August 30, 2025 • 58 mins
In our 14th episode with Australian economist Bill Mitchell, the conversation focuses on the MMT perspective on international trade. Bill explains what is meant by the statement “imports are a benefit, and exports are a cost,” where it fits into the history of economic thought, and some of its implications.
A significant portion of the conversation is dedicated to explaining the crucial shift from the Bretton Woods fixed exchange rate system to the modern system of floating exchange rates after 1971. Bill clarifies that in a floating regime, a currency-issuing government is not financially constrained in its domestic policy by “trade imbalances,” as it was under Bretton Woods.
The episode also touches on bond vigilantes, the IMF, and the shifting status of the US dollar as the world’s reserve currency.
William Mitchell is Professor of Economics and Director of the Centre of Full Employment and Equity (CofFEE) at the University of Newcastle, NSW Australia. He is also the Docent Professor of Global Political Economy at the University of Helsinki, Finland, and Guest International Professor at Kyoto University, Japan.
Follow Bill’s work, including his upcoming books, at https://billmitchell.org/blog/
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:43):
All right, folks, this isSteve with Macro and Cheese. My guest
is Bill Mitchell. And folks,you know Bill because we've had him
on quite a few times. In fact,as I say, usually go back to episode
number one to find out aboutthe T in mmt. Bill has been with
us from day one. Love havingBill on. And for those of you who
(01:03):
have not heard, Bill Mitchell.Bill Mitchell is a professor of Economics
and director of the center ofFull Employment and Equity Coffee
at the University ofNewcastle. He is also the docent
professor of Global PoliticalEconomy at the University of Helsinki,
Finland, and a guestinternational professor at Kyoto
University in Japan. Bill isalso an author of several great books,
(01:28):
including the Modern MonetaryTheory textbook. And he was also
the right author of Reclaimingthe State and many other books. The
guy is just prolific. Yougotta check out his blog, really
amazing content. Go toBillMitchell.org and find his latest
blog entries. Now, I've hadBill on two other times to discuss
(01:50):
a similar subject. And as weget more mature and we grow in knowledge
and we try to build up ourunderstanding of the world in which
we live, and as things change,the material conditions of the world
change all the time. Andthey've really changed quite a bit
here recently, obviously withthe Trump administration and tariffs,
which we've talked aboutpreviously. But we're going to talk
(02:13):
today about a paper that Billwrote in June of 2022, which is actually
part of a book, an Elgarseries book, and I'll let him get
into that here momentarily.But the paper was called the Modern
Monetary Theory Perspective onthe External Economy. And why are
we talking about this? Right,so we've got people constantly talking
(02:34):
about balance of trade and howthe United States doesn't create
anything, we don't doanything. But it's not just the US
We've talked to Fadal Kaboobabout Africa and we've talked to
Ndongo Sambasilla aboutAfrica, and we've talked to a bunch
of different economists withthe MMT background discussing their
particular portion of theworld. And this subject seems to
(02:55):
be near and dear to everyone'sheart, even if they completely butcher
it and don't get it right. TheMMT community has been out front
trying to get the details ofthe economy and accounting and understanding
the capacity of currencyissuing nations and the constraints
that go with that. I'm goingto bring on my guest, Bill Mitchell.
(03:16):
Thank you so much for joiningme again, sir. I appreciate it.
Thank you. Thanks for havingme and thanks to your listeners.
We love you, Bill, and justwant to be honest here. I am very,
very scared of the subjectstill. Even though we've talked at
great length, I've read a lotof books. I got the basics, I can
say the basics of my sleep.Imports are a benefit, exports are
(03:37):
a cost. We've talked aboutthis extensively from an accounting
perspective and also in termsof real trade perspective. But because
people tend to go out thereinto the political economy and they
tend to think of politicalrules or the choices different countries
make as immutable laws of theworld that cannot be changed, they
(04:01):
conflate the base case thatMMT posits with a lot of things that
just ain't so. And we havesome really great explanations for
the things that they thinkthat just ain't so. And we'll get
to those. But I want to see ifwe can set the stage here. MMT theorists,
and you being one of thegranddaddies of them all, have posited
(04:22):
this statement that importsare a benefit, exports are a cost.
Why don't we get started withthat explanation right up front and
then we'll go deeper into the paper.
That's just a reality. And I'msurprised. That conception of the
way in which a nation sitswith other nations and swaps resources
(04:42):
with other nations, I'msurprised that it's caused so much
controversy and in somequarters appears to be a major source
of it's an attack vector, ifyou like, on the credibility of mmt.
I'm just surprised by thatbecause for me it's such a mundane
statement for us to make andit's really just a preface to going
(05:06):
into much more technicaldetails and adding then political
economy layers and discussionsthat I'm interested in about global
power struggles, et cetera. Solet me just start. I'll read for
your listeners a quote. It's avery interesting quote and we'll
do a little quiz on it in asecond. Here's the quote. It'll take
(05:27):
about a minute. I'm startingin international trade area. The
language is almost alwaysabout how we must export and what's
really good is an industrythat produces exports. If we buy
from abroad and import, that'sbad. But Surely that's just upside
(05:48):
down as well. What we sendabroad we can't eat, we can't wear,
we can't use for our houses.The goods and services we send abroad
are goods and services notavailable to us. On the other hand,
the goods we import provide uswith TV sets we can watch, with automobiles
(06:08):
we can drive with all sorts ofnice things for us to use. The gain
from foreign trade is what weimport. What we export is the cost
of getting those imports. Theproper objective for a nation, as
Adam Smith put it, is toarrange things so we get as large
a volume of imports aspossible for as small a volume of
(06:29):
exports as possible. Thiscarries over to the terminology we
use. I have already referencedto the misleading terminology of
protection. But when peopletalk about a favourable balance of
trade, what is that term takento mean? It's taken to mean that
we export more than we import.But from the point of view of our
(06:50):
wellbeing, that's anunfavourable balance. That means
we are sending out more goodsand getting fewer in. Each of you
in your private householdwould know better than that. You
don't regard it as afavourable balance when you have
to send out more goods to getless coming in. It's favorable when
you get more by sending outless. Now, the quiz element is think
(07:15):
said that. And most people whoare aware of MMT will say, oh, one
of the MMT economists said it.And of course they'd fail the quiz
because that statement wasmade on April 27th in 1978, and it
was made during a lecture atKansas State University. And the
(07:38):
presenter of that famousannual lecture, the Landon Lecture,
was none other than MiltonFriedman. And the point we make is
that understanding from aconsumption point of view of the
concept of exports andexports, which is now pure mmt, of
course, was held by everybody,and as the lecturer Milton Friedman
(08:01):
said, it goes back to AdamSmith, even in the late 18th century,
that everybody has understoodfor years that if you send out more
than you get back, then that'san unfavorable balance from a resource
point of view and from aconsumption point of view. We buy
imports to consume or to beinputs into other productive things
(08:23):
that produce consumptiongoods. And we don't produce for the
sake of production, we produceto consume. And so it's just a basic
reality that if you aresending things away that you could
consume yourself, then that'sa cost to you, and the only reason
you'd want to do that is toget things that you can't produce
(08:44):
yourself. Or you can't producethem at a price that is viable. So
that's the MMT position andI've just been totally surprised
that's been denied.
I think a lot of the denialcomes from conflating the base understanding
of what you just said withpolitical economy and understanding
(09:05):
power dynamics that wediscussed. And how do you keep an
empire at bay when it'spredating upon a defenseless country
that is desperate and in abalance of payments spiral that is
just consuming them and theytake on IMF debt loan to pay it off.
And now they're having to sellthe thing that they make, they're
(09:25):
having to export that, andthen they have to import the very
thing that they made becausethey didn't have the ability to refine
it, et cetera, et cetera.These are all very, very important
relationships, but they'reconflating the base. Can you talk
about where the difference isthere? Because it is frustrating
because people weave in thosekinds of power dynamics and they
(09:48):
say MMT doesn't touch powerdynamics, it doesn't talk about inflation,
doesn't talk about balance,talk about imports. What happens
if the US is no longer theworld reserve currency, et cetera,
et cetera, et cetera. I meanwe got some of our favorite left
tubers out there constantlydecrying the death of the dollar
and how it's just going to dieon the vine and so on and so forth.
(10:10):
And they don't take a stepback, they don't want to know it,
they don't really necessarilyknow they need to know it. So they
just skip it and they justjump straight to political economy.
Can you help me divide that?
I think we've spoken about itbefore. There's layers of analytical
understanding and when we arefocusing on resources of consumption
(10:32):
in the quite independent ofthe political circumstances, then
it's just to me a selffulfilling fact that if you send
your resources to somebodyelse, you can't use them yourself.
That's a cost to you becauseyou could use them yourself. Now
there's nuances in that.People say in the context of Australia,
which is a primary commodityexporter, which means that it exports
(10:56):
iron ore and coal and thingslike that, then they say you can't
really consume iron ore, canyou? So how much of a cost is it
to send it to China and to getback things from China that they
make with the iron ore, steel.And that's a nuance, but it's not
a abrogation of the basicthing. If you're sending your resources
(11:19):
to another country so thatthey can use them, then that's a
cost to you that can't bedenied in my view. And anybody who
tries to deny that is runninga self serving type of agenda that's
not based upon fact. Andequally from a consumption perspective,
the things that you importthat you can't make yourself at either
(11:42):
at all because you don't havethe know how or the technology or
you can't make them at anaffordable price to consumers because
you don't have the skills ortechnology, they are benefits. From
a consumption point of view,why do we consume to have wellbeing.
Now I'm a long standing criticof the mass consumption that western
(12:03):
countries engage in and that'senvironmentally unsustainable. But
even within a sustainable degrowth type environment we're still
going to have to consumebecause we've got to eat and we've
got to dress and we've got tomove around and whatever. And we
see consumption as desirable.Obviously it is. If we can have food
(12:24):
security, decent publictransport and we can have clothes
that keep us warm or cooldepending on the season, that's desirable.
