Re: on stiglitz

[Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>]

Warren:

I read this through once - and, reading it again, will insert comments as I
go along.

Gunnar

----- Original Message -----
From: "Warren Mosler" <mosler@xxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Wednesday, September 10, 2003 11:09 AM
Subject: Re: on stiglitz


[snip]

> --- pdavidso <pdavidso@xxxxxxx> wrote:
> > In the Spring 2003 issue of Harvard Relations
> > Council International Review,
> > Nobel Prize winner Joseph Stiglitz indicates that
> > the international financial
> > system is suffering from a virulent malady that has
> > left developing nations,
> > e.g., Korea, Indonesia, Thailand, Mexico, Argentina,
> > Brazil, ecoonmically
> > devestated.
>
> AGREED.

Ditto.
> >
> > Stiglitz notes that international capital flows are
> > a primary cause of this
> > disease
>
> NO, THE CAUSE IS LOCAL POLICY RESPONSE.

The "capital flows" in question are a relatively recent (post-Bretton Woods)
phenomenon.

In the "good old days", most LDCs had insignificant amounts of both public
and private capital inflows and, broadly speaking, were going nowhere
insofar as their economic development was concerned.

All that began to change in the early 1970s - but, IF the "policy response"
of LDC recipients of "international capital flows" had been to make clear up
front that they would "default" on their external obligations, THEN the
problems of which Stiglitz spoke would not have occurred in the first place.

In other words, the LDCs would have remained stuck on a track of limited
capital inflows and development.

>
>  as every prudent nation (except the United
> > States) strives to maintain
> > a surplus of exports over imports to be added to the
> > nation's foreign
> > reserves.
>
> YES, THAT'S ONE OF THE POLICY RESPONSES THAT IS SUB
> OPTIMAL.

There is no single standard of "prudent" behavior in this respect - indeed,
in the post-Bretton Woods period a "typical" LDC consumed and invested
"beyond its means", with the attendant DEFICIT on external current account
being financed with net "capital inflows".

>
>  Since the global economy is in essence on
> > a dollar standard, foreign
> > reserves are held primarily in the form of US
> > Treasuries.
> >
> YES.  AGAIN A POLICY RESPONSE.  ALTERNATIVELY, THOSE
> RESERVES COULD BE SPENT ON IMPORTS.  BUT THE FACT THAT
> SOME NATIONS RUN SURPLUSES AND NET EXPORT IS A BOON TO
> THE REST OF THE WORLD.  SURPLUS NATIONS ARE THE
> WORLD'S SLAVES, NOT THE WORLD'S PROBLEM.

Again, neither "surpluses" nor "deficits" are good or bad in and of
themselves.

Also, in an inter-dependent world, the objective of overall world economic
growth would not be served by each country striving to maintain balance in
its external current transactions at all times.

In the heyday of OPEC oil surpluses, attempts by major OPEC
producer/suppliers to attain such balance would have thrown the world
economy into turmoil.

> >
> > Some countries, e.g.,  Japan and China, successfully
> > run persistent export
> > earning surpluses.
>
> YES, AS ABOVE.  IT'S THEIR REAL LOSS.

China's "persistent export surplus" is - to the tune of $100 billion per
annum - the mirror image of the "persistent import surplus" of the US.

According to the IMF's play-book - which may or may not be sensible -
China's "real loss" is a market response to EXCESS demand in the US economy.

>
>  Stiglitz correctly notes that one
> > country's surplus must be
> > some other nation(s)'s deficit as the saved foreign
> > reserves are not used to
> > buy the products of the nation's trading partners.
> > In essence, when any nation
> > runs trade surpluses, it is as if this nation is
> > playing a game of Old
> > Maid and passing the Black Queen of unemployment and
> > indebtedness to its
> > trading  partners.
>
> THAT IS THE CURRENT SITUATION DUE TO POLICY RESPONSE
> IN THE DEFICIT NATIONS.  THE REALITY IS THE SURPLUS
> NATIONS ARE HANDING OUT A FREE LUNCH TO THE DEFICIT
> NATIONS.  IT IS THEIR OWN POLICY RESPONSE THAT RESULTS
> IN UNEMPLOYMENT.  AND AS THE INTERNATIONAL DEBT IS
> UNSECURED AND NON RECOURSE IT IS THE LENDER'S PROBLEM,
> NOT THE BORROWER'S PROBLEM.

The proposition that, say, "China is playing a game of Old Maid and passing
the Black Queen of unemployment and indebtedness to its trading partner, the
US," does not hold water!

For, IF the US were to take fiscal and/or monetary measures to limit its
"absorption" of goods and services in order not to be stuck with the Old
Maid, it would be cutting off its nose to spite its face insofar as
"unemployment" is concerned - for the cutback needed to restore balance in
trade between the US and China would be several magnitudes larger than the
current $100 billion deficit, with much of the extra cutback translating
into reduced demand for goods and services produced in the US economy.

