Trade and external finance mysteries – Part 1

I have received many E-mails and direct twitter messages overnight and today following the ‘debate’ on Real Progressives yesterday, where trade issues and related financial transactions were discussed. I saw that section of the debate (after the fact) and concluded that only one of the guests knew what happened when nations exported and imported. But it appears that readers of this blog who listened to the debate were confused by what they heard. So, today, by request, I aim to clarify a few of these issues. They are in fact fairly simple to understand once you trace through the transactions carefully, so it is a surprise that basic errors were expressed in the ‘debate’. So here is the way Modern Monetary Theory (MMT) helps you understand trade transactions.

There appears to be a lot of confusion about the external economy in a fiat monetary system. Many economists do not fully understand how to interpret the balance of payments in a fiat monetary system.

So it is no surprise that the general public struggles in this domain.

For example, most economists will associate the rise in the current account deficit (exports less than imports plus net invisibles) as an excess of investment over saving.

The claim is then that the only way a nation can counter that imbalance is through foreign investment (via an offsetting the capital account surplus) which means that the net accumulation of foreign claims on the nation (via direct investment income, debt repayments or equity dividends) increases.

This is the so-called ‘living beyond our means’ narrative.

I considered these questions in detail in this blog post – Modern monetary theory in an open economy (October 13, 2009).

In the ‘debate’ yesterday, we heard that nations with current account surpluses are more robust and that current account deficits reduce potential growth because the increasing foreign ownership reduces profit retention and hence investment.

The claim is unsustainable in fact.

First, there was a denial that exports are a cost and imports are a benefit. That should be undeniable.

For an economy as a whole, imports represent a real benefit while exports are a real cost.

Exports mean that we have to give something real to foreigners that we could use ourselves – that is obviously an opportunity cost.

Imports represent foreigners giving us something real that they could use themselves but which we benefit from having. The opportunity cost is all theirs!

Thus, net imports means that a nation gets to enjoy a higher material living standard by consuming more goods and services than it produces for foreign consumption.

Further, even if a growing trade deficit is accompanied by currency depreciation, the real terms of trade are moving in favour of the trade deficit nation (its net imports are growing so that it is exporting relatively fewer goods relative to its imports).

German workers, for example, give up hours of labour time, and utilise all sorts of raw materials to make motor cars and motor cycles, which they then put on ships and send elsewhere for the enjoyment of others. That is a real cost to Germany because it could use those productive resources for themselves.

So, on balance, if we can persuade foreigners to send us more ships and airplanes filled with things for us, than we have to send them in return (net export deficit) then that has to be a net benefit to us in real terms.

How can we have a situation where foreigners are giving up more real things than they get from us (in a macroeconommic sense)?

The answer lies in the fact that our current account deficit ‘“finances’ their desire to accumulate net financial claims denominated in $AUDs.

Think about that carefully. The standard conception is exactly the opposite – that the foreigners finance our profligate spending patterns.

In fact, our trade deficit allows them to accumulate these financial assets (claims on us).

We gain in real terms – more packed ships full coming in than leave – and they accumulate $AUDs, in the first instance.

What happens to those $AUD stocks is another question (see below).

If the foreigners change their desires to hold financial or other assets denominated in $AUD then the trade flows will reflect that and our terms of trade (real) will change accordingly (because they will make it harder for us to get foreign exchange to buy the imports).

It is possible that foreigners will desire to accumulate no financial assets in $AUD which would mean we would have to export as much as we import.

In that case, a nation would have to adjust its export and import behaviour accordingly. If this transition is sudden then some disruptions can occur. In general, these adjustments are not sudden.

Now what are the ‘monetary’ effects of this.

A simple understanding that net financial assets can only be created and destroyed in the non-government sector through transactions with either the central bank or the treasury (the ‘consolidated’ government sector).

Government deficits are the sole source of net financial assets for the non-government sector. All transactions between agents in the non-government sector net to zero.

This accounting reality means that if the non-government sector wants to net save (spend less than it earns) in the currency of issue then the government has to be in deficit.

The sectoral balances derived from the national accounts generalise this result and show that the government deficit (surplus) always equals the non-government surplus (deficit).

Fiscal surpluses destroy non-government wealth by forcing the latter to liquidate its wealth to get cash and destroy liquidity (debiting reserve accounts), which is deflationary.

With an external deficit, fiscal surpluses result in increasing private domestic sector debt levels and cannot represent a sustainable long-term growth strategy.

The following graphics will help trace out the transactions that accompany trade.


  • I wish to buy a car, which is manufactured in Japan by a company that has costs in Yen and measures its profit and loss in Yen.
  • The factor ships cars to Australia to its dealer network and bills the network in Yen.
  • The car dealership accepts the yen-liability but sells the Japanese-made car in $AUD.
  • If I pay cash or wave a credit card across a sensor at the car dealership (digital cash), my bank reduces my deposit balance by $A20,000 (the price of the car) and the car dealer’s bank would increases the dealers deposits by the same amount.
  • The central bank (RBA) records a decrease in reserves for my bank and a corresponding increase in reserves for the car dealer’s bank as part of the clearing process.
  • The debit to my bank account is debited and the credit to the car dealer’s account means that the ownership of the $AUD has changed from me to the dealer. No new net financial assets are created.
  • If I take out a loan to buy the car, then my bank’s balance sheet now records the loan as an asset and creates a deposit (the loan) on the liability side. When I hand over the cheque to the car dealer (drawing on the loan), the dealer now has a new asset (bank deposit) via the fact that loans create deposits within the system. Again, no new net financial assets are created.