They're benefits. And so fromthat perspective it's undeniable
that imports benefits andexports are the costs that the investment
of resources that you engagein to get the benefits that you can't
(12:47):
produce yourself. Now thenyou've got overlays. So for example,
geopolitics centres thesituation. And so people argue, well
you've got to have amanufacturing industry, you can't
just import all yourmanufactured goods. So then the question
then is why do you want amanufacturing industry? Well, there's
(13:09):
advantages in having amanufacturing sector. What are those
advantages in a geopoliticalsense? People argue that it provides
you with national securitybecause during the Second World War,
for example, or themanufacturing sector shifted from
producing cars and whatever toproducing tanks, guns and bullets
(13:33):
and bombs. And so having amanufacturing sector gives you a
capacity, an independence, aself sufficiency to build military
goods in the case of some sortof threat from another country. Now
that's a valid reason and howmuch you want to buy into that depends
upon how paranoid you are andthe state of the geopolitics. And
(13:56):
at the moment everybody's veryscared of various nations and so
they're spending a lot onmilitary equipment. I think that's
probably wrong, but that'swhat they're doing. And other times,
at the end of the Cold War,for example, the late 1980s, we all
got this warmth that the worldwas A much more secure place. So
defence spending fell. But thepoint is that that's a reason why
(14:20):
you want to have amanufacturing sector and not just
rely on manufactured imports.Now another reason is that manufacturing
historically has been a sourceof innovation and productivity growth.
And because manufacturing iswhere new technologies are introduced
and higher value adding occursand that spreads out in the form
(14:43):
of higher real wage gains forworkers. And there's definitely validity
in that argument. If you justhave a service sector and you import
all your manufacturing goods,well, maybe you don't benefit from
the gains of the innovation inthe way in which we produce things.
So there's reasons why youwant to subsidize an export based
(15:04):
manufacturing sector. Iunderstand that, but that still doesn't
get over the basic fact thatexports are a cost because you're
sending resources that youcould use yourself away so that others
can use them and imports are abenefit. Now another angle to it
is the argument, and this isparticularly relevant to the debate
(15:24):
between the metropolitan andthe satellite world. In non jargon
terms, that's the powerfulfirst world advanced countries and
the non powerful, somewhatdependent poorer countries in the
world which are essentiallyrunning extractive economies. And
that means is that theyextract raw materials, raw primary
(15:48):
commodities and export them tothe first world, the rich countries.
Now the question is how hasthat been effective as a model for
economic development andgrowth? And the answer is, well,
it hasn't been very successfulfor many countries. And one of the
reasons is that the poorercountries, if all they are, are holes
(16:10):
in the ground, and the holesin the ground are being dug by first
world capital who have goneand built some mining capacity, some
railroads to ports, and thenshipping out the commodities to the
first world who thenmanufacture it, add value to those
primary commodities and thenship them back in the form of high
(16:32):
value exports which areimports to those countries. And we're
thinking cars or technology orwhatever, well then that doesn't
really help the poorer countryvery much at all. The profits disappear,
they don't get paid very muchfor their resources and then they're
stuck having to buy back thevalue added goods at high prices
(16:55):
to consume. And meanwhile backat the ranch they are burdened by
IMF and World bank debt and sothey just can't get ahead. Why is
Africa still poor? It'sincredibly wealthy country in resource
terms, yet it's still verypoor. And the reason is that their
exports are low value, buthigh value to the value adding nations
(17:19):
in the advanced world who thenexport the goods back. It's a Sort
of double whammy for the poorcountry. So there's all those issues
too, that are layered on topof the basic MMT understanding.
One of the things that you goto some significant length explaining
that I think is importantbecause we deal with it every single
(17:40):
day as just a layperson andactivist trying to interact with
people both on the phone, inreal life and online. Most people
haven't quite gotten itthrough their heads that we do not
live in a fixed rate peggedcurrency regime. We live in a free
floating fiat currency. And alot changed there. And that happened
(18:03):
in 71 when the Bretton WoodsAccord ended up. Would you mind just
quickly going over the BrettonWoods Accord and what changed in
71 and why that impacts ourability to do imports and exports
in a significantly different way.
Sure, most of us live now in aflexible exchange rate world, but
(18:25):
that wasn't always the case.So what's an exchange rate? An exchange
rate is just the rate at whichyou sell US Dollars to Australia
against Australian dollars.And after the Second World War, there
was a major conference, theBretton Woods Conference, that brought
all of the victors together.You know, all the large nations that
(18:45):
had participated in thevictory. And the war came at the
end of the Great Depression,of course, and there was huge financial
instability that reallystarted in the 1920s, and the famous
stock market crashes in 1929were manifestations of that. But
there was a lot of currencyinstability. In other words, currencies
(19:08):
would fluctuate quite wildly.And that's somewhat undesirable because
if you're a manufacturerthat's exporting commodities to the
rest of the world, forexample, and your export revenue
is determined by the exchangerate, yet your costs are determined
domestically. And so if youhave these wild shifts in the value
(19:29):
of your revenue because theexchange rate is shifting, yet your
costs are not as unstable,that makes it very hard to plan.
And in very short spaces oftime, if there are wild fluctuations
in exchange rates, a companythat's financially viable can become
within weeks, financiallyunviable. So that's a reality. And
(19:52):
it was considered that at theend of the Second World War, once
the peace had come and nationsgot together and decided, how are
we going to run peacetime nowthat we have stopped bombing the
hell out of each other, howare we going to do it? And one of
the things that was decidedupon was to try to stabilize the
(20:13):
global financial system toattenuate these wild fluctuations
in exchange parodies betweennations. And that there was a meeting
at Bretton woods which is intown, in the east part of American,
and they agreed on aconvertible gold standard. Now, what
that means is that theydecided that the US and the US were
(20:36):
bully boys in this process. Bythe way, other nations were bullied
by the Americanrepresentatives at Bretton woods.
And as a consequence, the USDollar became the center piece of
this system. And there wassome logic in that, by the way, that
given the trading strength ofAmerica, the manufacturing strength,
(20:56):
and the way in which thedollar had permeated the global financial
system, the US Dollar, I'mtalking about the US Dollar was at
the center of the system, andit was tied at a fixed rate to an
ounce of gold. And then allother currencies were fixed against
the US Dollar at agreedparities that were sort of worked
(21:17):
out to reflect their tradingrelationships with each other. So
all the currencies then had avalue against each other as a consequence
of that. And the Bretton woodssystem decided that the role of the
central banks in each of ourcountries would be to ensure that
those agreed parities betweenthe currencies were kept. Now, how
(21:41):
would that happen? If youthink about a country that's running
a trade deficit, which meansthat it's importing more than it's
exporting, that also hasimplications for the demand and supply
of its currency via the othercurrencies. So in the very simple
example would be, let's saythe Australia is running a deficit
against China, wasn't in thesystem, but a deficit against Britain,
(22:05):
for example, then that meansit's importing more than it's exporting.
And what exports leads to interms of financial flows is a demand
fuel currency, because thecountry that's importing your exports
has to get Australian dollars.So in this case, British people who
were buying Australian exportswould have to buy Australian dollars
(22:28):
in the foreign exchange marketto pay the exporter in Australian
dollars. And so that created ademand for your currency. But also
the Australian importers whowere importing from Britain would
have to buy sterling in theforeign exchange market to pay the
British exporters for theimports that we were getting from
them. And so you can see thatif a country is importing more than
(22:52):
it's exporting, then on allthe balance of transactions, the
supply of their currency willbe greater than demand for their
currency. And as aconsequence, there would be downward
pressure on the Australiandollar in that example. Now, under
the Bretton woods system,there were very narrow ranges in
which a currency couldfluctuate, but essentially the central
(23:13):
bank had to maintain theparity. So in that example, there
would be downward pressure onthe Australian dollar via V the sterling.
And the Australian Centralbank, the Reserve bank of Australia,
would have to resolve thatimbalance of that excess supply of
Australian dollars by buyingup the Australian dollar in the foreign
(23:34):
exchange market and sellingforeign currencies. Because you've
got to buy the Australiandollars up. They would have to buy
them with, in this case,British sterling. And that was the
system. And what it meant wasthat the domestic policy was always
compromised because if fiscalpolicy was too expansionary, in other
words, issuing too manyAustralian dollars into the economy.
(23:57):
Now remember that the supplyof your currency is not just the
amount that's floating aroundin the domestic economy, it's also
the amount that's in theforeign exchange markets. And so
if the government was tryingto maintain very low unemployment,
for example, by using fiscaldeficits, spending more Australian
dollars than it was bringingback out in taxes, that would add
(24:21):
to the supply of Australiandollars. And in a case where there
was an external deficit, atrade deficit which was putting downward
pressure on the Australiandollars, the Bretton woods system
demanded that the central bankwithdraw those Australian dollars
by buying them up. And so youcan see that there was a conflict
between the responsibilitiesof the central bank to the Bretton
(24:43):
woods system and the domesticpolicy aspirations to maintain wellbeing
and low unemployment andeconomic growth. So you had this
circumstance where it wasreferred to as stop growth patterns.
So for Australia, for example,which was running trade deficits,
the government would try tostimulate growth and reduce unemployment,
(25:05):
but that would increaseimports and cause downward pressure
on the exchange rate, that theReserve bank then had to withdraw
those dollars and increaseinterest rates to attract foreign
capital investment, whichincreased the demand for your currency.
And as a consequence, thegrowth in the economy would come
to a halt and unemploymentwould start rising. So you had this
(25:28):
period during the 50s and the1960s where countries that ran trade
had what were called in thosedays, weak trading fundamentals.
In other words, they ran tradedeficits and they were importing
capital or consumption goods.Well, they were always up against
it because they were alwaysfacing periods of economic stagnation
(25:50):
brought about by the centralbank having to withdraw their currency
from the foreign exchangemarket and the fiscal authorities,
the treasury and financeauthorities, having to run tighter
fiscal policy, in other words,reduce the size of deficits to stifle
imports and push upunemployment and cause recessionary
(26:11):
type biases. And that systembecame unviable by the 1960s. What
you had were countriesengaging in what were called competitive
devaluations. Oh, and by theway, one of the other problems was
that, of course, theAustralian government doesn't produce
sterling or US dollars orFrench francs or any of the other
(26:31):
currencies. And so the centralbank, the Reserve bank of Australia,
only had finite capacity inwhich it could defend an exchange
rate that was facing downwardpressure. And so then the question
was, under the Bretton woodssystem, what happens when the central
bank runs out of money, aforeign exchange in which it could
sell to buy up its owncurrency to bolster its value towards
(26:53):
the parity? The answer in theBretton woods system was the creation
of the imf. And theInternational Monetary Fund was created
as a body that would makeloans to nations that were running
short of foreign exchange, sothat it had plenty of currency, foreign
currency, in which it couldconduct its interventions. Now, then,
(27:14):
you had the problem thatcountries would become burdened with
debt through the IMF. And bythe late 1960s, the IMF then started
to attach conditionality tothat debt, which has now become their
common practice. And thatconditionality was the sort of monetarist
ideology started to take overin the academy and the forebears
(27:36):
of neoliberalism, the IMFstarted to become very aggressive
in the conditionality itimposed upon nations that were seeking
bailouts in terms of foreignexchange loans. And those conditionalities
were always biased towardsbeginnings of the privatisation,
the beginnings of tight fiscalpolicy, increased unemployment. So
(27:59):
nations in those circumstanceswere facing social instability. It
was becoming politicallyunviable for nations to operate within
this system. And so in the1960s, under the IMF agreements,
a nation could approach theIMF if its trading fundamentals were
so configured that it wasalways facing downward pressure on
(28:20):
its exchange rate. Obviously,that was unviable, not sustainable.