> > Countries stuck with the Old Maid must use a
> > combination of  international
> > loans and previously saved foreign reserves to pay
> > for their excess of imports
> > and to service their international debts.
>
> NOTHING WRONG WITH USING INTERNATIONAL LOANS AS LONG
> AS THEY UNDERSTAND IT MAKES NO SENSE TO NET PAY THEM
> BACK OR ALLOW ANY $NET OUTLAY FOR DEBT SERVICE.

I don't understand this point of view!

For, IF it makes no sense for foreign borrowers to abide by the terms of
their loan agreements, THEN - presumably - the sensible thing for domestic
borrowers from the US financial system would be to follow suit.

Let me leave it at that!

Gunnar

> > Ultimately, as its foreign reserves
> > dwindle and its international indebtedness
> > increases, the deficit
> > nation is unable to service its outstanding
> > international debt obligations.
>
> AGREED.
>
> > To prevent default, The IMF can make new loans to
> > the indebted nation. The IMF
> > loans require deficit nations adopt "Washington
> > Consensus" reforms where (1)
> > all domestic financial, labor and product markets
> > must be freed of government
> > control, and (2) the nation must tighten its belt,
> > i.e., run fiscal surpluses
> > and tight monetary (high interest) policies.
>
> AGREED.  POLICY RESPONSE IN THE NATIONAL INTEREST OF
> THE DEBTOR WOULD BE TO NOT TAKE THOSE MEASURES AND NOT
> BE INTIMIDATED BY THE POSPECT OF DEFAULT, AS, AGAIN,
> IT IS BOTH UNSECURED AND NON RECOURSE.  THERE IS NO
> PENALTY FOR DEFAULT, SO WHY SWALLOW THAT PILL?
>
> These
> > belt tightening policies
> > depress the nation's economy, in the  hope that the
> > resulting  impoverished
> > population will drastically reduce their purchases
> > of all goods and services
> > including imports.
>
> AGREED.  SO WHY DO IT???
>
> >
> >
> > Even as  the deficit nation tightens its belt,
> > however,  its increased
> > international indebtedness  (as the IMF loans are
> > added to the existing loans)
> > enlarged the annual international debt service
> > payments.
>
> YES.
>
>  Adding to this burden
> > is any decline in the nation's exchange rate as
> > domestic residents and foreign
> > investors attempt to move their funds to a safe
> > haven in another country.
>
> THE LEVEL OF THE CURRENCY DOES NOT ALTER THE REAL
> WEALTH OF THAT NATION, ONLY THE DISTRIBUTION OF ITS
> REAL WEALTH.
>
> > Almost inevitably, the indebted nation can not free
> > itself from the increasing
> > weight of its hard currency international debts
> > except by default. The result
> > is a moribund economy e.g., Argentina in 2002.
>
> YES, AND AFTER DEFAULT ARGENTINA'S GDP GREW AT
> SOMETHING OVER 5%, AND CAN GROW A LOT FASTER IF THEY
> CONTINUE TO IGNORE INTERNATIONAL DEBT PAYMENTS AND USE
> FISCAL POLICY TO SUSTAIN DOMESTIC DEMAND.
>
> >
> > Citing John Maynard Keynes as the inspiration for
> > his prescription, Stiglitz
> > suggests creating "global greenbacks" (known as
> > special drawing rights [SDR])
> > to be issued as handouts to developing countries and
> > other countries in times
> > of international financial difficulties. These SDRs
> > can be converted into hard
> > currencies to service debts, buy imports, or
> > supplement foreign reserves.
> > Unfortunately, such handouts are merely palliatives
> > and not the solution to
> > the problem. Moreover, some countries will become
> > SDR addicts, and when the
> > handouts end, the economic withdrawal symptoms will
> > be even more deadly.
> >
> TEH ALTERNATIVE OF DEFAULTING ON EXTERNAL DEBT AND
> USING LOCAL CURRENCY ONLY TO SUSTAIN DOMESTIC DEMAND
> IS ALWAYS THERE.  'HISTORY' IS NOT AN OBSTACLE TO FULL
> EMPLOYMENT.
>
> > The cure lies in creating new international
> > financial architecture as
> > President Clinton called for after the 1998 Russian
> > debt default Unfortunately
> > Clinton's clarion call went against the Washington
> > Consensus and therefore was
> > never seriously studied by political decision
> > makers. Stiglitz fails to
> > provide a new architecture because he ignores some