What happens next depends on the aspirations of the car manufacturer.

1. They might want the invoice paid in Yen.

2. They might be happy (if the dealers are wholly owned by the manufacturer) to leave the sales revenue in $AUD accounts at Australian banks.

3. They may decide to purchase AUD-denominated assets (financial or otherwise).

Whatever choice they make, at this stage, the export surplus (1 car) manifests in an accumulation of $AUD assets in the form of a bank deposit (or equivalent).

What happens if the car dealer decides to pay the invoice from the manufacturer? Clearly, there is a currency mismatch. The dealer has $AUD financial assets whereas the invoice requires Yen to be transferred.

  • The car dealer has $AUD and needs to get ¥. After deducting their profit, the car dealer will then enter the foreign exchange market (maybe via their bank) and negotiate an $AUD for Yen sale. So someone is currently holding Yen and desires to hold $AUD for whatever purpose.
  • A contract is initiated and the two currencies are exchanged.
  • The car dealer then transfers the Yen purchased from the counterparty to the Japanese bank of the car manufacturer (we ignore hedging etc, which would have been in operation to cover the uncertainty of the mismatch between revenues and costs).
  • The resulting financial effects are: (a) The AUD balances in the Australian financial sector remain the same but are owned differently than before the export occurred. (b) the Yen balances in the Japanese financial sector remain the same but ownership has transferred from the Foreign Exchange dealer to the car dealer and finally to the car manufacturer.

If the manufacturer decided to accept payment of the invoice in $AUD (then the foreign exchange market transaction would be unnecessary) and the transaction would just mean that the Japanese car company would have a new $AUD financial asset (bank deposit).

What it did with that deposit doesn’t alter the fact that all the export has achieved (other than allow me to have a new car) is transfer the ownership of my $A20k deposit to the car firm (including the dealership).

It is more complicated if the $AUDs are converted into Yen, but not overly so, as explained above.

The transaction (and by accounting definitions) net export surpluses do not increase the yen or $AUD balances, just change the ownership.

Now, what would happen if the Japanese car firm decided to store its $AUD assets in the form of Australian Government debt instead of holding the AUD-denominated bank deposits?

Some more accounting transactions would occur:

  • The Japanese company would instruct its agent to put in an order for the bonds and the firm would instruct its Australian bank (wherever it was located in the world) to transfer the $AUD bank deposit into the hands of the central bank (RBA) who is selling the bond (ignore the specifics of which particular account in the Government is relevant). The Japanese car maker’s lawyers or representative, in turn, would receive a bit of paper called an Australian government bond.
  • The Australian government’s foreign debt rises by that amount.
  • This merely means that the Australian Government promises, on maturity of the bond, to credit the bank account of the ultimate holder of the bond (add reserves to the Australian bank the car firm or final holder deals with) with the face value of the bond plus interest and debit some account at the central bank (or whatever specific accounting structure is involved with bond sales and purchases).

If you understand all of that then you will clearly understand that this merely amounts to substituting a non-interest bearing reserve balance for an interest-bearing Government bond. That transaction can never present any problems of solvency for a sovereign government.

Project Fear continues …

Then we hit the Project Fear claim that that foreign purchases of a government’s treasury debt props up that nation’s public spending and, without it, the government would have no financial viability.

The corollary of this theme, is that the power lies in the hands of those foreigners who hold the national government debt rather than the issuer, the national government.

China automatically accumulates US-dollar denominated claims as a result of it running a current account surplus against the US.

These claims are initially held somewhere within the US banking system and can manifest as US-dollar deposits or interest-bearing bonds. The difference is really immaterial to US government spending and in an accounting sense just involves adjustments within the banking system.

The accumulation of these US-dollar denominated assets (bits of paper and electronic bank balances) is the ‘reward’ that the Chinese (or other foreigners) get for shipping real goods and services to the US (principally) in exchange for less real goods and services being shipped from the US.

Given real living standards are based on access to real goods and services, you can work out, from a macroeconomic perspective, who is on top.

Please read my blog – Modern monetary theory in an open economy – for more discussion on this point.

Note, I used the qualifier ‘from a macroeconomic perspective’. A US worker in Detroit who has endured unemployment as a result of cheaper imports coming from nations with lower labour standards (pay and conditions) than the US is unlikely to be among those who benefit.

The US thus benefits from China’s willingness to deprive its citizens of material wealth (use of its own real resources) and net ship its ‘labour’ and other real resources embodied in the exports to other nations.

This is not to deny that when an economy experiences a depletion of foreign exchange reserves or finds the exchange terms of its own currency against foreign currencies it requires to purchase essential imports it has to take some hard decisions in relation to its external sector.

This is especially so if it is reliant on imported fuel and food products. In these situations, a burgeoning external deficit will threaten the dwindling international currency reserves.

In some cases, given the particular composition of exports and imports, currency depreciation is unlikely to resolve the CAD without additional measures.

