Re: Keynesian Christmas!-- and the collapsing international

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

JML: Argentina can have pesos, convertibility at one to the dollar, and a continuing and deepening depression, or a less convertible currency and eventual prosperity.

Gunnar: hence my long-standing conviction that post-Bretton Woods world monetary arrangements are fundamentally flawed and that, somewhere down the road, monetary reform at national and international levels will prove inescapable for both the U.S. and other major world economies.

While both of the above statements are true, they have meaning only if viewed in connection to globalized trade.  Foreign exchange is necessary only when trade is conducted, and globalized trade at that.  Bilateral trade has relatively simple foreign ecxchange issues.  But bilateral trade now is merely a sub-unit of global trade, in the sense that no product is anymore made in one or two single country. A "Japanese" car has 60% of its parts and 90% of its raw material made ouside of Japan or outside of  Japanese car assembly plants worldwide.  Similarly with American and German cars.  Detroit is the main importer of foreign steel, much to the unhappiness of US steel makers.  Thus when a car is sold in New Jersey for dollars, the foreign exchange implication of that one simple transaction is highly complex, as funds flow through multi-currency conduits of varying interest rates and values.  Trade is no longer the merely exchange of goods and services.  It has become the exchange of obligations and claims.  Wages take on exaggerated importance in the trade regime and have become the most significant determinant in plant location, mostly because among all factors of production, the most immobile factor remains the supply of workers, for political reasons, through immigration laws (often racist). Energy, trransportation, technology, finance are all mobile.  Container ports can be built faster than than changes in immigration laws.  Thus unemployment, the most direct cause of social unrest, can be tackled only two ways: 1) reduce wages or 2) upgrade labor skill demand in the economy.  Item one can only be accomplished with a floating exchange rate, because of  wage inelasticity in labor contracts. With a currency board, that option is closed. The US has relied on item two, by shifting its employment demand toward hightech.  And dollar hedgemony permits a strong dollar to keep wages constant in dollar terms within the US, but high in trade terms, exporting all low pay jobs overseas.  But most other emerging economies do not enjoy a option of shifting labor demand to a hightech economy, thus they are trapped with high unemployment, especially middle level economies such as Argentina, which cannot complete with low wage economies nor with hightech economies.

The bottom line is: globalized labor movement must accompany globalized trade and finance, or a new anti-imperialism struggle will re-emerge to bring the system crashing down.  There is much to idea of every economy sharing equally its share of high and low pay jobs to promote world growth.

Henry C.K. Liu

Gunnar Tómasson wrote:

John: Re. the following: The IMF has been and is still calling for more "austerity", meaning sacking school teachers and public health workers, abandoning public infrastructure maintenance and shredding the social security net.  They have got unemployment up to 20 per cent - full Depression levels - and they aren't yet satisfied.  This is full-on 1930s stuff, as if Keynes had never lived nor written.

In a recent off-list exchange, I commented on related issues as follows: 

The problem with the IMF's "crippling programs" is that they kick in only after governments have made a mess of things - and, once that situation has arisen, there is no alternative to cutting back on domestic money supply growth (increase taxes and cut government expenditures, on the one hand, and attack the non-government sector contribution to money supply growth through higher interest rates to encourage monetary savings and discourage new credit demand). 

Thus the real problem is the mind-set which gets governments into the mess in the first place - that is where we should look for the culprit in the piece and, once we do so, we find mainstream orthodoxy as taught in all the 'best' universities and remains the point of departure for the graduates of these 'best' universities at the IMF and the World Bank. 

And, digging deeper still, monetary economics is the one specific area where mainstream orthodoxy is dangerously mistaken - hence my long-standing conviction that post-Bretton Woods world monetary arrangements are fundamentally flawed and that, somewhere down the road, monetary reform at national and international levels will prove inescapable for both the U.S. and other major world economies. 

Gunnar

----- Original Message -----

From: John M. Legge

To: pkt@xxxxxxxxxxxxxxxx

Sent: Monday, December 31, 2001 9:01 PM

Subject: Re: Keynesian Christmas!-- and the collapsing international

 Sean,Neither public service workers nor SMEs in Argentina have a choice between pesos and secondary currencies: it is secondary currencies or nothing.  By pegging the peso to the dollar and allowing full convertibility the previous regime, backed by the IMF, provided a conveyor belt for capital flight; the currency board system ensures that each tranche of capital flight reduces the circulating currency, while Argentine banks, without access to the Federal Reserve discount window or FDIC insurance can't provide sufficient offsetting liquidity to either governments or SMEs.The IMF has been and is still calling for more "austerity", meaning sacking school teachers and public health workers, abandoning public infrastructure maintenance and shredding the social security net.  They have got unemployment up to 20 per cent - full Depression levels - and they aren't yet satisfied.  This is full-on 1930s stuff, as if Keynes had never lived nor written.I note that some on the list seem to think that convertibility is important for a currency.  I point out that, from the start of WWII until 1979 the UK had two currencies, "internal" and "external" pounds.  Only external pounds were fully convertible; ordinary pounds were legal currency in the UK, but could only be converted at official rates and subject to volume limitations.  By 1979 the restrictions were soft enough to allow most UK citizens to enjoy overseas holidays, but not so lax as to allow massive capital flight.Mrs Thatcher abolished the distinction, but did so at a time when the export of oil from the North Sea was pushing the UK into surplus on the current account.  She floated the pound, but still intervened when when she and the UK Treasury didn't like the direction that the market was headed.Argentina can have pesos, convertibility at one to the dollar, and a continuing and deepening depression, or a less convertible currency and eventual prosperity. JML

-----Original Message-----
From: pkt-owner@xxxxxxxxxxxxxxxx [mailto:pkt-owner@xxxxxxxxxxxxxxxx]On Behalf Of Sean Reilly
Subject: Re: Keynesian Christmas!-- and the collapsing international
 

The point is that when given the choice in terms of which currency a firm may or may not accept, the rational being is more likely to accept the higher valued currency than they would of the lesser valued currency.  Thus diminishing the purchasing power of the lesser valued currency. I don't think that anybody is stating that the Public Sector workers in Argentina do not deserve to be paid.  They don't deserve Argentinos.  They deserve Pesos, because that is the currency that they were being paid with before.  In a sense, if they are now paid with Argentinos, then they have just taken a pay cut. Respectfully,Sean