Re: floating vs fixed fx

[pdavidso <pdavidso@xxxxxxx>]

>===== Original Message From wmosler@xxxxxxxxxx =====
>>
>>
>> Keynes's liquidity preference determination of the interest rate doies
>> NOT
>> require a gold standard!
>
>It may not 'require' it, but it's an excellent/exact description of how it
>actually works under a gold standard or other fixed fx regimes.  But not
>so good a description of what happens under floating fx.

Warren we seem to be going around in circles on this -- without much
communication between us.  Perhaps the easiest answer is to go to your claim:

>Yes, but those aren't 'forces' under floating fx.  The currency adjusts
>continuously so that markets are continuously at sustainable 'indifference
>levels' regarding the trade picture.

The idea that a currency adjusts continuously at sustainable levels implicitly
assumes

(1) a large Marshall-Lerner condition value so that the imbalance between
value of imports and exports purchased and sold adjusts with a moinor change
in price --AND/OR

(2) a non-profit market maker in foreign exchange who has a virtually
unlimited amount (RESERVES) of both currencies (or can print , borrow, swap,
etc.) as necessary to get as much of the currency falling in value to keep the
market orderly!!

Now even financial markets get disorderly when there are pressures on the
prices of certain assets traded in the market --what I have called "fast exit
strategies" in my book FINANCIAL MARKETS, MONEY AND THE RFEAL WORLD -- and
sometimes the insitutional market maker  -- (e.g., specialists on the NYSE,
bond dealerS in NYC in US treasuries ) can (will) not make the market --
thereby requiring the central bank to help the private market maker maintain
an orderly market.

for a real world example, see page 111 of my book FINANCIAL MARKETS, MONEY AND
THE REAL WORLD where the Federal Reserve snapped up all government bonds
offerwd by dealers -BY BUYING  $70.2 billion on Thursday September 13, 2001
and  the Fed bought an additional record $81.25 billion of government
securities on Friday September 14, 2001.

The Fed dealt not only with the usual bond dealers who make the market -- but
according to the WALL STREET JOURNAL also with investment bankers such as
Goldman Sachs .  the JOURNAL reports that Goldman Sachs loaded with liquidity
due to Fed activities, phoned the chief investment officer of a large mtual
fund group -- just before the NYSE opened the following monday (it had been
closed since 9/11/01) to tell him that Goldman Sachs was willing to buy any
stocks the mutual fund managers wanted to sell.

Is this how you envision a freely flexible price financial market "adjusting
continuously so that markets are continuously at sustainable 'indifference
>levels'"?

Nor do I think that I have to remind you that in the Long Term Capital
Management fiasco, it took intervention by the NY Federal Reserve to
"encourage" LTCM creditors to not to pressure the LTCM for payment -- and
instead the creditors merely took over pumping in my more funds to prevent a
massive liquiditation crisis?


"Adjusting continously" --AND ORDERLY -- even in the classical model requires
a Walrasian auctioneer who takes all buy and sell bids BEFORE any transaction
is consumated -- and if the trade price turns out (from hindsight) not to be
the NEW EQUILIBRIUM price (where demand and supply flows are matched and so
the market remains orderly), then the theory REQUIRES RECONTRACT WITHOUT
PENALTY BETWEEN THE PARTIES TO THE "false trade".ie., the trade at the
nonequilibrium price.
>
>Not so with fixed fx, as reserves could be flowing out, threatening a
>financial 'crisis,' etc.  No such thing under floating fx.

here again this is not correct-- for an exchange market to remain orderly , in
the absence of the central bank interventions, there must be private market
makers who have inventories (reserves) of both currencies -- or access to
additional reserves on demand.

THere is an empirical study done by S. Weintraub (of the University of Texas )
in the late 1970s when after Nixon abandoned the fixed bretton woods system,
thast private market makers accumuloated inventories of foreign reserves at a
greater rate than central bankers had done so before the end of Bretton Woods.

