Re: Stiglitz on Soros

["Leigh Harkness" <Leigh@xxxxxxxxxxxxxxxxxxxx>]

Paul

You wrote:

> Here you are assuming both nations are already at fully employment and
then
> government policy creates "excess demand" -- while I am tlking about the
> real world -- where almost no country is even near full employment and yet
> persistent imports exceeding exports (e.g., Argentina, ) continue to
occur.

When I say a country has excess demand, I do not mean that a country has
full employment.  A country can have excess demand without full employment.

Let me explain.

Let us assume that a country is initially stable.  To remove the
employment/unemployment factor, let us assume that there is 8% unemployment.

For simplicity, let us assume that it has a fixed exchange rate system and
international receipts and payments are equal.  We will also assume that it
has no monetary growth.  The money people earn from production (both from
local demand and exports) they spend on consumption and capital goods
(supplied from the local economy and from imports).  For this economy to be
stable, exports and imports would be equal.

Now let us assume that the counrtry's banks increase their  total lending so
that they increased the money supply, thereby increasing current
entitlements in the economy (that is, increase current demand).

In this process the banks incease their deposits (bank liabilities) and also
increase their loans outstanding (bank assets).  To the economy, these loans
outstanding represent an obligation to supply goods to the economy.

But note that the timing between the increase in entitlements and the
increased obligation to supply is different.  The banks increase current
entitlements but the obligation to supply products to the economy is a
future obligation.

Hence in the current period, there is excess demand.  That is, the growth in
current entitlements has exceeded the growth in current obligations to
supply.

In accounting terms, the banks books are balanced.  But in the real economic
world, there increase in current entitlements above the increase in current
obligations causes a current account deficit.  If the country cannot obtain
foreign goods to make up for this deficit, it is likely to experience
hyper-inflation associated with a rising money supply facing a depleted
supply of products.

It is this definition of excess demand that I take to cause current account
deficit deficits.  It does not matter whether the bank credit is used to
finance government or private sector expenditure.

Printing money to finance goverernment expenditure could have similar
effects but this is relatively trivial in the real world.  I have tried it
and it has a very limited effect.  The banks send the money back to the
government, debit the banks accounts and the government ends up effectively
borrowing from the banks, anyway.

This has been my experience with current account deficits. It has nothing to
do with full employment.   I presume this form of excess demand was the
cause of the current account deficits in Argentina, as they are in Australia
and most likely the USA.

Do you know of any other source of excess demand (in the real world) that
could cause a current account deficit?

(Note that not all growth in bank lending need cause current account
deficits.  Appropriate monetary rules can ensure that the growth of bank
credit contributes to monetary stablility, full employment, economic growth
and international stablility.)


Leigh