The depreciation, in turn, raises the relative costs of imports, and imparts an inflationary bias to the economy. Moreover, depreciation leads to expectations of further depreciation and fuels the run out of the currency. There may be no interest rate that is high enough to counter expectations of losses due to depreciation and possible default.

The reality is that a nation facing a lack of ability to purchase imports, for whatever reason, has to either increase its exports or reduce its imports.

For less developed countries faced with currency crises, there is probably no short-run alternative but to urgently restore reserves of foreign currency either through renegotiation of foreign debt obligations, international donor assistance or default.

For an advanced nation, similar constraints might apply and a sudden shift in international sentiment against the nation or other financial assets denominated in that currency are no longer deemed as desirable, then adjustments in the flow of real goods and services sourced from foreigners are required.

And, as I explain in this blog – Ultimately, real resource availability constrains prosperity – the limits for a nation are clear – if it cannot command access to real resources owned by foreigners the it must rely on the resource wealth it has for sale in its own currency.

But none of that reduces the financial capacity of the currency-issuing government to purchase whatever is for sale in that currency.

What would happen if the Chinese holders of US government debt decided to liquidate their holdings of US government debt that have been accumulated to mirror the current account deficit the US runs against China?

This could be done slowly or quickly. A rapid liquidation would devastate the Chinese wealth stored in those $USD assets.

Such a liquidation would have no bearing on the US government’s capacity to buy goods and services for sale in US dollars but would seriously undermine the trading capacity of China.

Please read my blog post – Do current account deficits matter? (June 22, 2010) – for more discussion on this point.

Nominal versus real

But what is the discussion about real and nominal about?

Think about this simple example.

When I go to a shop and buy a good from the store I hand over some cash (or wave a credit card over a sensor which is the digital equivalent of handing over cash) and receive the product in return.

The shop is receiving a nominal payment and sacrificing a real good. The shop wants to accumulate nominal stocks of money whereas I want the real good to consume its use value when I leave the shop.

I clearly value the real benefits from the transaction more than I value the nominal holding of cash.

All commodity transactions share that characteristic except the transaction that involves an employer purchasing labour power in the labour market.

That transaction, as Marx so clearly showed, is unique, because unlike simple commodity exchange – where the exchange value is set during the transaction and the use values arising from the exchange are consumed outside of the exchange – the labour exchange is different.

Unlike the symmetry of a simple commodity exchange, there is an asymmetry in the labour exchange.

For the worker, the use value of the exchange is embodied in the wage received and that is consumed outside the workplace (we abstract from a worker enjoying his/her job).

But for the employer, the purchaser of the labour power, the use value of that ‘commodity’ – the flow of labour – has to be consumed during the transaction period. That introduces all manner of issues include the need to control what the worker does, etc.

So a nation with a current account deficit enjoys a real advantage over the export surplus nations (as explained above) but incurs nominal liabilities – the financial assets that the exporter accumulates.

The exporter could convert those nominal liabilities into real assets (via say FDI – see below) or not.

As I explain below there are some reasons to be concerned about the accumulation of financial assets in the hands of foreigners but they are not the usual suspects (such as the case discussed above concerning liquidation).

Foreign ownership

There was also the contention that a nation that runs a continuous current account deficit ends up only being a nation of workers.

The assertion was that the capital account of the Balance of Payments would reflect the increasing foreign ownership of companies in a nation with a current account deficit and that if that persisted all the “capitalists” would be foreigners.

In turn, it was asserted that this would mean profits were expropriated abroad, which would lead to reduced business investment (capital formation), slower growth, and declining standards of living.

We can break the assertion up into its two components.

First, Australia is a small, open economy and has been running persistent current account deficits for as long as the most recent national accounting data has been available (September-quarter 1959).

It has been in continuous deficit since the September-quarter 1975 as the following graph shows (from March-quarter 1960 to the December-quarter 2017), averaging 4 per cent of GDP over that time.

Hardly a small deficit.

Second, one can find ownership of Australian companies from the Australian Bureau of Statistics publication – Selected Characteristics of Australian Business, 2015-16 (latest published).

The following table is compiled from that data and refutes entirely the notion that our persistent current account deficit has lead to a mass takeover of our business firms by foreign capitalists.

In 2016, only 2 per of business in Australia were foreign-owned

Unfortunately, there are still plenty of Australian capitalists doing their thing in Australia :-)

The ABS also published data on – International Investment Position, Australia: Supplementary Statistics (Catalogue 5352.0). The most recent data is for 2016.

The national accounting framework divides financial flows into and out of a nation into Foreign direct investment (FDI) where funds are used to establish an operational business interest of at least 10 per cent ownership (including equipment, buildings, land) in a foreign country and Foreign portfolio investment (FPI) where funds are used to buy financial assets (shares, bonds) in a foreign country.

FPI is divided into liabilities accruing from equity investment (shareholdings) and debt securities (loans).

The following graph shows the aggregates since 2001 for Australia. So much of the financial side of our current account deficit is in fact reflected by foreign debt positions held by the private domestic sector.

Remember the previous graph shows the stock of foreign investment in Australia. So in 2016, total FDI was $A796,072 million while total Australian FDI abroad was $A554,874 million.

For FPI, the 2016 total foreign liability was 1,659,820 million while the total foreign asset was $A869,818 million.

The Net international investment position in thus less for FDI than for FPI.