Paul
>
>
>> With floating fx,
>> >the balance of payments is what it is, etc.
>>
>> The actual accounting value of the balance of payments is whatever it is
>> in
>> any period whether you have fixed or flexible exchange rates --
>> Equilibrium is
>> a concept Marshall borrowed from physics and requires a  balancing of
>> opposing
>> forces!!
>
>As above!  With fixed fx, reserve positions can be in or out of equil, and
>imply future events, some climactic.  Not so with floating fx, as there
>are no reserve positions, making that point moot.
>
>
>>
>> No Keynes argued for a fixed exchange rate as a stabilizing force
>> permiting
>> entrepeneurs to make long range investment plans -- but the exchange
>> rates
>> were not to be fixed in perpetuity, but they could change under
>> conditions,
>> well specified in advance,  -- allowing people to make long term
>> international
>> contractual commitments in a world of (nonergodic)uncertainty -- a
>> necessary
>> aid for entrepreneurs to be able to attempt to balance cash flows over
>> time--
>> and therefore avoid (a) a liquidity problem, and ultimately (b)
>> bankrupcy.
>
>Understood what he was arguing in favor of.  this is about the system he
>descibed.
>
>
>>
>> Flexible exchange rates -- make it impossible to evaluate long term
>> international investment projects (for example) or even domestic in
>> vestments
>> aimed for export markets  -- because markets to hedge against exchange
>> rate
>> fluctuations more than 180 days out rarely if ever exist .
>
>They change the nature of international investing for sure.  Companies do
>it in local currency to be better hedged.  They borrow pesos to make peso
>investments, for example, if peso profits are to be made, to not take
>currency risk.  Our fund does that continuously.  We borrow yen to make
>yen investments.  The profit margin is in yen.  There is no fx risk, etc.
>
>>
>> Yet investment project profitability expectations requires one to
>> calculate
>> the flow of future quasi-rents over long-lived capital goods relative to
>> the
>> money costs of these goods (when both quaasi rents and money costs are
>> specified in terms of the same currency.)
>
>Yes, and it can and is all done in the local currency, unless companies
>want to take fx risk, which many do, for speculative motives.
>
> >
>> >
>> >> >  While mainstream doesn't know this specifically, they
>> >> >none the less aren't technically wrong in dismissing some of Keynes
>> as
>> >> >inapplicable today (though I can do the same for their ramblings).
>> >>
>> >> Not true! The belief
>> >
>> >mine's not a 'belief.'  just statements of accounting facts.
>>
>>
>> Accountin g facts are merely ways of keeping score and have nothing to
>> do with
>> equilib rium in blanace of payments or the viability of industry,
>> nations,
>> etc.
>
>agreed!
>
>
>>
>> jusdt like a balance sheet is merely a way of keeping score-- and even
>> DOA
>> entreprises have balance shhets!!
>>
>> Accounting facts are meaningless !!
>
>????  Accounting identities 'tell' us the fed is the single supplier of
>net reserves, and therefore price setter of the interest rate, etc.
>That has 'meaning?'  Or maybe I'm using the wrong term?
>
> >
>> > in a flexible exchange rate system which you
>> >> apparently
>> >> share with mainstream economists
>
>many of them seem to lean towards fixed, flex only when fixed break down.
>
>those that like them often do for the 'wrong' reasons and continue to
>profess a budget constraint.
>
>
>requires the assumption of a very
>> large
>> >>
>> >> Marshall-Lerner condition.
>> >
>> >I never make those assumptions.  They don't matter to what I'm saying
>> >either way- whether they hold or not makes no difference.
>>
>> Well if the Marshall Lerner conditions do not hold tghen ,by definition,
>>
>> flexible exchange rares are going to make blanace of payments problems
>> worse
>
>define 'worse'- more net imports, I presume, which under flex fx are a
>benefit, not a problem.
>
>> -- no matter what the "accounting facts" are at any point of calendar
>> time!!
>>
>
>true- imports are a benefit.
>
>> So if you are advocating flexible exchange rsates as a desireable
>> policy, then
>> you must implicitly be relying on large Marshall-Lerner conditios
>> values-- or
>> else you are advocating a suicidal policy for each nation!!
>
>importing is not suicidal with flex fx.  in fact, the opposite.  net
>exports are suicidal, in that lives are spent/lost building things for
>other nations.
>> >
>> > Otherwise flexible exchange rates
>> >> exacerbate,
>> >> rather than cure,  the problem.
>
>the exporters have the problem, not the importers.
>
>
>> >
>> >Of course, we disagree on what 'the problem' is.  To you it's net
>> imports,
>> >etc.  And that's a throwback to fixed exchange rates, where arguably
>> that
>> >was a problem, as net imports corresponded with an outflow of gold or
>> >whatever the currency was convertible into.
>>
>>
>> It has nothing to do with net imports per se -- it has to do with a
>> balancing
>> of forces!!~
>
>right, as previously discussed.
>
>For example, in recent years, much of what you call
>> foreigner's
>> demand for net US assets - is the result of the Bank of China and the
>> Bank of
>> Japan (among other central banks) wanting to increase their holdings of
>> foreign reserves in their balance sheets---
>
>right, a major benefit for the US standard of living.
>
>
> but these accounting facts