So it could approach the IMFand get approval to revise the parity
that it had been originallyagreed. Now, by the 1960s, there's
a strategic practice calledcompetitive devaluation, where Britain
would go to the IMF anddevalue the sterling. And then, of
(28:42):
course, that would then giveit a competitive advantage against
all the other nations. So thenFrance would go and get a devalue
as well. And you've got theseleapfrogging devaluations which just
made the system unviable.
You are listening to Macro NCheese, a podcast by Real Progressives.
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(29:06):
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And so by the end of the1960s, it was quite clear that the
system was becoming unviable.The American government was running
(29:28):
large external deficits, andin part because it was prosecuting
the Vietnam War and spendingso much and importing so much. And
of course, under the Brettonwoods system, ultimately, the US
Government stood ready toconvert all US Dollars into gold
at the fixed parity if nationswanted to. So nations that were running
(29:51):
trade surpluses against the USin the 1960s, in all the European
nations, mostly, they wereaccumulating large foreign reserves
denominated in US dollars. Andof course, by the end of the 1960s,
with a huge spending on theVietnam War effort that the US Government
was making, the volume of USDollars floating around was huge.
(30:14):
And the French and othernations, but the first ones were
the French, started to worryabout the value of their US Dollar
reserves. And so the Frenchdecided that they were going to,
through the Bretton woodssystem, go to the US Government and
swap the US Dollars that theywere holding because of their trade
surpluses for gold. And the USGovernment started to formed the
(30:39):
view that they were going tolose Fort Knox reserves. They were
going to have to hand overhuge volumes of gold stocks to countries
that were holding these USDollar reserves who legitimately,
under the Breadwood system,could convert them into gold. And
that is why President Nixon inAugust 1971, decided that was unsustainable
(31:03):
for the US that they were notgoing to send their gold to France.
And at that point, he withdrewfrom the Bretton woods system. And
it took a few years and a fewhiccups and a few retries of the
Bretton woods system under theSmithsonian agreement. But by 1975,
most of the world agreed thatit just wasn't a sustainable system
(31:24):
to have all exchange ratesfixed between countries with quite
different industrialstructures and quite different trading
strengths. And most of theworld floated. The European nations
didn't, and that's a separatestory, but that's a legacy of decisions
that they had made in the1960s as part of European integration.
But most of the world floated,and once we floated, of course, that
(31:48):
trade imbalances didn't haveto be resolved by causing shifts
in domestic economic activityto stifle inputs and push up interest
rates to attract foreigncapital. The way in which a trade
imbalance could be attenuatedwas through the exchange rate. And
so if a country's running apersistent trade deficit, importing
(32:10):
more than it's exporting,well, then under a flexible exchange
rate system, its exchange Ratewill just start to depreciate somewhat.
And the depreciation thenmakes its exports much cheaper to
foreigners, makes imports muchmore expensive in local currency
to the consumers, and overtime, that creates forces that reduce
(32:32):
the imbalance. The domesticpolicy then is freed to pursue domestic
objectives like fullemployment and prosperity, good health
systems, good educationsystems, they don't become compromised,
as they were under the Brettonwoods system, to defending the exchange
rate. So that's sort of, in aNutShell, Bretton Woods 101, obviously,
(32:53):
that was an.
Important piece of historythat we kind of really need to wrap
our heads around, because thatis the world that we live in today.
One of the things that jumpsout is this fear of the bond vigilantes
and the money marketsrebelling. You touched on it in there
as one of the things that wereparticularly challenging during the
(33:15):
Bretton woods system. Buttoday, what kind of power does money
markets and these kind of bondquote unquote vigilantes have on
currency issuing nations? Whatdifference does it make? If a country
has a high import to exportratio and they also spend heavily
domestically on infrastructureand healthcare and education, et
(33:38):
cetera, what could they do?Based on the fears of losing confidence
in the dollar and the bondvigilantes and these money market
folks going nuts out, do theystill have this power or is it largely,
we assume they have the power,but they really don't have the power
of currency issuing nations.Understood. What are we dealing with
there?
Well, certainly thevigilantes, as you call them, they
(34:02):
could really cause havoc underthe fixed exchange rate system, because
they knew under that systemthat the central bank had the responsibility
to defend the exchange rate.And so they could make bets on what
they were able to anticipate,what the government would do. Now,
under a flexible exchangerate, they've got less capacity to
(34:22):
do that. Now, there'scelebrated examples, Black Wednesday
in 1993 in Britain, where thiswas the Soros attack on the British
pound. What Soros was bettingwas that the British government would
be forced to push up interestrates. And of course, he was betting
(34:43):
causing lots of instability inthe British sterling relative to
other currencies. And heunderstood that under a fixed exchange
rate, because Britain was tiedto the European Exchange Rate Mechanism,
which they were part of thefixed exchange rate system. And Maggie
Thatcher had really opposedthat. And John Major took them into
(35:04):
it after Thatcher had gone.But what George Soros knew was that
the British government underthat fixed exchange rate system would
try to defend the pound, andthat if he undermined the pound's
value by selling it short, inother words, anticipating that the
pound would drop in value. Andso in the speculative markets he
(35:25):
is entering contracts of thatilk. Then he knew that the British
government had no option ifthey stayed in the system. And in
that case he was correct, hecould cause havoc. And what happened
on that Wednesday was that bylate afternoon it became quite obvious
that the British governmentpushed interest rates up, I'd forgotten,
17% or something in a day orsomething, desperately trying to
(35:48):
stay within their fixedexchange system. And they couldn't.
And so they withdrew and theynever re entered that system. And
they floated to sterling afterthat. Now, in a flexible exchange
rate system, the capacity ofthe speculators to cause havoc is
less obvious. And in themodern sense they talk about the
trust moment. A couple ofyears ago when Liz Truss became,
(36:10):
for the shortest periodpossible, Prime Minister of Britain.
The financial markets turnedagainst her because she was proposing
spending increases. Theproblem for her was that she had
such a tenuous hold on theleadership and the financial markets
formed the view that if theyput pressure on the sterling that
(36:32):
she would reverse herposition. And she did because she
did have a tenuous hold on thePrime Ministerial position. They
were betting that the sterlingwould depreciate and they won out
because the government folded.Now you think about Japan. Japan
runs huge deficits and has thelargest gross public debt of any
(36:54):
country. Historically, thathas been the subject of massive short
selling. What that means ispeople are predicting that the government
will roll over and increaseinterest rates and reduce government
spending and kowtow to thefinancial markets bets who are betting
that interest rates will rise.Well, all of those financial market
(37:16):
speculators have lost billionsover the years, billions in those
bets. And the reason isbecause the Japanese government is
confident in its own positionand is resolute and does what's best
for Japan. Whereas the LizTruss moment was because Liz Truss
wasn't confident. She didn'thave a hold on power, she didn't
(37:37):
have a defined economicstrategy. It was just all over the
place. The Tories were inchaos and the financial markets knew
it. And think about the otherexample, Iceland during the global
financial crisis. Tiny littlevolcanic rock out there. During the
buildup before the globalfinancial crisis, it had a huge reconfiguration
(38:00):
of its financial system, itsbanking system and all these foreign
banks went in there andmanipulated the system and took the
most unbelievable speculativepositions and were offering ridiculous
returns to depositors and thefull neoliberal catastrophe. And
of course, when the globalfinancial crisis came, Iceland's
(38:24):
banking system, which washeavily foreign owned, collapsed.
One of the largest collapsesin history. Now the Iceland currency
started to depreciate. Whatdid the Icelandic government do?
It introduced capitalcontrols. In other words, it prevented
the financial markets fromtaking out currency and swapping
(38:45):
it for other currencies as away of reducing losses. And the big
hedge funds in America wereexposed to this and they couldn't
get their money out. They wentinto international courts. They made
all the sort of standardthreats, will kill your currency,
will destroy your economy, itwill wreck your financial system,
(39:05):
blah, blah, blah. TheIcelandic government stood firm under
presidential edict not to bowto the pressures of the global financial
markets. And the internationalcourts ruled that the sovereignty
of Iceland was the prime thingand that the financial interests
of the hedge funds was asecondary matter. And so they wouldn't
(39:28):
rule against the Icelandicgovernment. In other words, establishing
the sovereignty of the electedlegislature in Iceland soon after.
The problem for them was thatit started to appreciate too much
and in the currency value.During the early days of the GFC
prompted a massive touristboom. And everybody wanted to do
the loop of Iceland. That'sthe famous tourist loop. So its currency
(39:52):
started to get stronger again.The government of Iceland successfully
defended itself against someof the largest American hedge funds.
So that's an example thatshows you that the legislature has
the jurisdiction the financialmarkets don't. You know, the financial
markets tried to hijackIcelandic ships in French ports and
(40:14):
things like this to get backmoney, and they couldn't. It was
ruled that the Icelandicgovernment had legislative jurisdiction
and were operating within thatjurisdiction. So the point of that
example is that that was asensible decision by the Icelandic
government under presidentialedict to defend the interests of
Iceland against the interestsof foreign capital. It was hugely
(40:37):
successful and a role modelfor others. The other example I could
give was Argentina in 2001,when the Argentinian economy had
foolishly borrowed a lot ofmoney to build export capacity denominated
in US dollars. And for a timethat seemed to be a good idea because
(40:58):
the mining and primarycommodity sector was booming during
the 90s, the primarycommodities boom that a lot of extractive
countries like Australiabenefited from. And of course, that
came to a halt in the late 90sand the export revenue started to
dry up. Of course, if youborrow in foreign currencies, you've
(41:18):
got to be able to earn foreigncurrencies through exports to pay
your loans back. And when yourexport revenue starts to dry up,
which it did in theArgentinian case, they realized that
they were running out of thecapacity to service the public debt.