But from the Balance of Payments data we can also extract more information that bears on this discussion.

The above data is for stocks – so the total assets and liabilities measured at some discrete point in time (annual in this case).

But the stocks of assets (arising from FDI and FPI) generate income flows into and out of the country.

And the question of interest, given the assertion that profits disappear from nations running current account deficits, is what proportion of investment income arising from FDI is reinvested?

The answer can be found in the ABS publication – Balance of Payments and International Investment Position, Australia, Dec 2017 (Catalogue No. 5302.0).

From March-quarter 2008 to the December-quarter 2017, on average 53.6 per cent of investment income flowing to FDI has been reinvested into new FDI in Australia.

So we have seen that a persistent current account deficit does not:

1. Lead to a takeover of local businesses by foreigners.

2. Lead to all profits being repatriated and investment falling.

Investment does not depend on who owns firms anyway

Further, the claim that local investment would suffer and growth would be retarded if foreign ownership increased as a result of current account deficits allowing foreigners to accumulate equity in local firms and repatriated all the resulting profits, misunderstands the way in which loans create deposits.

There is typically no ‘shortage’ of funds available for credit-worthy borrowers (including firms seeking funds to invest in new productive capital) in a fiat monetary system.

We could have a situation where all firms were foreign owned and repatriated all profits and, yet, the local banking system would still stand ready to create loans (and hence deposits) to firms that were deemed to be financially viable who were seeking funds.

Why might we care about foreign ownership?

I will write a separate blog post on this topic in the future.

The main reasons to be concerned are not related to takeover or lack of investment potential.

The idea of foreign ownership has long been a concern for progressives because ownership of financial wealth bestows power and allows the owners to influence government policy to their advantage.

Further, the accumulation of local currency assets can manifest in asset price bubbles (real estate) that disadvantage local residents, especially lower income cohorts.

In this regard, governments have to have strict rules in place as to which assets a foreigner can accumulate in the currency of issue.

More later on that issue.


I hope that clarifies some of these issues.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

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    125 Responses to Trade and external finance mysteries – Part 1

    1. Henry Rech says:


      Your comments are typical of the things said in this blog when someone comes along and raises questions about MMT in a genuine enquiry.

      I’ve been labelled a neoliberal, a neoclassicist and now a Republican asshole. LOL!

      It’s rather sad.

      If you don’t or won’t get my point, I can’t help you.

    2. Curt Kastens says:

      Of course MMT does not preclude someone from beeing environmentally unconscious. The reason that I brought up the environmental angle again is because I want to emphasis the need for international economic Sycronization. Right now we have internaional economic anarchy. Well except for some unfair structure imposed by the world’s largest and most treachorous empire.
      I do not support one world government like many socialists do. It might already be to late to save this planet’s human supporting environment. If its not to late to save our environment the only way that it is going to be saved is if the world’s national economies are sycronized as accurately as a swiss time piece. I guess an implication of that would be that a job guarantee that is nationally funded but locally administered is going to have to have deedback all the way up to something like the U:N:
      I suggest that the ideas of Parecon ( see zmag, znet) might be a solution as to how to allocate resources between countries including the job guarantee programs of each specific country.

    3. Some Guy says:

      Henry Rech:Exports allow you to employ more people – or is that incorrect?’
      SG:That’s incorrect. . . I am saying export industries are not the only way to create jobs.
      HR:In the context of the discussion what’s the point of saying this?
      It makes it clear the “Exports allow you to employ more people” is wrong. Exports allow you to shift the composition of employment from domestic jobs (or unemployment) to export jobs, nothing else. But before the exporting, you were allowed to create jobs, shift jobs around too- the great majority of jobs are created for domestic purposes, not export purposes.

      “Exports are a cost Imports are a benefit” is just saying:
      Country A’s exports are things that goes from country A to country B, they are country B’s imports.
      A loses them, they are a cost to A. B gains them, they are a benefit to B.

      Country A’s imports are things that goes from country B to country A, they are country A’s exports.
      A gains them, they are a benefit to A. B loses them, they are a cost to B.

      If it did not work that way, then people would not pay for imports and would not get paid for exports. The financial payments going the other way are benefits/costs that balance the moving-stuff-around costs/benefits. There could be reasons for governments to intervene, to promote some transactions and discourage others, there could be hidden benefits and costs but that is another, less fundamental matter – and one that must be built on clearly understanding this one. Everybody does understand it in practice. That’s the reason that people skip too quickly over the theory – and can get it wrong.

      The way MMT or Abba Lerner’s FF of decades ago uses the phrase “Exports are a cost, Imports are a benefit” is to say something utterly obvious and tautological. Arguing with it is arguing that some arrows in Bill’s explanations above should go the other way. Look at them: that makes no sense.

      It is an axiom or definition used at the beginning of an argument as something (a) that nobody in their right mind can disagree with & (b) to be a foundation for arguments for less obvious statements. It is just like a formal proof in math, in high school geometry.

      Understanding it in any other way, is taking it to mean something NOT intended. There would be no need to say such things if (a) MMT were not fanatically, mathematically precise and logical & (b) other types of economics were not. They can end up using long, recondite but specious arguments to “prove” things as crazy as “adding 2 positives make a negative”.

      Again, it is a pleasure to discuss things with you, and I have more comments on the way.

