Re: Danby seminar: liquidity

[Colin Danby <danbyc@xxxxxxx>]

Bruce writes:

> I don't think this is a quibble, but this is why I write
> the long-winded 'a country facing challanges due to international
> liquidity constraints', rather than 'a country facing an
> international liquidity constraint'. If it wasn't long-winded
> *enough*, edit it to say 'the range of international liquidity
> constraints faced by its nationals'.

Sorry not to have read your post sympathetically enough!

There's still a point here that I, at any rate, am not clear
on and which maybe Bruce or someone else can help me unpack.
It has to do with the nature of the time in which we think
about a constraint and about liquidity.

As I read the Thirlwallian argument, we have in essence a
BoP flow constraint.  Imports plus capital acct balance
and reserve use are all you have to pay for exports -- that
kind of thing.  From this kind of approach we get the foreign
savings gap in Chenery's 2-gap model and so forth.  In that
sort of perspective we usually assume away "liquidity"
problems properly speaking in the sense that if our period
is one year and your exports are mainly in the 2nd half of
the year, we assume that short term financing for imports is
readily available in the first half (i.e. you can borrow
on your 2nd-half imports in the first half.)

When we move to a Davidsonian world things look different.
Units have future payment commitments and cannot be sure
enough of timing and extent of future income that they need
to hold money and do various other things to avoid being
caught short.  Liquidity is an ever-present problem but not
a simple constraint as it was in the bookkeeping sense of
the BoP.

Take Indonesia, which has obligingly had a financial crisis
this week in order to illustrate my arguments.  Indonesia
has a fat trade surplus that is only going to grow fatter.
Yet the currency is dropping like a stone, and liquidity is
tight, in both $ and rupiah terms. Short-term interest rates
in the Philippines are also absurdly high right now.

Why aren't people rushing to buy rupiah at their cheaper $
price?  Because they don't know how much damage a fragile
financial structure is going to sustain, damage that
will have a variety of real effects.

> However, the point is important *not* because any group
> within the country can create liquidity within itself -- it can
> only create a form a *local* liquidity. Rather, it is important
> because different groups within the country face different obtsacles
> (in both severity and type) in forming groups with foreign individuals
> to create international liquidity.

The liquidity problems I'm trying to zero in on are those
affecting individual units, as Bruce notes.  At the moment I
don't see those as flow constraints over long periods so much
as weaknesses of financial structure that can produce nasty
surprises in the very short run.

So I see this as a structural constraint operating on
individual firms, with further structural and political-economy
consequences (like implicit state guarantees -- Daniel Kostzer
made a related argument a couple of weeks back), rather than a
flow constraint.  The 2 kinds of problems could interact in a
number of ways; Bruce noted some short-term possibilities in
his first post and I also noted that possibility that in the
very long run a weak financial sector may be associated with
a weak and capital-poor export sector.  But I don't have a
neat theoretical way for relating the 2.

Thanks, Colin