Re: Stiglitz

["Barkley Rosser" <rosserjb@xxxxxxx>]

     Speaking of catastrophes, I have a new paper
up on my website entitled, "The Rise and Fall of
Catastrophe Theory Applications in Economics:
Was the Baby Thrown out with the Bathwater?"
for any who might be interested, :-).
Barkley Rosser
http://cob.jmu.edu/rosserjb

----- Original Message -----
From: "pdavidso" <pdavidso@xxxxxxx>
To: "Warren Mosler" <mosler@xxxxxxxxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Friday, September 12, 2003 9:59 AM
Subject: Re: Stiglitz


> >===== Original Message From Warren Mosler <mosler@xxxxxxxxxxxxxx> =====
> >SECOND, REAL RESOURCES DO NOT VANISH.  YES THERE WOULD
> >BE (OR WILL BE) 'FINANCIAL CHAOS' BUT THE 'WEST' HAS
> >BANKRUPTCY, ETC. AND SHAREHOLDERS OF FAILED
> >INSTITUTIONS LOSE, DEBT HOLDERS BECOME EQUITY HOLDERS,
> >ETC. AND MOST OFTEN 'BUSINESS AS USUAL' CONTINUES.
>
> But then again sometimes, business is not as usual -- e.g., the Great
> Depression --which some believe was the result of international trade and
> payments problems.
>
> Do we really want that type of "business as usual" to occur -- even once
in
> every century?
>
>
> >LIKE WITH THE BANKS IN JAPAN, WORLD COM, ETC.  7
>
>
> Yes -- as long as the world sticks to a dollar standard with tightly
managed
> exchange rates --- and the US defikcits sufficiently to satisfy the
liquidity
> demands of the rest of the world to hold dollar denominated assets.
>
> But if the dollar standard breaks down -- the result could be business as
> usual chaos.  Don't you think it is worth insuring against such
catastrophies
> even if the possibility of such a catastrophy is very low.  {by the way
there
> is a great literature on catastrophy insurance-- and the fact that,
without
> social institutions forcing people to worry about the occurence of low
> possibility but catastrophic cost events-- for otherwise they go along
> thinking it can't happen , i.e., business as usual}
>
> >TRILLION IN EQUITY VANISHED IN THE US STOCK MARKET,
> >MANY LOST FINANCIAL ASSETS, BUT LIFE GOES ON.
>
> As it did in the Great Depression -- but the life style was certainly
> different and not very pleasant for a majority of the little people --
>
>  IF AGG
> >DEMAND FALL SHORT, TAXES CAN BE CUT OR GOVT. SPENDING
> >INCREASED TO INSURE FULL EMPLOYMENT, ETC.  THE TOOLS
> >ARE THERE TO GET BY IT AND GO ON.
>
> As the Roosevelt Administration did -- but it still took almost a decade
and a
> war to get back to something similar to the 1928 lving style -- just think
of
> how many lives were ruined during that decade -- even if those lives went
on!
> >
> > 2)FLOATING THEIR CURRENCY IF
> >>THEY HAVEN'T ALREADY,
> >
> >Warren assumes that a LARGE Marshall-Lerner condition
> >ubiquitously
> >holds so
> >that changing relative export-import prices will
> >miraculously cure
> >balance  of
> >payments deficits without any significant real income
> >loss.
> >
> >NOT APPLICABLE IN THIS CASE.  WITH A FLOATING EXCHANGE
> >RATE A TRADE DEFICIT DOESN'T DRAIN RESERVES, ETC. SO
> >IT ISN'T A 'FINANCIAL' RISK, BUT A 'REAL' BENEFIT AS
> >NET IMPORTS ARE BENEFITS.
> >
>
> Not true -- even under a flexible exchangew rate system -- Foreign trade
> requires entrepreneurs in different countries to enter into a forward
> contract(i.e., a contract specifying a forward date of delivery and a
forward
> date of payment) denominated in some specific country's currency. The
currency
> may either be that of the exporter's nation or the importer's nation, or
even
> the currency of a third nation.
>
> Since calendar time must elapse between signing of the contract and
payment
> date -- each party to the contract takes on a very expensive exchange rate
> uncertainty  (under a flesxible exh. rate system) thus adding a
significant
> cost of production  -and also encouraging indiviuals to hold large
portfolios
> of foreign currencies as a speculative portfolio--- so foreign reserves as
> still necessary -- but now they may be held primarily in the hands of the
> private sector -- which means that in case of a rapid change in exchange
rates
> (e.g., a one percent change in the day's exchange rate is equivalent to a
365%
> annual rate of change) can create chaos in the export-import sector and
their
> banking institutions.
>
> Moreover if someone want to argue that floating rates will move
slowly --as
> business as usual -- let us remem ber that even under the gold standard
there
> was a range of approximately 4% in which the exchange rate can fluctuate--
And
> even under current "fixed exchange rates -- unless capital flow controls
are
> instituted -- there is an unannounced range in which the exchange rate can