And as a consequence they hadthe financial meltdown in December
2001. And what did theArgentinian government do? It sensibly
(41:43):
brought in basically a jobguarantee, a sort of modified version
of an MMT job guarantee. I hadsome doing in that indirectly, but
they also defaulted on all oftheir foreign currency denominated
debt. Now when they did that,the IMF and all of the hedge funds
threatened them withextinction basically and that they
(42:06):
would never get another pennyfrom anywhere. Now soon after they
stabilized their economythrough this head of households employment
program, they started torecover from the crisis. Suddenly,
foreign direct investmentstarted to come back in again. Now
it wasn't from America or thefirst world sources, it was from
(42:28):
Venezuela and other countriesthat typically were seizing an opportunity
to recycle their own tradesurpluses into returns because Argentinian
economy was resuming growth.And then exchange rates started to
appreciate again, wasn'tdestroyed. By 2005, the central bank
(42:49):
in Argentina was strugglingwith an excessively valued Argentinian
currency. And of course thefirst world investors started to
flood back in. And I recall apress conference where the Minister
for Finance was asked a simplequestion. How do you explain the
fact, sir, that you defaultedon all foreign currency loans, yet
(43:10):
five years later investors arecoming back. And if my foreign language
translation is accurate, hereplied one word, greed. And the
point he made was that all ofthe commentators and economists,
they're ideologues. Whereasthe bond and foreign investment community
don't invest on ideology, theyinvest on margin. With the economy
(43:32):
growing again so strongly by2005, 6, 7, the investors could see
margin and arbitrageopportunities. It's what drives them,
not ideology. Now theArgentinian economy since has been
mishandled, but that's anothermatter. But I think those are illustrative
examples of why the idea ofbond vigilantes is just a preposterous
(43:57):
notion For a nation that'swell managed. The research evidence
is very clear what providesfor exchange rate stability. It's
a well educated workforce,stable government, well articulated
and enforced rule of law withrespect to contracts. Foreign investors
(44:17):
don't scared of investing incountries where they're not sure
they're going to get theirmoney back. But for countries like
Australia, Australia's beenrunning external deficits of about
3.5% of GDP since the 1970s.You know, not small and our currency
fluctuates a bit. But by andlarge we have no trouble attracting
(44:37):
foreign direct investmentbecause they know they're going to
get their money back becausewe have stable laws, stable government,
well educated workforce whichprovides the sort of stable environment
for investment security.Various times our exchange rate fluctuates
from $0.50 US dollar to adollar US dollar. Most of us don't
(44:59):
even feel the difference. BMWand luxury cars go up in price because
we import them. Snow holidaysto the Swiss Alps go up in price.
But for the average camper inAustralia, the average citizen who
doesn't have a BMW car or aMercedes or a Maserati and doesn't
(45:19):
have annual ski holidays tothe Swiss Alps, it's really water
off a duck's back. It doesn'treally matter. Some things get a
bit more expensive and thenthey get cheaper again. We're an
economy that has a fluctuatingexchange rate and we're one of the
wealthiest countries in the world.
I would be remiss if I did notask you this final question, and
this is to me what a lot ofpeople are worried about. We touched
(45:42):
on this with Bretton woodswhen the dollar was the global hegemon,
if you will. Now we're dealingwith a basket of reserve currencies
and floating exchange rates.And obviously, yes, the dollar is
the primary, at least withinthe. I think it's the G10 countries.
But ultimately, what does thereserve currency at this point have
(46:04):
to do with trade and balanceof trade? Obviously the US has let
its dollar kind of matriculatethrough all these different countries
and it's been widely justsaturating around the world. But
what does that do at thispoint? I mean, people don't actually
use dollars typically in theircountry. Maybe they do offline, but
it's not like they're used perse. I mean, these are facilitating
(46:27):
trade. So what does that do,if anything?
The fact that a significantproportion of foreign trading contracts
are denominated in US dollars,that's a fact. Now, that proportion
has declined significantly andit's not inevitable that it will
remain as high and itdefinitely won't. The euro and the
(46:50):
Chinese currencies areexpanding in importance in world,
but the reality is that sinceBretton woods, since the end of the
Second World War, the USdollar is used as the denominator
for a significant proportionof trade in contracts. Now what that
means is that people then haveto get hold of the US dollar to engage
(47:14):
in trade. Now it's not justtrade with the us, it's trade with
everybody. The fact thatpeople in that context are required
to get hold of US dollars inorder to facilitate and execute trading
contracts that gives the USdollar a particular status. And it
means effectively that the USnation can run larger deficits at
(47:38):
the same value of the dollarthan it could otherwise if there
was less demand for itscurrency. So that's a fact. Now what
does that mean? It means itcan run larger external deficits
for longer withoutexperiencing loss of value of the
dollar. That's a fact. Nowwhat does that mean for domestic
policy? Well, not much. Therest of the world doesn't issue the
(48:00):
US dollar. The US governmentissues it as the only institution
in the world that issues theUS dollar. And so in terms of its
domestic policy ambitions, ithas no financial constraint on how
many dollars it can spend inthe domestic economy. So it can always
ensure that all the productiveresources that are available to it
(48:22):
domestically can be fullyutilised. Then think about, say,
Australia, can Australia enjoythat same capacity? And the answer
is Australian dollar isn't areserve currency. Not many traded
contracts are denominated inAustralian dollars. But does that
undermine the capacity of thefederal government in Australia to
(48:44):
ensure that all productiveresources are fully utilised within
Australia that are availableto it? And the answer is, of course
it doesn't undermine that. TheAustralian government issues the
Australian dollar and it's theonly institution that issues the
Australian dollar. Just likethe US government in terms of the
US dollar, the Australiangovernment has no financial constraints
(49:05):
on its spending. Now all itmeans is that there will be less
demand for the Australiandollar than there is for the US dollar
in the world foreign exc whichmeans that the size of the external
deficit that the Australiangovernment can run at a stable exchange
rate is probably less than thesize in relative terms than the US
(49:27):
nation can run. That's all itmeans. It doesn't reduce the capacity
of the Australian governmentto ensure that all of its domestic
available resources are fully employed.
MMT has two primary purposessimilar to the Fed. Ironically, you
know, we want price stabilityand we want full employment. With
that in mind, when you thinkabout the fact that most countries
(49:50):
don't have full employment andmost countries are experiencing either
inflation because of monopolypower, et cetera, but they also experience
import pass through inflationas well. And I don't believe these
are immutable, that they can'tbe solve. But what is it about MMT
(50:11):
and deficits and understandingcapacities at home versus the import
side that folks focus on? Whatthe US dollar is no longer this,
you guys are going tocollapse, blah blah blah. There's
no one else that gets this.Literally everyone out there is running
around with their hair onfire. And the analysis is Almost
(50:31):
unbearable to listen to.Correct me if I'm wrong, but MMT
is not really dealing with theindividual purchases on Amazon. They're
talking in aggregates. BecauseMMT is really macroeconomics. That's
the textbook macroeconomics,mmt. What is it about MMT that people
really need to understand asthey try to evaluate full employment,
(50:53):
price stability and thisimport export kind of world that
consumes?
It's understanding what thecapacities of the currency issuer
are and what constraints thecurrency issuer faces. For the mainstream
analysis that you read in allof the papers every day and watch
on TV and all the stupidprograms on the tv, et cetera, they
(51:16):
start with a fiction that thenational government is like a household.
And once you frame it in thatway, then you're really invoking
all of our personalexperiences as households as a means
of creating an understandingof the way in which the national
(51:37):
government can operate itscapacities and its constraints. And
of course my experience as ahouseholder provides me with no intelligence
as to what the capacities ofthe Australian government are. Nor
is your experience as ahouseholder any guide to what the
capacities of the US nationalgovernment are. $it's that false
(51:58):
starting point that leads toobsessions about financial constraints
that aren't there. There areno financial constraints on the US
dollar. There are politicalconstraints on the US government,
there are politicalconstraints, self imposed financial
constraints. But in rawintrinsic monetary terms, the central
(52:19):
banker of the US governmentcan type what, whatever number it
likes into bank accounts andthat will be validated funded spending.
That's the reality. There areno financial constraints. And so
mainstream just get obsessedat that level. And they have all
sorts of complex discussionsabout sustainable financial ratios
(52:43):
and fiscal space and all ofthis stuff. But once you get beyond
the fact that the USgovernment has no financial constraint,
then the question is, what arethe constraints then? Can it just
spend to infinity? And ofcourse the answer is definitely can't
do that. And the reason isbecause the constraints are resource
constraints, not financialconstraints. And that throws the
(53:08):
attention of an analyst andthe reader or the listener or whatever
into a totally different logicspace and a totally different comprehension
framework. Because if we'reworried about, oh, if there's resources
that are idle, that can bebrought back into productive use,
then if a government has nofinancial constraints, it can always
do that. And if it doesn'thave resource availability, then
(53:32):
its fiscal options are muchmore limited. And if it tries to
buck against the lack ofresources available, then it will
cause inflation. And thatdiscussion then leads to discussions
about what's the purpose oftaxation? Well, if the government
doesn't need to be fundedthrough taxes, why do you tax? Well,
you tax to stop us havingmoney so that we can't spend as much
(53:55):
and that creates idleresources. And so you get a totally
different comprehension ofwhat taxation is in a modern monetary
system. So if you start offunderstanding that's where the mainstream
go or go wrong by thinking interms of financial constraints that
determine the constrain ahousehold decision make, if you start
(54:15):
off at that level and makethat mistake, well, then you can't
retrieve from that situation.And that's really the contribution
of modern monetary theory.
Well said, Bill. Well said.Thank you so much for this. This
was very nicely done. Do youhave any new books coming out here
soon? You got any other workthat we should be aware of?
We're working on a revisedversion of the textbook and that'll
(54:38):
be out early next year, Ihope. And our publisher Bloomberg
Press has now approved a firstyear principles MMT book. So the
current textbook is a two yearsequence. So it goes from beginner
to somewhat sophisticated.We've now got a second book that
will be delivered in 2027. Itwill just be a really easy book in
(55:02):
your context, collegestudents, but non economic majors.
So a basic principles book.And I think that book will be accessible
to all sorts of people, notjust university students. And then
there's another book I've gotSimmering Away that will come out
next year on de growth andsustainability and empire and colonialism
(55:23):
and all that sort of stuff.And there's another project that
will be out later in the year.I hope it'll be in Japanese language
on the challenge of Japan. Sothat's another project I'm working
on with my colleagues at Kyoto.
Wow. And you are really busy, sir.
You only live once, Steve, soyou gotta pack it in.