> > guidelines that Keynes
> > indicated were essential to avoid international
> > financial problems and
> > recessionary forces in the post World War II era.
> > Keynes indicated that the
> > surplus nation(s) must be required to bear a large
> > responsibility for
> > eliminating persistent trade imbalances. Keynes
> > other suggestions
> > included: "We need a quantum of international
> > currency... [which] is governed
> > by the actual current [liquidity] requirements of
> > world commerce, and is
> > capable of deliberate expansion.... We need a method
> > by which the surplus
> > credit balances arising from international trade,
> > which the recipient does not
> > wish to employ can be set to work... without
> > detriment to the liquidity of
> > these balances" .
> >
> YES, UNILATERAL DOMESTIC FULL EMPLOYMENT POLICY
> ACCOMPLISHES THIS IN THE CONTEXT OF FLOATING EXCHANGE
> RATES.
>
>
> > Accordingly in my book, Financial Markets, Money and
> > the Real World, I have
> > embedded Keyness essential suggestions in a proposal
> > for a new international
> > financial architecture that is designed [1] to
> > prevent a lack of global
> > effective demand due to any nation(s) either holding
> > excessive idle reserves
> > or draining reserves from the system, [2] to provide
> > an automatic mechanism
> > for placing a major burden of payments adjustments
> > on the surplus nations,
>
> YES, IF I RECALL CORRECTLY THIS PROGRAM 'DIRECTS'
> SURPLUS NATIONS TO IMPORT MORE.  THAT IS 'A' SOLUTION,
> BUT IT KILLS THE SURPLUS GOOSES LAYING THE GOLDEN EGGS
>
> FOR THE REST OF US.  WHY DO THAT?
> [3]
> > to prevent financial crises while providing each
> > nation with the ability to
> > monitor and, if desired, to control movements of
> > flight capital,
>
> THIS HAS MAINLY BEEN A PROBLEM ONLY WITH FIXED
> EXCHANGE RATE REGIMES.
>
>   [4] to
> > expand the liquidity of the international financial
> > system as global capacity
> > warrants, and [5] to induce the debtor nations to
> > work their way out of debt
> > rather than await handouts.
>
> RIGHT, ONCE THE GEESE ARE DEAD, POTENTIAL STANDARDS OF
> LIVING ELSEWHERE GO DOWN.
>
> >
> > The health of the global economic system will not
> > permit us to muddle through
> > with the present arrangements much longer. Before an
> > international financial
> > calamity occurs, it is time to look at blue prints
> > for a New Financial
> > Architecture that will prevent recurrent financial
> > crises and the economic
> > stagnation that the global economy appears to have
> > become mired in.
>
> ALSO, BEST I CAN TELL THIS NEW ARCHITECTURE INVOLVES
> ALL PAYMENTS FOR IMPORTS AND EXPORTS GOING THROUGH THE
> LOCAL CENTRAL BANK WHICH CONTROLS AND EVEN RATIONS THE
> ABILITY TO EXPORT AND IMPORT.  DETAILS OF THIS PROCESS
> ARE YET TO BE DETERMINED.
>
> MEANWHILE THIS DISCUSSION REMAINS LARGELY ACADEMIC.
> AT THE MOMENT RUSSIA IS WORKING AT RESOLVING IT'S
> INTERNATIONAL DEBT AND ARGENTINA IS WORKING WITH THE
> IMF TO BE IN COMPLIANCE AS WELL, AND THE US HAS THE
> TREASURER IN ASIA TRYING TO FORCE THEM TO RAISE PRICES
> ON THEIR EXPORTS TO US (ALLOW THEIR CURRENCIES TO
> APPRECIATE) SO WE CAN'T AFFORD TO BUY THEM AND THEREBY
> HELP OUR DOMESTIC INDUSTRY.
>
> WARREN MOSLER
> >
> > Paul Davidson
> >
> > Paul Davidson
> > Editor, Journal of Post Keynesian Economics
> > University of Tennessee
> > SMC 503
> > Knoxville, Tennessee 37996-0550
> > office phone #;(865)974-4221; office fax#
> > (865)974-1686 or (865)974-4601
> > home phone and fax # (865)692-0802
> > email pdavidson@xxxxxxx
> > http://econ.bus.utk.edu/davidsonextra/Davidson.html
> >
> >
>
>
> =====
> Warren Mosler
> Valance Co. Inc.
> 5000 Estate Southgate
> Christiansted, USVI  00820
> 340-692-7710 office phone
> Primary email contact:  wmosler@xxxxxxxxxx
> www.mosler.org
>
>
>
>
> =====
> Warren Mosler, www.mosler.org
> Valance Co. Inc.
> 5000 Estate Southgate
> Christiansted, USVI  00820
> 340-692-7710 office phone
> Primary email contact:  wmosler@xxxxxxxxxx
>
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