    4. Jerry Brown says:

      Some Guy, I also enjoy discussing, or arguing, with Henry. And with you, although that is more rare. But I argue.

      At the current time, with the current state of policy and, perhaps, understanding as to what is possible by policy makers, it is fair to say that exports allow more jobs. Regardless that some other jobs could be created by the government who had the intention and willingness to do so. And that is very important especially to the people with those jobs and the communities that depend on them. In my opinion of course.

      And at some basic level, exports allow for imports, which could be extremely important for people in a country that needs those imports.

      And Bill Mitchell seems to recognize that the Nation state has a duty to consider what is best for its own people and the ability to do something about that (unless I totally misunderstood his book “Reclaiming the State” or the 4 part blog series titled “The case against free trade”). I don’t think there is anything in there that says a country should necessarily allow itself to accommodate some other country’s export policy to the detriment of its own domestic industrial policy or labor markets – even if the export goods and services it receives are more or less free because they are paid for with fiat currency.

      And it just seems to me that when my country does accommodate ‘free trade’ imports it is always in such a way that it is our workers that get screwed out of very hard won gains they have made in wages, hours, and working conditions and safety. And everyone gets screwed worldwide when pollution regulations are weaker somewhere else and that is the difference as to the cost of imports. So yes, there are a LOT of somewhat hidden benefits and costs in my opinion.

    5. Henry Rech says:

      Bill says “exports” have an opportunity cost.

      For sure, but so does every other economic activity. Saying they have an opportunity cost says nothing.

      No-one’s really tackled my point that if exports are a “loss” or whatever, why is there some much of it happening. Why do countries seek to promote their exports?

      Warren Mosler in his Seven Deadly Frauds says:

      Societal welfare = domestic production + imports – exports.

      On the other hand:

      domestic employment is a function of non traded goods production + exports – imports.

      How are the two relationships reconciled?

      Should Australia shut down it’s c. 800Mt of iron ore exports which produce $50billion plus revenue and 50,000 direct jobs?

      It’s fine to talk theory and generalities until you have a look at specific realities.

    6. Robert says:

      Yes, Australia should shut down their iron ore exports, refine that ore into steel, manufacture high end machine tools and automobiles, and drive their German competitors out of business.

      No matter how his questions are answered, Henry Rech remains unsatisfied.

    7. Henry Rech says:


      You have a lot of shoulds in your comment.

      There have been multiple plans for steel mill development for the last 50 years that have not seen fruition. Why not?

      Australian steel consumption is around 5 million tonnes. This is mostly sourced from Australian ore. So you’re saying shut down 800Mt of iron ore production or build steel mills to supply a non existent car industry.

      It seems we did have a motor car industry until not so recently – what happened to it? – can’t say it drove German competitors out of business.

    8. Curt Kastens says:

      I myself do not know how economists dsitinguish between costs and losses. Economists are as a rule just one step away from nutritionists. I myself say that costs are temporary losses. Losses can not be recovered. Therefore my definition is the correct one. Therefore exports are not bad unless the currency that you took in payment looses value before it can be converted to another product or currency. Imports paid for with fiat currency might be in a sense free but why has the opportunity costs of that not been pointed out. If Mexicans buy TV sets from Japan they have lost the opportunity to pay Mexicans to manufacture the exact same tv set. If Mexicans were already making TV sets, but not as good or as inexpensively then Mexicans have lost the opportunity to invest in the Mexican TV industry to make better and cheaper TV sets. All the money that went to Japan for TV sets could have been used for the Mexican TV industry.
      Would the story not be different if the Mexican Government or Mexican TV manufacturing companies were paying Australians fiat currency for Iron Ore that would have otherwise have been bought from the USA at a higher price? If that is the case I do not really see a lost opportunity, do you?
      YET if the Mexicans did not pay for Japanese TV sets those Japanese would loose their jobs, IF THEY WERE AMERICANS. But those Japanese workers are not Americans. Once their TV manufacturing companies understand that they can not export TV any longer they will figure out what they can either supply to the domestic Japanese market or export to be able to make profits for the firm so that the executives can have a great life and the workers can have a good enough life that they do not revolt. Those executives will not really give a shit about whether or not the product is needed only if they can likely SELL it.
      Of course we are supposed to believe that if people are willing to buy it that is all the proof that we need that these products or services are needed. After all people NEED what they DESIRE. Any ATTempt to interfer with the process of giving people what they desire is elitist and anti democratic!!
      Of course there are arrogent people who think that they know what is better for everyone else. They are a dime a dozen. But who appointed anyone of them to be a GOD like Authoritian dictator to make decisions for everyone that almost no one else can understand let alone agree with?
      The world has to be ruthless which such potential trouble makers. They should be strapped with a 50lb lead belt and thrown in to a Hawaiian Volcano lava pool. If any one them can walk out then maybe we could consider whether or not they should be appointed to the position of dictator.
      When that day comes the first job of the JG can be the position of their secretary, a temporary position of course.

    9. Curt Kastens says:

      ANd if those Japanese TV manufacturing workers were like Americans and they lost their jobs some of them would certianly try to immigrate to Mexico. Would then then do something really crazy like try to change the way that Mexico is spelled? The possible variations are endless.

    10. Robert says:


      I was being sarcastic. The answer depends on whether it was/is profitable. That is the sole criterion for commodity producers.