(55:44):
Amen, brother, Amen. Allright, well you make sure you tell
your wife I said hello. Thankyou once again for always making
time for me. I really amexcited about this. I think this
is a really compact, tight, onpoint talk. So thank you for all
of us. Folks. My name is SteveGrumbine. I am the host of Macro
and Cheese. I'm also thefounder of Real Progressives, the
(56:06):
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(56:50):
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(57:13):
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All right, folks, this isSteve with Macro and Cheese. My guest
is Bill Mitchell. And folks,you know Bill because we've had him
on quite a few times. In fact,as I say, usually go back to episode
number one to find out aboutthe T in mmt. Bill has been with
us from day one. Love havingBill on. And for those of you who
(01:03):
have not heard, Bill Mitchell.Bill Mitchell is a professor of Economics
and director of the center ofFull Employment and Equity Coffee
at the University ofNewcastle. He is also the docent
professor of Global PoliticalEconomy at the University of Helsinki,
Finland, and a guestinternational professor at Kyoto
University in Japan. Bill isalso an author of several great books,
(01:28):
including the Modern MonetaryTheory textbook. And he was also
the right author of Reclaimingthe State and many other books. The
guy is just prolific. Yougotta check out his blog, really
amazing content. Go toBillMitchell.org and find his latest
blog entries. Now, I've hadBill on two other times to discuss
(01:50):
a similar subject. And as weget more mature and we grow in knowledge
and we try to build up ourunderstanding of the world in which
we live, and as things change,the material conditions of the world
change all the time. Andthey've really changed quite a bit
here recently, obviously withthe Trump administration and tariffs,
which we've talked aboutpreviously. But we're going to talk
(02:13):
today about a paper that Billwrote in June of 2022, which is actually
part of a book, an Elgarseries book, and I'll let him get
into that here momentarily.But the paper was called the Modern
Monetary Theory Perspective onthe External Economy. And why are
we talking about this? Right,so we've got people constantly talking
(02:34):
about balance of trade and howthe United States doesn't create
anything, we don't doanything. But it's not just the US
We've talked to Fadal Kaboobabout Africa and we've talked to
Ndongo Sambasilla aboutAfrica, and we've talked to a bunch
of different economists withthe MMT background discussing their
particular portion of theworld. And this subject seems to
(02:55):
be near and dear to everyone'sheart, even if they completely butcher
it and don't get it right. TheMMT community has been out front
trying to get the details ofthe economy and accounting and understanding
the capacity of currencyissuing nations and the constraints
that go with that. I'm goingto bring on my guest, Bill Mitchell.
(03:16):
Thank you so much for joiningme again, sir. I appreciate it.
Thank you. Thanks for havingme and thanks to your listeners.
We love you, Bill, and justwant to be honest here. I am very,
very scared of the subjectstill. Even though we've talked at
great length, I've read a lotof books. I got the basics, I can
say the basics of my sleep.Imports are a benefit, exports are
(03:37):
a cost. We've talked aboutthis extensively from an accounting
perspective and also in termsof real trade perspective. But because
people tend to go out thereinto the political economy and they
tend to think of politicalrules or the choices different countries
make as immutable laws of theworld that cannot be changed, they
(04:01):
conflate the base case thatMMT posits with a lot of things that
just ain't so. And we havesome really great explanations for
the things that they thinkthat just ain't so. And we'll get
to those. But I want to see ifwe can set the stage here. MMT theorists,
and you being one of thegranddaddies of them all, have posited
(04:22):
this statement that importsare a benefit, exports are a cost.
Why don't we get started withthat explanation right up front and
then we'll go deeper into the paper.
That's just a reality. And I'msurprised. That conception of the
way in which a nation sitswith other nations and swaps resources
(04:42):
with other nations, I'msurprised that it's caused so much
controversy and in somequarters appears to be a major source
of it's an attack vector, ifyou like, on the credibility of mmt.
I'm just surprised by thatbecause for me it's such a mundane
statement for us to make andit's really just a preface to going
(05:06):
into much more technicaldetails and adding then political
economy layers and discussionsthat I'm interested in about global
power struggles, et cetera. Solet me just start. I'll read for
your listeners a quote. It's avery interesting quote and we'll
do a little quiz on it in asecond. Here's the quote. It'll take
(05:27):
about a minute. I'm startingin international trade area. The
language is almost alwaysabout how we must export and what's
really good is an industrythat produces exports. If we buy
from abroad and import, that'sbad. But Surely that's just upside
(05:48):
down as well. What we sendabroad we can't eat, we can't wear,
we can't use for our houses.The goods and services we send abroad
are goods and services notavailable to us. On the other hand,
the goods we import provide uswith TV sets we can watch, with automobiles
(06:08):
we can drive with all sorts ofnice things for us to use. The gain
from foreign trade is what weimport. What we export is the cost
of getting those imports. Theproper objective for a nation, as
Adam Smith put it, is toarrange things so we get as large
a volume of imports aspossible for as small a volume of
(06:29):
exports as possible. Thiscarries over to the terminology we
use. I have already referencedto the misleading terminology of
protection. But when peopletalk about a favourable balance of
trade, what is that term takento mean? It's taken to mean that
we export more than we import.But from the point of view of our
(06:50):
wellbeing, that's anunfavourable balance. That means
we are sending out more goodsand getting fewer in. Each of you
in your private householdwould know better than that. You
don't regard it as afavourable balance when you have
to send out more goods to getless coming in. It's favorable when
you get more by sending outless. Now, the quiz element is think
(07:15):
said that. And most people whoare aware of MMT will say, oh, one
of the MMT economists said it.And of course they'd fail the quiz
because that statement wasmade on April 27th in 1978, and it
was made during a lecture atKansas State University. And the
(07:38):
presenter of that famousannual lecture, the Landon Lecture,
was none other than MiltonFriedman. And the point we make is
that understanding from aconsumption point of view of the
concept of exports andexports, which is now pure mmt, of
course, was held by everybody,and as the lecturer Milton Friedman
(08:01):
said, it goes back to AdamSmith, even in the late 18th century,
that everybody has understoodfor years that if you send out more
than you get back, then that'san unfavorable balance from a resource
point of view and from aconsumption point of view. We buy
imports to consume or to beinputs into other productive things
(08:23):
that produce consumptiongoods. And we don't produce for the
sake of production, we produceto consume. And so it's just a basic
reality that if you aresending things away that you could
consume yourself, then that'sa cost to you, and the only reason
you'd want to do that is toget things that you can't produce
(08:44):
yourself. Or you can't producethem at a price that is viable. So
that's the MMT position andI've just been totally surprised
that's been denied.
I think a lot of the denialcomes from conflating the base understanding
of what you just said withpolitical economy and understanding
(09:05):
power dynamics that wediscussed. And how do you keep an
empire at bay when it'spredating upon a defenseless country
that is desperate and in abalance of payments spiral that is
just consuming them and theytake on IMF debt loan to pay it off.
And now they're having to sellthe thing that they make, they're
(09:25):
having to export that, andthen they have to import the very
thing that they made becausethey didn't have the ability to refine
it, et cetera, et cetera.These are all very, very important
relationships, but they'reconflating the base. Can you talk
about where the difference isthere? Because it is frustrating
because people weave in thosekinds of power dynamics and they
(09:48):
say MMT doesn't touch powerdynamics, it doesn't talk about inflation,
doesn't talk about balance,talk about imports. What happens
if the US is no longer theworld reserve currency, et cetera,
et cetera, et cetera. I meanwe got some of our favorite left
tubers out there constantlydecrying the death of the dollar
and how it's just going to dieon the vine and so on and so forth.
(10:10):
And they don't take a stepback, they don't want to know it,
they don't really necessarilyknow they need to know it. So they
just skip it and they justjump straight to political economy.
Can you help me divide that?
I think we've spoken about itbefore. There's layers of analytical
understanding and when we arefocusing on resources of consumption
(10:32):
in the quite independent ofthe political circumstances, then
it's just to me a selffulfilling fact that if you send
your resources to somebodyelse, you can't use them yourself.
That's a cost to you becauseyou could use them yourself. Now
there's nuances in that.People say in the context of Australia,
which is a primary commodityexporter, which means that it exports
(10:56):
iron ore and coal and thingslike that, then they say you can't
really consume iron ore, canyou? So how much of a cost is it
to send it to China and to getback things from China that they
make with the iron ore, steel.And that's a nuance, but it's not
a abrogation of the basicthing. If you're sending your resources
(11:19):
to another country so thatthey can use them, then that's a
cost to you that can't bedenied in my view. And anybody who
tries to deny that is runninga self serving type of agenda that's
not based upon fact. Andequally from a consumption perspective,
the things that you importthat you can't make yourself at either
(11:42):
at all because you don't havethe know how or the technology or
you can't make them at anaffordable price to consumers because
you don't have the skills ortechnology, they are benefits. From
a consumption point of view,why do we consume to have wellbeing.
Now I'm a long standing criticof the mass consumption that western
(12:03):
countries engage in and that'senvironmentally unsustainable. But
even within a sustainable degrowth type environment we're still
going to have to consumebecause we've got to eat and we've
got to dress and we've got tomove around and whatever. And we
see consumption as desirable.Obviously it is. If we can have food
(12:24):
security, decent publictransport and we can have clothes
that keep us warm or cooldepending on the season, that's desirable.
They're benefits. And so fromthat perspective it's undeniable
that imports benefits andexports are the costs that the investment
of resources that you engagein to get the benefits that you can't
(12:47):
produce yourself. Now thenyou've got overlays. So for example,
geopolitics centres thesituation. And so people argue, well
you've got to have amanufacturing industry, you can't
just import all yourmanufactured goods. So then the question
then is why do you want amanufacturing industry? Well, there's
(13:09):
advantages in having amanufacturing sector. What are those
advantages in a geopoliticalsense? People argue that it provides
you with national securitybecause during the Second World War,
for example, or themanufacturing sector shifted from
producing cars and whatever toproducing tanks, guns and bullets
(13:33):
and bombs. And so having amanufacturing sector gives you a
capacity, an independence, aself sufficiency to build military
goods in the case of some sortof threat from another country. Now
that's a valid reason and howmuch you want to buy into that depends
upon how paranoid you are andthe state of the geopolitics. And
(13:56):
at the moment everybody's veryscared of various nations and so
they're spending a lot onmilitary equipment. I think that's
probably wrong, but that'swhat they're doing. And other times,
at the end of the Cold War,for example, the late 1980s, we all
got this warmth that the worldwas A much more secure place. So
defence spending fell. But thepoint is that that's a reason why
(14:20):
you want to have amanufacturing sector and not just
rely on manufactured imports.Now another reason is that manufacturing
historically has been a sourceof innovation and productivity growth.
And because manufacturing iswhere new technologies are introduced
and higher value adding occursand that spreads out in the form
(14:43):
of higher real wage gains forworkers. And there's definitely validity
in that argument. If you justhave a service sector and you import
all your manufacturing goods,well, maybe you don't benefit from
the gains of the innovation inthe way in which we produce things.
