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The Weekend Quiz – March 10-11, 2018

Welcome to The Weekend Quiz. The quiz tests whether you have been paying attention or not to the blogs I post. See how you go with the following questions. Your results are only known to you and no records are retained.

1. A sovereign national government can run a balanced fiscal position over the business cycle (peak to peak) as long as it accepts that, after all the spending adjustments are exhausted, the private domestic balance will mirror the external balance. That means a country running an external deficit will have an increasingly indebted private domestic sector.

2. A nation that manages its currency via a currency board (for example, Estonia and Latvia) has to have sufficient foreign reserves to match the outstanding central bank liabilities (reserves and cash outstanding). Under this arrangement it can always guarantee 100 per cent convertibility but has to endure deflationary tendencies unless it runs external surpluses.

3. Modern Monetary Theory (MMT) allows for the possibility that trade union power can cause mass unemployment.

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    This Post Has 8 Comments
    1. Did Estonia and Latvia use Currency Boards before adopting the euro? So I understand. But not today of cource. Swedish banks were acting like a shadow banking system in the Baltics selling people loans en masse defacto denominated in euros(pegged!). This ended up in a foreseable crisis 2008-9 when local currencies crashed putting the borrowers under water with revalued debts and falling real estate-prices. I was surprised the swedish centralbank and regulation authorities was not proactive enough?

      I wonder how these boards reacted? They must have known swed banks were selling naked euros with forward deliveries? A classical debt trap for countries with non-floating currency. Swedish bankcustomers were fooled to borrow in deutche marks during the ERM-system to earn the rate-differential. It worked well for some time! Hungary also had their housing-bust in euro!

      When capital were fleeing these baltics countries the Currency Board-system did not allow(as I understood) the central bank to “print money” for the local banks.

    2. @ThorLeif

      “When capital were fleeing these baltics countries the Currency Board-system did not allow(as I understood) the central bank to “print money” for the local banks.”

      It’s funny, because the ECB needed an aggregated $8 trillion from the Fed.

      See also

      On page 129 they describe how the Fed opened a swap line to the Swiss National Bank so it could funnel dollars to UBS so they could create a SPV to buy $60 billion in bad assets. Thus the Fed printed a lot of money for big private sector finance firms in 2008 and after. The Fed’s signaling unlimited liquidity saved world markets. Constraints on public budgets are waived for private sector budgets.

      The Fed should have opened swap lines to many more central banks, like Greece. The ECB used swap lines to bail out private banks, but took a hard stance with public budgets.

    3. “after all the spending adjustments are exhausted”

      Note that as much as $21 trillion in unsupported adjustments have accumulated over the decades.

      “As a result of the above-noted circumstances, the federal government’s ability to determine the impact of these differences on the amounts reported in the accrual-based consolidated financial statements is significantly impaired.”

      When you total up all the unsupported adjustments over the decades the GAO has been noting them in appendices and footnotes, Prof. Mark Skidmore found $21 trillion.

    4. Robert Mitchell 10:44;

      In fact both the IMF and ECB incl swedish Riksbank had to assist the Baltic states. But not with swap-lines to my recall(loans and guaranties). Sorry but the FED could not assist euro-member countries directly. National central banks in the euro-zone have all given up their sovereignty according to the treaty. By the way; US FED demand high quality collateral. Greek government bonds i.e were at the time falling towards zero without ECB assistance(bailout of european holders(banks i.e).

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