>> in
>> Japan and China are counted in terms of YEN in Japan and the local
>> currency in
>> China.
>
>right, so?
>
>>
>> Now what happens to the Bank of Japan's accounting fact (balance) sheet)
>> if
>> the Yen was suddenly to be upward val;ued by say 30 per cent.  What
>> happens to
>> the asset side of the BOJ balance sheet -- as a matter of accounting
>> facts???
>
>What you are getting at is that in yen terms, the $US are 'worth less.'
>So what?  That doesn't make Japan poorer, or the US richer, or vice versa.
>Japan's solvency is not at risk.
>
>I don't see the problem with that balance sheet info.
>
>>
>> >
>> >
>> > Emopirical evidence including the
>> >> J-curve analysis indicates that for most nations the Marshall-Lerner
>> >> condition
>> >> does not hold in the short-run
>> >
>> >So???  Imports are a benefit, exports a cost.
>>
>> In real terms imports may be a benefit and not a cost  -- but not in
>> financial
>> terms -- and given the business that you are in, I should not have to
>> tell you
>> that its money (and finance) that makes the real world go round-- and
>> not vica
>> versa!
>
>Imports are a benefit at the macro level.  At the micro level there can
>and will be winners and losers.  That's always the case, including the
>case of unemployment.
>
>I assume we are talking macro???
>
>
> That's why Keynes called it the general theory of MONEY,
>> interest and
>> EMPLOYMENT where MONEY IS  NEVER NEUTRAL IN EITHER THE LONG RUN OR THE
>> SHORT
>> RUN.
>
>Obviously!!!  Did I say otherwise???
>
>
>> >
>> > and in the long run we'll all be dead! So
>> >>
>> >> flexible exchange rates are the problem, not the solution.
>
>Sorry, I fail to follow the immediately above logic.
>Still looks like fixed fx is the problem, as it restricts imports and it
>constrains net govt spending that is often needed for full employment, and
>all because 'money isn't neutral.'  Yes, you can attempt to monkey with a
>fixed fx system, make it adjustable, etc. and require all kinds of
>compliance costs to trade internationally, etc. and it will sort of work.
>But not as well as floating, properly applied to sustain full employment
>and maximize real terms of trade.
>
>
>> >> >
>> >>
>> >as above.  The problem is unemployment, not 'balance of trade,' etc.
>> >for that, one needs flex exchange rates to be able to sustain domestic
>> >demand such that the domestic labor force is fully employed.
>>
>> THAT JUST AIN'T SO UNLESS THE MARSHALL -LERNER CONDITION HOLDS
>
>domestic deficit spending can always sustain full employment.
>
>OR TGHE
>> NATION
>> TURNS TO AUTARKY!
>
>you lost me here.
>
>>
>>   ANY nation
>> >can do that independently.  There are not 'global' constraints that
>> >prevent domestic full employment, only self imposed constraints.
>>
>> AGAIN THAT JUST AIN'T SO UNLESS ---(AS ABOVE).
>
>don't follow this.
>
>> >
>> >> I believe that by tying your argument regarding deficits and foreign
>> >> savings
>> >> demands for US dollar denominated assets with the desire of flexible
>> >> exchange
>> >> rates, you are tying you very correct innovative view of savings and
>> the
>> >>
>> >> demand for net assets (which underlies Keynes's liquidity preference
>> >> analysis)
>> >> to the very inapplicable flexible exchange rate system -- and thereby
>> >> draw
>> >> away attention -- and deleting the importance --from your truly
>> >> important
>> >> deficit-savings message.
>> >
>> >The message is, the US or any other country employing flex fx policy
>> can
>> >independently sustain domestic full employment.
>>
>> AGAIN THAT JUST AIN'T SO IF YOU ALLOW THE ECONOMY SO THAT DOMESTIC
>> RESIDENTS
>> ARE ABLE TO ENTER INTO DEBT CONTRACTS WITH FOREIGNERS BEFORE A CHANGE IN
>> THE
>> EXCHANGE RATE.
>
>what does that mean?  fx rates change continuously with floating fx.
>
>
> Contracts matter in our entrepreneurial economy-- and as
>> you
>> well know wshen Deutche Bank or any other foreign enterprise backsa out
>> of a
>> contractual commitment because of rapidly changing exchange rates, etc.
>> this
>> can play havoc with the the best laidplans of mice, men and
>> entrepreneurs!!
>>
>right, but don't prevent domestic full employment via any of a number of
>govt options.
>
>> >>
>> >> But we have gone through this before and I don't seem to be able to
>> get
>> >> you to
>> >> understand why the lack of  aMarshall -Lerner condition makes a
>> >> difference.
>> >>
>> >
>> >As above.  Can't get you to see imports are the benefit, not the
>> cost!!!
>>
>>
>> sEE MY ABOVE STATEMENT ABOUT MONEY MAKING THE WORLD GO AROUND.
>
>understood- very well!
>
>warren
>
>>
>> Paul
>>
>> Paul Davidson
>> Editor, Journal of Post Keynesian Economics
>> University of Tennessee
>> SMC 503
>> Knoxville, Tennessee 37996-0550
>> office phone #;(865)974-3303; office fax#(865)974-4601
>> home phone and fax # (561)369-1951
>> email pdavidson@xxxxxxx
>> http://econ.bus.utk.edu/Davidson.html
>>
>
>
>=====
>Warren Mosler, Valance Co. Inc.
>5000 Estate Southgate, Christiansted, USVI  00820
>340-692-7710, wmosler@xxxxxxxxxx, www.mosler.org
>
>Associate Fellow, Cambridge Centre for Economic and Public Policy
>Downing College, Cambridge University, Cambridge, UK

Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 503
Knoxville, Tennessee 37996-0550
office phone #;(865)974-3303; office fax#(865)974-4601
home phone and fax # (561)369-1951
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/Davidson.html