So there's reasons why youwant to subsidize an export based
(15:04):
manufacturing sector. Iunderstand that, but that still doesn't
get over the basic fact thatexports are a cost because you're
sending resources that youcould use yourself away so that others
can use them and imports are abenefit. Now another angle to it
is the argument, and this isparticularly relevant to the debate
(15:24):
between the metropolitan andthe satellite world. In non jargon
terms, that's the powerfulfirst world advanced countries and
the non powerful, somewhatdependent poorer countries in the
world which are essentiallyrunning extractive economies. And
that means is that theyextract raw materials, raw primary
(15:48):
commodities and export them tothe first world, the rich countries.
Now the question is how hasthat been effective as a model for
economic development andgrowth? And the answer is, well,
it hasn't been very successfulfor many countries. And one of the
reasons is that the poorercountries, if all they are, are holes
(16:10):
in the ground, and the holesin the ground are being dug by first
world capital who have goneand built some mining capacity, some
railroads to ports, and thenshipping out the commodities to the
first world who thenmanufacture it, add value to those
primary commodities and thenship them back in the form of high
(16:32):
value exports which areimports to those countries. And we're
thinking cars or technology orwhatever, well then that doesn't
really help the poorer countryvery much at all. The profits disappear,
they don't get paid very muchfor their resources and then they're
stuck having to buy back thevalue added goods at high prices
(16:55):
to consume. And meanwhile backat the ranch they are burdened by
IMF and World bank debt and sothey just can't get ahead. Why is
Africa still poor? It'sincredibly wealthy country in resource
terms, yet it's still verypoor. And the reason is that their
exports are low value, buthigh value to the value adding nations
(17:19):
in the advanced world who thenexport the goods back. It's a Sort
of double whammy for the poorcountry. So there's all those issues
too, that are layered on topof the basic MMT understanding.
One of the things that you goto some significant length explaining
that I think is importantbecause we deal with it every single
(17:40):
day as just a layperson andactivist trying to interact with
people both on the phone, inreal life and online. Most people
haven't quite gotten itthrough their heads that we do not
live in a fixed rate peggedcurrency regime. We live in a free
floating fiat currency. And alot changed there. And that happened
(18:03):
in 71 when the Bretton WoodsAccord ended up. Would you mind just
quickly going over the BrettonWoods Accord and what changed in
71 and why that impacts ourability to do imports and exports
in a significantly different way.
Sure, most of us live now in aflexible exchange rate world, but
(18:25):
that wasn't always the case.So what's an exchange rate? An exchange
rate is just the rate at whichyou sell US Dollars to Australia
against Australian dollars.And after the Second World War, there
was a major conference, theBretton Woods Conference, that brought
all of the victors together.You know, all the large nations that
(18:45):
had participated in thevictory. And the war came at the
end of the Great Depression,of course, and there was huge financial
instability that reallystarted in the 1920s, and the famous
stock market crashes in 1929were manifestations of that. But
there was a lot of currencyinstability. In other words, currencies
(19:08):
would fluctuate quite wildly.And that's somewhat undesirable because
if you're a manufacturerthat's exporting commodities to the
rest of the world, forexample, and your export revenue
is determined by the exchangerate, yet your costs are determined
domestically. And so if youhave these wild shifts in the value
(19:29):
of your revenue because theexchange rate is shifting, yet your
costs are not as unstable,that makes it very hard to plan.
And in very short spaces oftime, if there are wild fluctuations
in exchange rates, a companythat's financially viable can become
within weeks, financiallyunviable. So that's a reality. And
(19:52):
it was considered that at theend of the Second World War, once
the peace had come and nationsgot together and decided, how are
we going to run peacetime nowthat we have stopped bombing the
hell out of each other, howare we going to do it? And one of
the things that was decidedupon was to try to stabilize the
(20:13):
global financial system toattenuate these wild fluctuations
in exchange parodies betweennations. And that there was a meeting
at Bretton woods which is intown, in the east part of American,
and they agreed on aconvertible gold standard. Now, what
that means is that theydecided that the US and the US were
(20:36):
bully boys in this process. Bythe way, other nations were bullied
by the Americanrepresentatives at Bretton woods.
And as a consequence, the USDollar became the center piece of
this system. And there wassome logic in that, by the way, that
given the trading strength ofAmerica, the manufacturing strength,
(20:56):
and the way in which thedollar had permeated the global financial
system, the US Dollar, I'mtalking about the US Dollar was at
the center of the system, andit was tied at a fixed rate to an
ounce of gold. And then allother currencies were fixed against
the US Dollar at agreedparities that were sort of worked
(21:17):
out to reflect their tradingrelationships with each other. So
all the currencies then had avalue against each other as a consequence
of that. And the Bretton woodssystem decided that the role of the
central banks in each of ourcountries would be to ensure that
those agreed parities betweenthe currencies were kept. Now, how
(21:41):
would that happen? If youthink about a country that's running
a trade deficit, which meansthat it's importing more than it's
exporting, that also hasimplications for the demand and supply
of its currency via the othercurrencies. So in the very simple
example would be, let's saythe Australia is running a deficit
against China, wasn't in thesystem, but a deficit against Britain,
(22:05):
for example, then that meansit's importing more than it's exporting.
And what exports leads to interms of financial flows is a demand
fuel currency, because thecountry that's importing your exports
has to get Australian dollars.So in this case, British people who
were buying Australian exportswould have to buy Australian dollars
(22:28):
in the foreign exchange marketto pay the exporter in Australian
dollars. And so that created ademand for your currency. But also
the Australian importers whowere importing from Britain would
have to buy sterling in theforeign exchange market to pay the
British exporters for theimports that we were getting from
them. And so you can see thatif a country is importing more than
(22:52):
it's exporting, then on allthe balance of transactions, the
supply of their currency willbe greater than demand for their
currency. And as aconsequence, there would be downward
pressure on the Australiandollar in that example. Now, under
the Bretton woods system,there were very narrow ranges in
which a currency couldfluctuate, but essentially the central
(23:13):
bank had to maintain theparity. So in that example, there
would be downward pressure onthe Australian dollar via V the sterling.
And the Australian Centralbank, the Reserve bank of Australia,
would have to resolve thatimbalance of that excess supply of
Australian dollars by buyingup the Australian dollar in the foreign
(23:34):
exchange market and sellingforeign currencies. Because you've
got to buy the Australiandollars up. They would have to buy
them with, in this case,British sterling. And that was the
system. And what it meant wasthat the domestic policy was always
compromised because if fiscalpolicy was too expansionary, in other
words, issuing too manyAustralian dollars into the economy.
(23:57):
Now remember that the supplyof your currency is not just the
amount that's floating aroundin the domestic economy, it's also
the amount that's in theforeign exchange markets. And so
if the government was tryingto maintain very low unemployment,
for example, by using fiscaldeficits, spending more Australian
dollars than it was bringingback out in taxes, that would add
(24:21):
to the supply of Australiandollars. And in a case where there
was an external deficit, atrade deficit which was putting downward
pressure on the Australiandollars, the Bretton woods system
demanded that the central bankwithdraw those Australian dollars
by buying them up. And so youcan see that there was a conflict
between the responsibilitiesof the central bank to the Bretton
(24:43):
woods system and the domesticpolicy aspirations to maintain wellbeing
and low unemployment andeconomic growth. So you had this
circumstance where it wasreferred to as stop growth patterns.
So for Australia, for example,which was running trade deficits,
the government would try tostimulate growth and reduce unemployment,
(25:05):
but that would increaseimports and cause downward pressure
on the exchange rate, that theReserve bank then had to withdraw
those dollars and increaseinterest rates to attract foreign
capital investment, whichincreased the demand for your currency.
And as a consequence, thegrowth in the economy would come
to a halt and unemploymentwould start rising. So you had this
(25:28):
period during the 50s and the1960s where countries that ran trade
had what were called in thosedays, weak trading fundamentals.
In other words, they ran tradedeficits and they were importing
capital or consumption goods.Well, they were always up against
it because they were alwaysfacing periods of economic stagnation
(25:50):
brought about by the centralbank having to withdraw their currency
from the foreign exchangemarket and the fiscal authorities,
the treasury and financeauthorities, having to run tighter
fiscal policy, in other words,reduce the size of deficits to stifle
imports and push upunemployment and cause recessionary
(26:11):
type biases. And that systembecame unviable by the 1960s. What
you had were countriesengaging in what were called competitive
devaluations. Oh, and by theway, one of the other problems was
that, of course, theAustralian government doesn't produce
sterling or US dollars orFrench francs or any of the other
(26:31):
currencies. And so the centralbank, the Reserve bank of Australia,
only had finite capacity inwhich it could defend an exchange
rate that was facing downwardpressure. And so then the question
was, under the Bretton woodssystem, what happens when the central
bank runs out of money, aforeign exchange in which it could
sell to buy up its owncurrency to bolster its value towards
(26:53):
the parity? The answer in theBretton woods system was the creation
of the imf. And theInternational Monetary Fund was created
as a body that would makeloans to nations that were running
short of foreign exchange, sothat it had plenty of currency, foreign
currency, in which it couldconduct its interventions. Now, then,
(27:14):
you had the problem thatcountries would become burdened with
debt through the IMF. And bythe late 1960s, the IMF then started
to attach conditionality tothat debt, which has now become their
common practice. And thatconditionality was the sort of monetarist
ideology started to take overin the academy and the forebears
(27:36):
of neoliberalism, the IMFstarted to become very aggressive
in the conditionality itimposed upon nations that were seeking
bailouts in terms of foreignexchange loans. And those conditionalities
were always biased towardsbeginnings of the privatisation,
the beginnings of tight fiscalpolicy, increased unemployment. So
(27:59):
nations in those circumstanceswere facing social instability. It
was becoming politicallyunviable for nations to operate within
this system. And so in the1960s, under the IMF agreements,
a nation could approach theIMF if its trading fundamentals were
so configured that it wasalways facing downward pressure on
(28:20):
its exchange rate. Obviously,that was unviable, not sustainable.
So it could approach the IMFand get approval to revise the parity
that it had been originallyagreed. Now, by the 1960s, there's
a strategic practice calledcompetitive devaluation, where Britain
would go to the IMF anddevalue the sterling. And then, of
(28:42):
course, that would then giveit a competitive advantage against
all the other nations. So thenFrance would go and get a devalue
as well. And you've got theseleapfrogging devaluations which just
made the system unviable.
You are listening to Macro NCheese, a podcast by Real Progressives.
