Re: IMCU questions

[Paul Davidson <pdavidson@xxxxxxx>]

At 11:06 PM 6/11/2002 -0700, you wrote:


> >
>
> I guess I just don't see how a floating exchange rate policy concedes
> strong
> power
> to control and constrain expansionary govt. policies, apart from
> influencing
> those following
> flat earth theories.


Like Ronald Reagan,  Bill Clinton, Al Gore, and George W and
pere.  Not to mention the Washington Consensus pounded together by
Robert Rubin, Alan Green span, Larry Summer, Stanley Fischer, etc. 
all these have tremendous power-- which the electoraye bows to them and
their flat earth theories of economics.  And if these guys don't
have power who does?
> >
> > >Floating
> > >exchange rate examples include the extreme case of Japan, where
> even 0
> rates
> > >for
> > >about 10 years haven't weakened the currency via 'currency
> flight' as you
> > >call it.
> >
> > Since when has Japan had a floating exchange rate when the Bank of
> Japan
> > intervenes to prevent the yen from declining to 140 by actively
> selling
> > dollars --- as the US applies pressure to prevent the yen from
> falling?
>
> A floating exchange rate means the currency itself is not directly
> convertible
> at the central bank at a predetermined rate.  This, for example,
> means the
> term structure of 'risk free' rates is under direct CB control, if it
> wishes
> to influence the
> entire curve.  Most of course don't and simply peg the overnight
> interbank
> rate.


But that is part and parcel of the flat earth theory!


> With fixed exchange
> rates, on the otherhand, market forces drive the term
> structure
> of rates, as any move by the CB to 'fight' these forces leads to a loss
> of
> it's
> reserves of whatever it has promised to convert the currency
> into.

you forget my proviso #2 and one-way convertibility between IMCU and the
domestic currency -- this permits policy makers domestically to regulate
international capital (financial) flows -- or what others call capital
controls.  Onjce policy makers have that power, fixed exchange rates
do not mean that the market can determine the term structure -- only
policy makers can --if they renounce the flat earth theory.


> > Also you forgot
> to note my qualifing phrase: "If enough people do
> > this".  "Enough people" have apparently learned
> by observing the Bank of
> > Japan that if the yen starts to move rapidly, the Bank of Japan
> will
> > actively intervene .
>
> Sometimes they do, and sometimes they don't, and sometimes they change
> their
> levels, but overall they can only be sustainably effective in selling
> their
> own currency,
> as that builds fx reserves.  Right now, for example, I could sell
> the yen
> short, and
> make the interest rate spread, and be reasonably assured the MOF won't
> let
> the yen strengthen vs the $US.  But I haven't done that trade. 
> Why not?


It does not matter under my IMCU  proposal your ability to move into
and out of foreign currencies can be controlled by the CB and the pro
buono managers of the clearing union in my IMCU.  

> Heaps of
> risk!!!  I'd be short a currency with an 'institutional' trade
> surplus that
> tends to
> get stronger unless the MOF sells it and has a domestic deflation
> in
> progress,
> and long a currency, the $US, with the largest
> trade deficit in the history of the world, with a small domestic
> inflation
> ongoing,
> whose Treas sec wants it weaker.  You yourself could
> sell yen forward on the futures market and play the 'carry' as
> well.  Have
> you done
> it? 


I do not speculate in financial markets,  not because I am
restricted by law or  regulation in the current system -- but
because the activities necessary to make money would, in general, be
against my principles based on the economic theory I advocate. 

Maybe that's why I'm relatively poor compared to you and other financial
managers

But if I am arguing that most short-run speculative activity is
detrimental to the operation of the economic system, and we should
develop policies to prevent anyone from systematicallv profiting from the
variability of short run  financial assets, it would be unethical of
me to "speculate" in order to  try to line my own pocket.

>  It would have
> worked well as the MOF sold off the yen from 85 to 125.
>
> > > > >  Is it therefore not to their benefit to not
> only deficit spend in
> their
> > > > > own currency to maintain
> > > > >domestic full employment but additionally to
> > > > >import as much as possible via additional deficit
> spending of their
> own
> > > > >currency?


Only in the very short-run -- but sooner or later (depending on their
liquid holdings of reserves) servicing the debt will become a major
problem --with depressing effects on both the domestic economy and the
nation's trading partners.

> > > >
> >
> >
> > But you forget the hold that the quantity theory of money has on
> both the
> > public and the policy makers' minds.
>
> Yes, the flat earthers again!

If it weren't for the flat earthers -- the world economy would have grown
much more in the 67 years since the end of world war 2.

>  And if they
> forget, the medias can
> > always print the pictures from the Great German Inflation of
> 1922-23,
> where
> > Germans used wheel barrels full of currency to shop at the retail
> market,
> > as  the German government printed its own currency and spent
> freely!!
> > And we all know one picture is worth a thousand words!
>
> Heard the latest from the flat earthers?  They are ashamed that we
> are
> sending young
> troops to afghanistan on borrowed $, and those same troops will be the
> ones
> who
> later have to pay them back.  They want the fiscal responsibility
> NOW!!!

Who was it who said "No one   (entrepreneur) ever went
broke underestimating the (economic) intelligence of the
public".  (Of course the actual quote is something like
"no one ever went broke underestimating the taste of the
public"  but I think you understand what I mean. 

That is why we need leadership and a meritocracy operating within
institutions that are specifically designed to prevent  enterprise
being mere bubble on the whyirlpool of speculation.