      At the government level, the usual reasons given for an export oriented strategy are economic development (China) and facilitating balanced budgets (Germany). The former is reasonable, the latter is ridiculous. Both reasons are nebulous when compared with profitability. If Chinese and German exporters begin to lose money, they’ll stop shipping their goods overseas. China’s leaders appear willing to shift their economy towards domestic consumption; Germany’s may insist upon reducing their labour cost.

      From the perspective of consumers, imports are a net benefit.

      For workers, it depends on which sector of the economy they are employed. Imports of goods and foreign workers may be harmful. When secondary effects are considered, imports may turn out to be beneficial for other workers. (e.g. import of Canadian softwood will sustain American construction jobs)

    11. Curt Kastens says:

      My Bad, Some Other Alien is correct. I did not consider something that I read from Murray Rothbard 40 years ago. If the Mexicans buy Japanese TVs then the opportunity costs is not only to let their own domestic TV industry suffer. The Mexicans then have an OPPERTUNITY to redirect their nations TV manufacturing potential to some other product. They could for example increase production of telescopes so that every Mexican could stare out in to the night sky and see where planet earth is headed.
      Jerry pointed out above that MMT is a formula for doing the most sensible thing economically that can be done for ones country. If he understood Reclaiming the State correctily. We are clearly past the point that economic nationalism (patriotism if one prefers) is an option. Economic decisions are for the most part not being made by countries the decisions are being made by firms. Firms that have an international presence. Firms that escape national oversight. MMT is correct as far as it goes. Yet it must go the extra mile and come up with a plan for international ovesight.
      Or the founders of MMT could take the easy way out and endorse my plan for international Parecon that took me all of 2 minutes to come up with. Two principles would define the plan. One is rationing. Two is proportional rationing. Three is a deviation from proportional rationing based on progress in meeting goals that are negotiated between lets say 10 planetary Federations, ( NAFTA, ASEAN; EU, China, India, ect.). Examples of such negotiated goals might be reducing the number of fossile fuel powered vehicles manufactured for family use to zero over a 10 year period. Reducing the birth rate two 2.0 over a 10 year period. Reducing the amount of beef consumption to 2 or 3 lbs per person per year over a 5 year period. Oh just for your information I do not support the manufacture of electric family vehicles either, other than bikes as they require rare metals for the batteries as far as I am told. Four sacred cows must be sacrificed, even in India.
      I am sure that most of you have heard of the Amish. A rellgion that requires people to drive around in horse drawn buggies. Can I see a show of hands as to how many people have heard of the Amish.
      Ok that is a lot. Now can I see a show of hands as to how many people have heard of the Hutterites?
      See not as many. Well the Hutterites are not as conservative as the Amish. The Hutterites accept some modern technology. Here is the KEY. The Hutterites actually make an attempt to try to figure out how new technology will affect their society. After this analysis they collectively accept or reject the technology.
      The world needs leaders that will give some FORESIGHT to the world’s economic production now. Ok
      such people were actually needed way back in 1991. I really doubt that the people capable of providing this foresight can obtain any position of influence through a democratic process. The masses are completely incapable of undertanding that for which they have not been educated for. The elites have made sure that is the case. At this point those who propose that world policies should be decided through an electoral process need to be trampled to death by a stampeede of wild elephants.
      One man one vote was a good idea in the 19th century. Now it is a planetary death sentence. What has had even more influence on the planets developement in the past 100 years than one man one vote is one dollar one vote. The second has clearly corrupted the first. It was an inevitable outcome. One dollar one vote of course has to be uprooted as well.

    12. Henry Rech says:


      OK with all your comments.

      The point is, who decides what is good for the economy, markets or governments?

      I think it is silly to say, broad sweepingly, exports are bad, imports are good.

    13. Robert says:


      Economists decide what is good for the economy, governments decide what is good for the people. Markets are a means of distributing goods and services. Alternatives to markets include rationing and subsidies.

      Economics is an academic profession. The role of an academic, the role played by academia, is different to that of government. The role of government includes public purpose. Academia can inform government with regard to public purpose, which affects policymaking, which affects us.

      Generally speaking, imports are good. If they weren’t, there’d be little to no international trading. Obviously you can’t have exports without a demand for imports. Whether imports are good or bad, exports are a consequence of foreign demand. Only government and academia can look at a situation and conclude that exports are not in the best interest of a country. In such cases, foreign demand is ignored, and resources are directed towards achieving other objectives.

      I would say that exports are bad when it comes to primary resource extraction. “Plunder until exhaustion” has been a theme throughout history. There are better ways to manage the export of primary resources, but corrupt governments and a ‘wild west’ mentality usually prevail.

    14. Thomas E. Nugent says:

      By characterizing imports as good and exports as bad, the subsequent discussion is overshadowed by the theory. It is like saying hot is good and cold is bad. For the worker(s) who produce a product to be exported there is the fact that they work and get paid for that work, spend it and on and on. If there was no market for that export and it didn’t occur, the worker(s) might not have a job and would not spend and would require government intervention. The bottom line is complex relationships require further examination to draw valid conclusions.