We are a 501c3 nonprofitorganization. All donations are tax
(29:06):
deductible. Please considerbecoming a monthly donor on Patreon
Substack or our website,realprogressives.org now back to
the podcast.
And so by the end of the1960s, it was quite clear that the
system was becoming unviable.The American government was running
(29:28):
large external deficits, andin part because it was prosecuting
the Vietnam War and spendingso much and importing so much. And
of course, under the Brettonwoods system, ultimately, the US
Government stood ready toconvert all US Dollars into gold
at the fixed parity if nationswanted to. So nations that were running
(29:51):
trade surpluses against the USin the 1960s, in all the European
nations, mostly, they wereaccumulating large foreign reserves
denominated in US dollars. Andof course, by the end of the 1960s,
with a huge spending on theVietnam War effort that the US Government
was making, the volume of USDollars floating around was huge.
(30:14):
And the French and othernations, but the first ones were
the French, started to worryabout the value of their US Dollar
reserves. And so the Frenchdecided that they were going to,
through the Bretton woodssystem, go to the US Government and
swap the US Dollars that theywere holding because of their trade
surpluses for gold. And the USGovernment started to formed the
(30:39):
view that they were going tolose Fort Knox reserves. They were
going to have to hand overhuge volumes of gold stocks to countries
that were holding these USDollar reserves who legitimately,
under the Breadwood system,could convert them into gold. And
that is why President Nixon inAugust 1971, decided that was unsustainable
(31:03):
for the US that they were notgoing to send their gold to France.
And at that point, he withdrewfrom the Bretton woods system. And
it took a few years and a fewhiccups and a few retries of the
Bretton woods system under theSmithsonian agreement. But by 1975,
most of the world agreed thatit just wasn't a sustainable system
(31:24):
to have all exchange ratesfixed between countries with quite
different industrialstructures and quite different trading
strengths. And most of theworld floated. The European nations
didn't, and that's a separatestory, but that's a legacy of decisions
that they had made in the1960s as part of European integration.
But most of the world floated,and once we floated, of course, that
(31:48):
trade imbalances didn't haveto be resolved by causing shifts
in domestic economic activityto stifle inputs and push up interest
rates to attract foreigncapital. The way in which a trade
imbalance could be attenuatedwas through the exchange rate. And
so if a country's running apersistent trade deficit, importing
(32:10):
more than it's exporting,well, then under a flexible exchange
rate system, its exchange Ratewill just start to depreciate somewhat.
And the depreciation thenmakes its exports much cheaper to
foreigners, makes imports muchmore expensive in local currency
to the consumers, and overtime, that creates forces that reduce
(32:32):
the imbalance. The domesticpolicy then is freed to pursue domestic
objectives like fullemployment and prosperity, good health
systems, good educationsystems, they don't become compromised,
as they were under the Brettonwoods system, to defending the exchange
rate. So that's sort of, in aNutShell, Bretton Woods 101, obviously,
(32:53):
that was an.
Important piece of historythat we kind of really need to wrap
our heads around, because thatis the world that we live in today.
One of the things that jumpsout is this fear of the bond vigilantes
and the money marketsrebelling. You touched on it in there
as one of the things that wereparticularly challenging during the
(33:15):
Bretton woods system. Buttoday, what kind of power does money
markets and these kind of bondquote unquote vigilantes have on
currency issuing nations? Whatdifference does it make? If a country
has a high import to exportratio and they also spend heavily
domestically on infrastructureand healthcare and education, et
(33:38):
cetera, what could they do?Based on the fears of losing confidence
in the dollar and the bondvigilantes and these money market
folks going nuts out, do theystill have this power or is it largely,
we assume they have the power,but they really don't have the power
of currency issuing nations.Understood. What are we dealing with
there?
Well, certainly thevigilantes, as you call them, they
(34:02):
could really cause havoc underthe fixed exchange rate system, because
they knew under that systemthat the central bank had the responsibility
to defend the exchange rate.And so they could make bets on what
they were able to anticipate,what the government would do. Now,
under a flexible exchangerate, they've got less capacity to
(34:22):
do that. Now, there'scelebrated examples, Black Wednesday
in 1993 in Britain, where thiswas the Soros attack on the British
pound. What Soros was bettingwas that the British government would
be forced to push up interestrates. And of course, he was betting
(34:43):
causing lots of instability inthe British sterling relative to
other currencies. And heunderstood that under a fixed exchange
rate, because Britain was tiedto the European Exchange Rate Mechanism,
which they were part of thefixed exchange rate system. And Maggie
Thatcher had really opposedthat. And John Major took them into
(35:04):
it after Thatcher had gone.But what George Soros knew was that
the British government underthat fixed exchange rate system would
try to defend the pound, andthat if he undermined the pound's
value by selling it short, inother words, anticipating that the
pound would drop in value. Andso in the speculative markets he
(35:25):
is entering contracts of thatilk. Then he knew that the British
government had no option ifthey stayed in the system. And in
that case he was correct, hecould cause havoc. And what happened
on that Wednesday was that bylate afternoon it became quite obvious
that the British governmentpushed interest rates up, I'd forgotten,
17% or something in a day orsomething, desperately trying to
(35:48):
stay within their fixedexchange system. And they couldn't.
And so they withdrew and theynever re entered that system. And
they floated to sterling afterthat. Now, in a flexible exchange
rate system, the capacity ofthe speculators to cause havoc is
less obvious. And in themodern sense they talk about the
trust moment. A couple ofyears ago when Liz Truss became,
(36:10):
for the shortest periodpossible, Prime Minister of Britain.
The financial markets turnedagainst her because she was proposing
spending increases. Theproblem for her was that she had
such a tenuous hold on theleadership and the financial markets
formed the view that if theyput pressure on the sterling that
(36:32):
she would reverse herposition. And she did because she
did have a tenuous hold on thePrime Ministerial position. They
were betting that the sterlingwould depreciate and they won out
because the government folded.Now you think about Japan. Japan
runs huge deficits and has thelargest gross public debt of any
(36:54):
country. Historically, thathas been the subject of massive short
selling. What that means ispeople are predicting that the government
will roll over and increaseinterest rates and reduce government
spending and kowtow to thefinancial markets bets who are betting
that interest rates will rise.Well, all of those financial market
(37:16):
speculators have lost billionsover the years, billions in those
bets. And the reason isbecause the Japanese government is
confident in its own positionand is resolute and does what's best
for Japan. Whereas the LizTruss moment was because Liz Truss
wasn't confident. She didn'thave a hold on power, she didn't
(37:37):
have a defined economicstrategy. It was just all over the
place. The Tories were inchaos and the financial markets knew
it. And think about the otherexample, Iceland during the global
financial crisis. Tiny littlevolcanic rock out there. During the
buildup before the globalfinancial crisis, it had a huge reconfiguration
(38:00):
of its financial system, itsbanking system and all these foreign
banks went in there andmanipulated the system and took the
most unbelievable speculativepositions and were offering ridiculous
returns to depositors and thefull neoliberal catastrophe. And
of course, when the globalfinancial crisis came, Iceland's
(38:24):
banking system, which washeavily foreign owned, collapsed.
One of the largest collapsesin history. Now the Iceland currency
started to depreciate. Whatdid the Icelandic government do?
It introduced capitalcontrols. In other words, it prevented
the financial markets fromtaking out currency and swapping
(38:45):
it for other currencies as away of reducing losses. And the big
hedge funds in America wereexposed to this and they couldn't
get their money out. They wentinto international courts. They made
all the sort of standardthreats, will kill your currency,
will destroy your economy, itwill wreck your financial system,
(39:05):
blah, blah, blah. TheIcelandic government stood firm under
presidential edict not to bowto the pressures of the global financial
markets. And the internationalcourts ruled that the sovereignty
of Iceland was the prime thingand that the financial interests
of the hedge funds was asecondary matter. And so they wouldn't
(39:28):
rule against the Icelandicgovernment. In other words, establishing
the sovereignty of the electedlegislature in Iceland soon after.
The problem for them was thatit started to appreciate too much
and in the currency value.During the early days of the GFC
prompted a massive touristboom. And everybody wanted to do
the loop of Iceland. That'sthe famous tourist loop. So its currency
(39:52):
started to get stronger again.The government of Iceland successfully
defended itself against someof the largest American hedge funds.
So that's an example thatshows you that the legislature has
the jurisdiction the financialmarkets don't. You know, the financial
markets tried to hijackIcelandic ships in French ports and
(40:14):
things like this to get backmoney, and they couldn't. It was
ruled that the Icelandicgovernment had legislative jurisdiction
and were operating within thatjurisdiction. So the point of that
example is that that was asensible decision by the Icelandic
government under presidentialedict to defend the interests of
Iceland against the interestsof foreign capital. It was hugely
(40:37):
successful and a role modelfor others. The other example I could
give was Argentina in 2001,when the Argentinian economy had
foolishly borrowed a lot ofmoney to build export capacity denominated
in US dollars. And for a timethat seemed to be a good idea because
(40:58):
the mining and primarycommodity sector was booming during
the 90s, the primarycommodities boom that a lot of extractive
countries like Australiabenefited from. And of course, that
came to a halt in the late 90sand the export revenue started to
dry up. Of course, if youborrow in foreign currencies, you've
(41:18):
got to be able to earn foreigncurrencies through exports to pay
your loans back. And when yourexport revenue starts to dry up,
which it did in theArgentinian case, they realized that
they were running out of thecapacity to service the public debt.
