Re: Nellīs_comments_on_Mosler (fwd)

[Mathew Forstater <forstate@xxxxxxxx>]

>From Warren Mosler:

---------- Forwarded message ----------


---eperez  wrote:
>
> In the case of some developing economies it  is
> difficult to argue that it is the "state´s fiscal
authority that
> underlies the monetary system." Especially when tax
evasion rates are
> very high. The central bank provides currency
stability not the
> government.

Interesting observation.  I would say, for example,
the  Mexican peso is a tax driven currency.  The
Mexican government, however, is probably not aware of
it and does not recognize its available options.

The central bank can influence the currency primarily
in two ways- by direct intervention in the fx markets,
and by adjusting the level of peso interest rates.

I think it is becoming more understood that adjusting
level interest rates is a mixed bag.  For sure the spread
between spot and forward fx rates adapts, by
definition. But it is unclear to me that raising rates, for
example, will result in absolute currency appreciation.  One
problem is that the tsy is a large net payer of interest, so
higher rates means the tsy's interest expenditures increase.
This sends more 'new' peso's into the private sector at
a time when the cb is trying to accomplish the
opposite.  It may even cause the tsy to try to borrow more foreign
currency, in order to minimize interest payments.
The private sector is thereby encouraged the same way.  This puts
the entire nation at increased risk as external debt is
encouraged.

The model presented shows how for every 'borrower'
there is a 'saver' of pesos (horizontal expansion).
Changing the peso interest rate increases the income of one
side and decreases the other side equally.  Again, the Tsy is
a net payer, so increased rates increases total private
sector income.  Yes, various propensities to spend are most likely very
different, but this is what interest rate policy relies on, in
addition to causing massive shifts from savers to borrowers and
vice versa.

The other option of the cb is direct purchases and
sales of currencies in the market place.  This can
certainly be used without limit to purchase foreign currencies,
but the reverse is the problem, of course.

Mexico may have high tax evasion rates, but the fact
is that what tax authority there is does create sellers of
goods and services who do accept pesos in exchange.  I think
that if the government understood this dynamic, and
realized that it is in control of the vertical component to
the extent of its taxing authority, it could
establish the contol inherent in the sytem.   This could very quickly
'turn around' the Mexican economy.  And with the resources and
industry of the population thus unleashed, become a
model for the world.

Let me add that presently, many countries are not
utilizing tax driven currencies as you state.  Most of those are
indirectly utilizing some other nation's tax driven
currency. And yes, the Central Bank is administering the policy.
Those countries are part of the other country's
horizontal component.  And as such, they may have currency
stability, but they are opreating under an economic bias that
works against their standard of living.

Again, I think the model presented can be a useful
tool for analysis of this type.

Warren Mosler


>
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>
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> Esteban Pérez, UNITED NATIONS, ECLAC México
> Phone   : 250-1555
> Ext.    : 242
> Fax     : 531-1151
> Internet: eperez@xxxxxxxxx
>
> This message does not constitute official ECLAC
> correspondence; the organization is not responsible
> for the contents or the consequences of its use,
> not for inaccurate transmission or misdirection
>
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