    15. Some Guy says:

      Jerry Brown: I think I’ve realized what the problem is in this discussion of ‘exports are a cost, imports are a benefit’. If one just says “export” that means – and it should be clear from the context here- unpaid exports, exports not considering whatever payment may be made for them. But people seem to be understanding “export” as a completed export/import trade transaction, which is just not what is meant here, should not be understood that way until later in the arguments perhaps. Bill & MMT (& earlier Lerner & functional finance) analyze things in very fine-grained way (in some respects) – to avoid common errors and confusions.

      On a personal note, once upon a time I helped set up a business importing used heavy equipment (Caterpillars, Komatsus etc) to the US, exported from Japan after their bust. I had a lot of work to do at a moment’s notice, clearing customs, agricultural department permits, finding and leasing a place it was legal to store them etc, etc. All this before a single one was sold – my boss, who spoke very little English, had put them on a ship from Japan with no customers, before we had even met, none of the above done. He had exported them from Japan, we got them to our lot in Jacksonville, but it was all expense, all loss until we sold the first one, which was when I left. With no sale, the export would have been pure loss to him and to Japan. The export and the payment for it are different actions.

      So with this clarification, do you think that anybody can reasonably disagree with “(Unpaid) exports are a cost, (unpaid) imports are a benefit”?


      And Bill Mitchell seems to recognize that the Nation state has a duty to consider what is best for its own people and the ability to do something about that (unless I totally misunderstood his book “Reclaiming the State” or the 4 part blog series titled “The case against free trade”). I don’t think there is anything in there that says a country should necessarily allow itself to accommodate some other country’s export policy to the detriment of its own domestic industrial policy or labor markets – even if the export goods and services it receives are more or less free because they are paid for with fiat currency.

      This is confused because it opposes “accommodation” and the health of “domestic industrial policy or labor markets”. MMT says that a Nation-state should always accommodate, always accommodate savings desires, wherever they are coming from. Here the savings desires are constituted by another country’s export-oriented policy. What screws workers etc, primarily by disemploying them is the not-accommodating, not the accommodating. There might be some other policies, maybe anti-“free trade” policies, maybe protection of strategic or essential domestic production from foreign competition, that might lessen the need to accommodate. But whatever else is done, MMT says – you then always accommodate, up to the point of full employment by using fiscal policy, in particular by a Job Guarantee.

      What the bad guys do is “accommodate” just enough to keep them rich and not wreck the economy by deflation and depression. But they avoid completely accomodating in order to maintain a reserve army of the unemployed, in order to keep themselves on top, feeding off gains, creating a race to the bottom. This is a delicate task that requires fine judgment: Sabotage the economy, but not enough to wreck it, only just enough to crush the lesser people’s hopes and will. But nobody ever said being a supervillain was easy. :-)

    16. Jerry Brown says:

      Well I don’t think that MMT says that a nation state should ‘always accommodate’ the policies of some other country if it isn’t in its own interest to do so. But if it does then I guess I think it is wrong on that.

      I understand that MMT points out that it is usually beneficial for a country when the people of some other country are willing to provide real goods just because they desire to ‘save’ in the importing nation’s fiat currency. And I agree that usually, maybe almost always, that would be true if that was the only thing actually going on there. I’m saying it isn’t the only thing going on. And I’m saying that at the present time, if the imports cause domestic industries to fail and if the importing country does not have policies like a Job Guarantee in place that can help those who suffer from those failures, then imports can be used to undermine domestic labor standards and regulations as well as environmental standards.

      Actually, even if the importing country had a Job Guarantee, if imports are only based on price and the price is lower because there is no labor or environmental standards in the producer’s country, doesn’t that subvert the intended policy of the importing country in some way? A state makes a policy that electric power generation can create only so much pollution, which raises the cost of generating that power there. But the neighboring state doesn’t so it costs less and they now want to sell power to the first state. Should the state that enacted the tougher environmental rules consider this a net benefit? Even if the smoke form the power plants blows into their state? No!

    17. Some Guy says:

      Well I don’t think that MMT says that a nation state should ‘always accommodate’ the policies of some other country if it isn’t in its own interest to do so. But if it does then I guess I think it is wrong on that.

      Well, MMT does say that- ‘always accommodate’. “Accommodate” here means – spend enough for full employment, in particular have a JG. This holds whatever else is done – about pollution, diminishing domestic productive capacity, whatever.

      The point is, it is NEVER not in the interest of the nation state to accommodate. In other words, it is never in the interest of the nation state to disemploy people. I don’t think you realize you are arguing that there are times when it is good for a nation state to have unemployment, but unwind the discussion – that is what you are saying.

      To find serious hypothetical examples when it would be good to have unemployment, you have to consider things like – Big country A says – “We will bomb the cities of small country B if it dares to have a job guarantee program.” There really isn’t any other kind of case where unemployment is a “good” policy.

      I’m saying it isn’t the only thing going on.
      Neither I nor Bill disagree. Sure, no Job Guarantee changes things. But no Job Guarantee is a criminally insane idea.

      To criticize Bill & other heroic MMT royalty :-) – A real problem is that too many details are often given, to make arguments bulletproof, practically applicable etc. But at the expense of exposition and understanding. For which K I S, S is necessary. And maybe shouting with giant, bold typefaces. The priority, the order and importance of propositions and proposals can become unclear.