And as a consequence they hadthe financial meltdown in December
2001. And what did theArgentinian government do? It sensibly
(41:43):
brought in basically a jobguarantee, a sort of modified version
of an MMT job guarantee. I hadsome doing in that indirectly, but
they also defaulted on all oftheir foreign currency denominated
debt. Now when they did that,the IMF and all of the hedge funds
threatened them withextinction basically and that they
(42:06):
would never get another pennyfrom anywhere. Now soon after they
stabilized their economythrough this head of households employment
program, they started torecover from the crisis. Suddenly,
foreign direct investmentstarted to come back in again. Now
it wasn't from America or thefirst world sources, it was from
(42:28):
Venezuela and other countriesthat typically were seizing an opportunity
to recycle their own tradesurpluses into returns because Argentinian
economy was resuming growth.And then exchange rates started to
appreciate again, wasn'tdestroyed. By 2005, the central bank
(42:49):
in Argentina was strugglingwith an excessively valued Argentinian
currency. And of course thefirst world investors started to
flood back in. And I recall apress conference where the Minister
for Finance was asked a simplequestion. How do you explain the
fact, sir, that you defaultedon all foreign currency loans, yet
(43:10):
five years later investors arecoming back. And if my foreign language
translation is accurate, hereplied one word, greed. And the
point he made was that all ofthe commentators and economists,
they're ideologues. Whereasthe bond and foreign investment community
don't invest on ideology, theyinvest on margin. With the economy
(43:32):
growing again so strongly by2005, 6, 7, the investors could see
margin and arbitrageopportunities. It's what drives them,
not ideology. Now theArgentinian economy since has been
mishandled, but that's anothermatter. But I think those are illustrative
examples of why the idea ofbond vigilantes is just a preposterous
(43:57):
notion For a nation that'swell managed. The research evidence
is very clear what providesfor exchange rate stability. It's
a well educated workforce,stable government, well articulated
and enforced rule of law withrespect to contracts. Foreign investors
(44:17):
don't scared of investing incountries where they're not sure
they're going to get theirmoney back. But for countries like
Australia, Australia's beenrunning external deficits of about
3.5% of GDP since the 1970s.You know, not small and our currency
fluctuates a bit. But by andlarge we have no trouble attracting
(44:37):
foreign direct investmentbecause they know they're going to
get their money back becausewe have stable laws, stable government,
well educated workforce whichprovides the sort of stable environment
for investment security.Various times our exchange rate fluctuates
from $0.50 US dollar to adollar US dollar. Most of us don't
(44:59):
even feel the difference. BMWand luxury cars go up in price because
we import them. Snow holidaysto the Swiss Alps go up in price.
But for the average camper inAustralia, the average citizen who
doesn't have a BMW car or aMercedes or a Maserati and doesn't
(45:19):
have annual ski holidays tothe Swiss Alps, it's really water
off a duck's back. It doesn'treally matter. Some things get a
bit more expensive and thenthey get cheaper again. We're an
economy that has a fluctuatingexchange rate and we're one of the
wealthiest countries in the world.
I would be remiss if I did notask you this final question, and
this is to me what a lot ofpeople are worried about. We touched
(45:42):
on this with Bretton woodswhen the dollar was the global hegemon,
if you will. Now we're dealingwith a basket of reserve currencies
and floating exchange rates.And obviously, yes, the dollar is
the primary, at least withinthe. I think it's the G10 countries.
But ultimately, what does thereserve currency at this point have
(46:04):
to do with trade and balanceof trade? Obviously the US has let
its dollar kind of matriculatethrough all these different countries
and it's been widely justsaturating around the world. But
what does that do at thispoint? I mean, people don't actually
use dollars typically in theircountry. Maybe they do offline, but
it's not like they're used perse. I mean, these are facilitating
(46:27):
trade. So what does that do,if anything?
The fact that a significantproportion of foreign trading contracts
are denominated in US dollars,that's a fact. Now, that proportion
has declined significantly andit's not inevitable that it will
remain as high and itdefinitely won't. The euro and the
(46:50):
Chinese currencies areexpanding in importance in world,
but the reality is that sinceBretton woods, since the end of the
Second World War, the USdollar is used as the denominator
for a significant proportionof trade in contracts. Now what that
means is that people then haveto get hold of the US dollar to engage
(47:14):
in trade. Now it's not justtrade with the us, it's trade with
everybody. The fact thatpeople in that context are required
to get hold of US dollars inorder to facilitate and execute trading
contracts that gives the USdollar a particular status. And it
means effectively that the USnation can run larger deficits at
(47:38):
the same value of the dollarthan it could otherwise if there
was less demand for itscurrency. So that's a fact. Now what
does that mean? It means itcan run larger external deficits
for longer withoutexperiencing loss of value of the
dollar. That's a fact. Nowwhat does that mean for domestic
policy? Well, not much. Therest of the world doesn't issue the
(48:00):
US dollar. The US governmentissues it as the only institution
in the world that issues theUS dollar. And so in terms of its
domestic policy ambitions, ithas no financial constraint on how
many dollars it can spend inthe domestic economy. So it can always
ensure that all the productiveresources that are available to it
(48:22):
domestically can be fullyutilised. Then think about, say,
Australia, can Australia enjoythat same capacity? And the answer
is Australian dollar isn't areserve currency. Not many traded
contracts are denominated inAustralian dollars. But does that
undermine the capacity of thefederal government in Australia to
(48:44):
ensure that all productiveresources are fully utilised within
Australia that are availableto it? And the answer is, of course
it doesn't undermine that. TheAustralian government issues the
Australian dollar and it's theonly institution that issues the
Australian dollar. Just likethe US government in terms of the
US dollar, the Australiangovernment has no financial constraints
(49:05):
on its spending. Now all itmeans is that there will be less
demand for the Australiandollar than there is for the US dollar
in the world foreign exc whichmeans that the size of the external
deficit that the Australiangovernment can run at a stable exchange
rate is probably less than thesize in relative terms than the US
(49:27):
nation can run. That's all itmeans. It doesn't reduce the capacity
of the Australian governmentto ensure that all of its domestic
available resources are fully employed.
MMT has two primary purposessimilar to the Fed. Ironically, you
know, we want price stabilityand we want full employment. With
that in mind, when you thinkabout the fact that most countries
(49:50):
don't have full employment andmost countries are experiencing either
inflation because of monopolypower, et cetera, but they also experience
import pass through inflationas well. And I don't believe these
are immutable, that they can'tbe solve. But what is it about MMT
(50:11):
and deficits and understandingcapacities at home versus the import
side that folks focus on? Whatthe US dollar is no longer this,
you guys are going tocollapse, blah blah blah. There's
no one else that gets this.Literally everyone out there is running
around with their hair onfire. And the analysis is Almost
(50:31):
unbearable to listen to.Correct me if I'm wrong, but MMT
is not really dealing with theindividual purchases on Amazon. They're
talking in aggregates. BecauseMMT is really macroeconomics. That's
the textbook macroeconomics,mmt. What is it about MMT that people
really need to understand asthey try to evaluate full employment,
(50:53):
price stability and thisimport export kind of world that
consumes?
It's understanding what thecapacities of the currency issuer
are and what constraints thecurrency issuer faces. For the mainstream
analysis that you read in allof the papers every day and watch
on TV and all the stupidprograms on the tv, et cetera, they
(51:16):
start with a fiction that thenational government is like a household.
And once you frame it in thatway, then you're really invoking
all of our personalexperiences as households as a means
of creating an understandingof the way in which the national
(51:37):
government can operate itscapacities and its constraints. And
of course my experience as ahouseholder provides me with no intelligence
as to what the capacities ofthe Australian government are. Nor
is your experience as ahouseholder any guide to what the
capacities of the US nationalgovernment are. $it's that false
(51:58):
starting point that leads toobsessions about financial constraints
that aren't there. There areno financial constraints on the US
dollar. There are politicalconstraints on the US government,
there are politicalconstraints, self imposed financial
constraints. But in rawintrinsic monetary terms, the central
(52:19):
banker of the US governmentcan type what, whatever number it
likes into bank accounts andthat will be validated funded spending.
That's the reality. There areno financial constraints. And so
mainstream just get obsessedat that level. And they have all
sorts of complex discussionsabout sustainable financial ratios
(52:43):
and fiscal space and all ofthis stuff. But once you get beyond
the fact that the USgovernment has no financial constraint,
then the question is, what arethe constraints then? Can it just
spend to infinity? And ofcourse the answer is definitely can't
do that. And the reason isbecause the constraints are resource
constraints, not financialconstraints. And that throws the
(53:08):
attention of an analyst andthe reader or the listener or whatever
into a totally different logicspace and a totally different comprehension
framework. Because if we'reworried about, oh, if there's resources
that are idle, that can bebrought back into productive use,
then if a government has nofinancial constraints, it can always
do that. And if it doesn'thave resource availability, then
(53:32):
its fiscal options are muchmore limited. And if it tries to
buck against the lack ofresources available, then it will
cause inflation. And thatdiscussion then leads to discussions
about what's the purpose oftaxation? Well, if the government
doesn't need to be fundedthrough taxes, why do you tax? Well,
you tax to stop us havingmoney so that we can't spend as much
(53:55):
and that creates idleresources. And so you get a totally
different comprehension ofwhat taxation is in a modern monetary
system. So if you start offunderstanding that's where the mainstream
go or go wrong by thinking interms of financial constraints that
determine the constrain ahousehold decision make, if you start
(54:15):
off at that level and makethat mistake, well, then you can't
retrieve from that situation.And that's really the contribution
of modern monetary theory.
Well said, Bill. Well said.Thank you so much for this. This
was very nicely done. Do youhave any new books coming out here
soon? You got any other workthat we should be aware of?
We're working on a revisedversion of the textbook and that'll
(54:38):
be out early next year, Ihope. And our publisher Bloomberg
Press has now approved a firstyear principles MMT book. So the
current textbook is a two yearsequence. So it goes from beginner
to somewhat sophisticated.We've now got a second book that
will be delivered in 2027. Itwill just be a really easy book in
(55:02):
your context, collegestudents, but non economic majors.
So a basic principles book.And I think that book will be accessible
to all sorts of people, notjust university students. And then
there's another book I've gotSimmering Away that will come out
next year on de growth andsustainability and empire and colonialism
(55:23):
and all that sort of stuff.And there's another project that
will be out later in the year.I hope it'll be in Japanese language
on the challenge of Japan. Sothat's another project I'm working
on with my colleagues at Kyoto.
Wow. And you are really busy, sir.
You only live once, Steve, soyou gotta pack it in.
(55:44):
Amen, brother, Amen. Allright, well you make sure you tell
your wife I said hello. Thankyou once again for always making
time for me. I really amexcited about this. I think this
is a really compact, tight, onpoint talk. So thank you for all
of us. Folks. My name is SteveGrumbine. I am the host of Macro
and Cheese. I'm also thefounder of Real Progressives, the
(56:06):
nonprofit that sponsors thispodcast. We are a 501c3 not for profit
organization and that meansthat we survive on your donations,
which by the way are taxdeductible. So please consider donating
to real progressives. RealProgressives has put macaron cheese
out every week for almostseven years. Think about that. Seven
(56:28):
years without missing a week.And we keep going because we feel
that this is the mostimportant information that you could
get your hands on. And thanksto guests like Bill Mitchell who
provide their time sograciously, I can't even begin to
tell you how much I thank youfor that. Please consider following
us on our webpage, which isrealprogressives.org, please also
(56:50):
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And with that, on behalf of myguest Bill Mitchell and myself, Steve
(57:13):
Grumbine, Macro and Cheese, wewe are outta here.
Production transcripts,graphics, sound engineering, extras
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