> >
> > Yes -- if you look at my IMCU proviso  #2-- there is only
> one-way
> > convertibility from the IMCU to a domestic currency.  Hence if
> a country
> > wants to import from a foreigner it must possess IMCU's that they
> can
> > convert into the foreigner's money to purchase the foreigner's goods
> for
> > import.  (You cannot buy from a foreigner unl;ess you have
> IMCUs. That is
> > an essential element of my plan
>
> So if Japan wanted to sell cars in the US they could not unless the US
> had
> IMCU's?  Wouldn't Japan's exporters sell the cars for $US, and then
> convert
> those $ to yen at the BOJ, and then the BOJ uses those $ to buy 
> IMCU's?
> Let me know if I'm missing something.


Yes -- your hypothetical case here requires two way convertibility.


> > >I see a
> problem of servicing  international debts
> > > > denominated in foreign currencies -- which an exchange
> rate decline
> merely
> > > > exacerbates
> > >
> > >Me too.  I only advocate govts use local currency when they
> transact.
> >
> > But they cannot buy imports with domestic currency under the IMCU
> plan--
> so
> > the exporting country is not being "cheated" as you tend
> to suggest, while
> > the importer gets something for nothing.
>
> As above, from inception, please walk me through the mechanics
> companies
> from a country
> like Japan selling cars in the US.  I thought they could export them
> and
> sell them in the
> US for $US as they do today, but subsequently, unlike today, exchange
> those
> $US at the
> BOJ for yen.  Today they sell unwanted $ for yen in the 'open
> market.'


No importer in the US can by cars produced outside of the US only if the
US central bank makes IMCU's available to the importer to convert into ,
in this case, yen.





> > > >
> >   That is, purchase as many imcu's from the CB (which will
> go into
> > > > > overdraft as per clause #5) as possible and spend
> them on imports?
> >
> > Under my proviso #5  short-term overdrafts are only available
> when the pro
> > bono managers of the clearing agency know that the borrowing nation
> will
> > receive a surplus of IMCU from selling its exports in the near
> future
> > (e.g., if exports consist of seasonal crops, etc.)
> > \As the following quote from your email indicates-- I have already
> made
> > these comments to you regarding one-way convertibility and
> short-term
> > overdrafts but you apparently have not understood my
> argument.
>
> Sorry, as above.  Lets start from inception and trace the flows for
> the
> first
> exporting company, if you don't mind.

Hope you understand that you can only export to a nation that has 
IMCUs in its clearing account.  [In essence this is equivalent to
arguing that retailers can only sell to people who have sufficient
positive balances in  their bank  account to pay for what they
purchase----.


> >
> > > >
> > > > If you read my IMCU proviso#2 you will see that there is
> only
> > > > one-way  guaranteed convertibility -- any central
> bank who holds IMCUs
> att
> > > > the clearing union can always convert them into any
> nation's domestic
> > > > money. BUT a nation's central bank  does NOT have the
> option of
> printing
> > > > domestic money and convert it to IMCU  as they
> wish.
>
> I only thought a CB could convert 'foreign money' for IMCU's.


NO


> > >
> >    Proviso #5 permits  "short-term
> overdrafts" when a nation requires
> such
> > > > credits to smooth out SEASONAL export- import flow
> payments  --and
> then
> > > > this seasonality will require the pro bono publico
> managers of the
> > >clearing
> > > > house to provide approval.  Thus, for example, if a
> nation produces
> some
> > > > agricultural crops as its major exports, it will be flush
> with IMCUs
> after
> > > > the harvest and sale of its crops --
>
> OK again. to get those IMCU's, the farmer would have to export,
> obtain
> foreign currency balances,
> convert them at his CB for local currency? 


No the farmer would have to be able to sell in the near future a
sufficient amount so that his nation's central bank will earn at least
enough IMCUs  (from the agricultural importers central bank ) 
to pay off the overdraft.


> > > >
> >3.  Doesn't forcing creditor nations to spend imcu's in nations
> with
> > > > >overdrafts actually, in real terms, help the creditor
> nations at the
> > > > >expense of debtor nations?

No one forces anyone to psend IMCUs-- we only have a trigger mechanism
that ultimately penalizes those nations who hold excessive imcu credits
at the clearing union. If they do not want to spend the excessive imcus,
they can give them away (e.g., A Marshall Plan type operation) or have
the excessive balance taxed  away at 100% of what is  con
sidered, under the rules, as excessive balances.


> > > >
> > > > No it helps the debtor AND the creditor nation -- for the
> debtor
> nation
> > >can
> > > > enjoy full employment
>
> With a floating exchange rate, as in the US, you can 'enjoy'  your
> job and
> keep your output.  Your plan would mean in today's world we would
> 'enjoy'
> our jobs but need to export an additional 400 b of output!  That's a
> big
> loss
> of standard of living for the US, and any other country today with
> a
> floating
> exchange rate and a trade deficit.


If the US dollar continues to decline relative to the Euro, then , under
the current system, people and their central b anks may abandon the $ as
the primary form of foreign reserves and substitute Euros for $'s in
their reserve holdings. In that case Greshams's Law  may take over,
cause a further fall in the dollar and making it difficult if not
impossible for the US to services its tremendous international
debt



>  without having
> to service excessive (real income
> > > > reducing) international debts.
> Govt's need not get involved with external debt.  Most don't. 
> The ones
> that take that path and stay on it are the ones who seem to suffer all
> the
> time.


It does not matter-- the US enterprises will also be unable to
service  debts --leading to systemic bankruptcys and a liquidity
caused depression that will be passed onto the entire global economy
still holding significant dollar reserves.

paul

Paul Davidson

Editor, Journal of Post Keynesian Economics

505 SMC

University of Tennessee

Knoxville, Tn 379996-0550

phone Number: (865) 974-4221

fax number: (865) 974-1686