this threshhold,
> the rest of the world couldn't care less - any resulting economic
> upheaval and chaos will be confined within the borders of Argentina,
> Turkey etc. with minimal spillover effects on the rest of the world.
>
> If the country in question is the United States of America, whose
> currency is also the world's currency, the limit to the amount of
> money the government can create is defined by the rest of the world's
> readiness to extend to the U.S. the accommodation which it will not
> extend to Argentina, Turkey, etc. - namely, to continue to accept
> newly-issued national money in exchange for its supply of real goods
> and services.
>
> If the U.S. Federal Reserve and Treasury push the U.S. advantage as
> sole issuer of the world's currency beyond that point, the result is
> certain to be a world-wide version of the chaotic consequences of
> excess money creation by Argentina, Turkey etc.
>
> Gunnar
>
>
>  MH's comment:     I don't exactly agree. Look at poor Norway. It
> hesitates to create money, imagining that this is inflationary. there
> is a LOT of room to create domestic money to put UNEMPLOYED or
> underemployed domestic labor to work. the result will be higher
> output, not higher prices. David Hume acknowledged this fact over two
> centuries ago in letters to Oswald and others (I discuss it in my
> trade theory book).
>       Michael