> float before active intervention occurs.
>
> >
> >The Soviet system offered a job toanyone who wanted to
> >work -- but the
> >resulting allocation of labor was not what the private
> >sector
> >households
> >wanted to buy with their full employment
> >income---hence long queues in
> >shops!
> >
> >THEY HAD STATE OWNERSHIP OF ALL THE MEANS OF
> >PRODUCTION WHICH IS ANOTHER STORY AND NOT APPLICABLE
> >TO TODAY'S ECONOMIES IN QUESTION.
>
> But if the government offers direct employment jobs -- as you advocate --
then
> the government must own the means of production in which the government
hired
> workers operate -- so it is applicable.
>
> >
> >RIGHT, AND THE PRIVATE SECTOR 'SHOWS WHAT IT WANTS'
> >VIA THE PRICE SYSTEM, ETC.  CAPITALISTS BUILD WHAT
> >THEY CAN SELL AT A PROFIT.
>
> But elsewhere Warren you have argued that the government sets the price
system
> in the things it buyers in order to get money into the hands of the
private
> sector so they can pay their taxes!
>
> >THE TRADE OFF BETWEEN PUBLIC AND PRIVATE GOODS IS A
> >POLITICAL CHOICE.  TAXATION/SPENDING IS 'COERCIVE' AS
> >IT MOVES RESOURCES FROM PRIVATE TO PUBLIC DOMAIN, AND
> >THE PRIVATE SECTOR HAS THE REMAINING RESOURCES TO WORK
> >WITH, ALONG WITH ANY REAL BENEFITS FROM THE PUBLIC
> >SECTOR'S USE OF RESOURCES.
>
> Yes - but if the government employment sector is large then resources are
> being drained from producing more things that the private sector could
demand
> from their full employment income.
> >
> >Unfortnuately in a global economy, a nation cannot
> >avoid global
> >financial
> >requirements--
> >????  I THINK AS A GOVT. CAN AVOID GLOBAL FINANCIAL
> >REQUIREMENTS AND *SHOULD* AVOID THEM.
>
> LDC's may need government loan guarantees  in order to get foreign direct
> investment -- or even to borrow from World Bank or other OECD lenders to
> finance building of necessary infrastructure-- e.g., highweays.
> telecommunication grid, health facilities, clean drinking water
facilities,
> educational facilities, etc.
> These government can NOT avoid the global financial system or its
> consequences.
>
>
>
> >
> >So far the main reason --certainly since the 1980s--
> >that the global
> >financial
> >payments system has not collapsed into a great
> >depression is that the
> >US
> >ignore its external debt obligations -- which can be
> >serviced  by $US
> >dollars.
> >
> >THE US GOVT. MEETS ALL ITS OBILGATIONS ON A TIMELY
> >BASIS.  IT DOESN'T IGNORE THEM.
>
> By ignore -- I meant that the US does not worry about the size of its
external
> debt relative to GNP.
>
>
> ALL GOVERNEMNTS WITH
> >FLOATING EXCHANGE RATE CAN NECESSARILY COMPLY WITH ALL
> >PAYMENTS DUE IN THEIR CURRENCY OF ISSUE.
>
>
>
> All governments can comply with payments due in their own currency -- even
> under a fixed exchange rate system --
> The problem is that all international contracts will be fixed in terms of
one
> currency-- so that the party to the contract whose currency it is not --
> always has a potential debt servicing problem. Fixed Vs. Flexible exchange
> rates has nothing to do with the matter-- except that flexible exchange
rates
> may exacerbate the problem.
>
> >>
> >>THE LESSON OF RUSSIA AND ARGENTINA IS THAT THE
> >>EXTERNAL DEBT IS BOTH UNSECURED AND NON RECOURSE.
> >>THERE IS NO PENALTY FOR NON PAYMENT.  AND BOTH DID
> >>SUBSTANTIALLY BETTER AFTER DEFAULTING ON IT.
>
>
> I do not believe if you asked any Argentinian man in the street --whether
> there was a penalty for nonpayment -- they would say no!  What you mean
was in
> the circumstances that prevailed nonpayment created less penalty than
payment
> would have caused!!
> >
> >Yes! as Keynes once said "when you owe your bankerf 5
> >pounds its your
> >problem,
> >but when you owe your banker 500 pounds its the
> >bankers problem".
> >
> >WHEN THE DEBT IS NON RECOURSE AND UNSECURED IT'S
> >ALWAYS THE BANKER'S PROBLEM!!!
>
> And if default becomew prevalent -- then it becomes everyone's problem as
the
> intenrational finacial system collapses!
> >
> >THEY CAN ALWAYS BUY GOODS WITH 'CREDITS' EARNED BY
> >EXPORTS.  THE PRIVATE SECTOR DOES THIS JUST FINE AT
> >THE MACRO LEVEL WITHOUT GOVT. EXTERNAL DEBT MUCKING
> >THINGS UP.
> >
>
> But even exports must be financed --and shipping costs -- usually in a
foreign
> currency -- must be finnaced before the "credits" in a foreign currency
are
> earn ed.  The whoile purpose of my IMCU is too maske sure that IMCU
credits
> are earned and then immediately used to buy imports so that all remain in
> balance at the clearing house!!!
>
> Paul
>
> 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
>
>