      As very often, the logical order and historical order are reversed. Accommodation, the JG are ALWAYS, necessary, logical policies. But they are going to be effectuated historically after the maybe, historically contingent capital controls, protectionism, pollution agreements, etc.

      And concerning just dollar terms, the Job Guarantee or accommodation are very big things – they do the heavy lifting, they are essential. The others just aren’t as important, aren’t as necessary, do not involve as much money or enterprises as large.

    18. Jerry Brown says:

      Some Guy, I am in no way, no where, arguing that it is good to have or tolerate unemployment- MMT shows that a country can have no trade at all and have basically no unemployment with a Job Guarantee policy. And I am on board with that.

      I am arguing (since the beginning of this thread) that sometimes it is wrong to consider all imports as always being a benefit to the importing country when all factors are taken into account. And I now think that would remain the case even with a Job Guarantee in place. I would be interested in what you thought of my electric power pollution example.

      And also, that under current policy, sometimes an export based strategy will be a net benefit for the exporting country. And I would think that, historically, this has been true. Although, I agree, that with a Job Guarantee in place in the exporting country, then maybe, the excess exports over what is needed to import would be a somewhat useless cost to the exporting country. In some cases.

      Just for example, consider if there is an industry where the domestic market alone is not large enough to justify the investment needed to develop an industry. Investment of real resources, not money. Still, it might be a good thing for a country to undertake that investment of resources- hoping others will buy some of the product- and that way allay some of the real costs that must be incurred in order to develop expertise in the skills, processes, and supply chains needed for that industry. Because in the longer term that expertise will also have large side benefits.

      None of that is necessarily bad for anyone except when it interferes too much with the markets in other countries for those goods. Countries who either have probably done the same thing in the past, or countries that hope to do the same thing in the present. So those countries might have a legitimate interest in refusing some of those imports if they interfered too much.

      My caricature of the argument is- ‘Hey its all good- they are basically giving us free stuff so we can sit around doing nice things for each other. Our own industries might go away because they can’t compete with some other country’s industrial policy. But that’s ok- we got free stuff! And that’s how it will always be forever and ever.’

    19. Hog says:

      “The point is, who decides what is good for the economy, markets or governments?”

      if your government isn’t fiddling with the market, that leaves more room for foreign governments to do so.

    20. Some Guy says:

      Some Guy, I am in no way, no where, arguing that it is good to have or tolerate unemployment-
      You suggest it right here, when you suggest MMT “is wrong on that”, to be sure you qualify it with “if it isn’t in its own interest..”: “Well I don’t think that MMT says that a nation state should ‘always accommodate’ the policies of some other country if it isn’t in its own interest to do so. But if it does then I guess I think it is wrong on that.”

      Again, my point is that you are considering a nonexistent case. But in any case, always, “not accommodate” = “tolerate unemployment.” They are two ways of saying the same thing. I am not sure we disagree. But I am not sure we agree.

      MMT shows that a country can have no trade at all and have basically no unemployment with a Job Guarantee policy.
      But the point is – trade changes nothing; you can have full employment and plenty of trade. That is what people see imaginary problems arising from.

      I would be interested in what you thought of my electric power pollution example. Sure, I agree. Could be a reason to do something.

      I am arguing (since the beginning of this thread) that sometimes it is wrong to consider all imports as always being a benefit to the importing country when all factors are taken into account.
      But that “imports as always being a benefit to the importing country when all factors are taken into account” is not what MMT is saying, as I tried to explain above, a few times. It is saying, just take one factor into account at a time, and then another factor. Don’t try to do it all at once, don’t try to run before you walk.

      And also, that under current policy, sometimes an export based strategy will be a net benefit for the exporting country.
      MMT, Bill doesn’t disagree, especially if you are talking about a country without a job guarantee.

      The point is that almost all the criticism is arguing with things that MMT, that Bill, that Abba Lerner before him are NOT saying, they often enough agree with these “criticisms”. But worse, bogged down with this, the criticism then misses what they are actually saying from beginning to end.

      Hey its all good- they are basically giving us free stuff so we can sit around doing nice things for each other. Our own industries might go away because they can’t compete with some other country’s industrial policy. But that’s ok- we got free stuff! And that’s how it will always be forever and ever.’

      I know this is a caricature but:
      A) Imports paid for with fiat currency are not “free stuff”. They will be paid for, otherwise the exporter would not accept your fiat currency.
      B) That is what having an industry is – “doing nice things for each other”. So suggesting they all go away while we do nice things for each other is a contradiction in terms.
      C) Whether a nation should care about some industry going away or not is something to be decided on a case by case basis.
      D) In any case, the “doing nice things for each other” = accommodating = full employment, job guarantee, will generally do the heavy lifting of solving whatever problems occur. People are worried about small problems that don’t and can’t really exist.

      Again, the real problems people see – say America’s Rust Belt – are overwhelmingly caused by the supervillains NOT applying MMT or functional finance, by not accommodating. They aren’t caused by accommodating.

    21. Some other guy says:

      A successful manufacturer or retailer would class “sales” as a benefit and the “cost of sales” as a cost. Sales are (like exports) affected by purchaser whim and companies sometimes go out of business. I think a country’s interests line up similarly although national actions bring on more debate than corporates.

    22. Henry Rech says:

      “Again, the real problems people see – say America’s Rust Belt – are overwhelmingly caused by the supervillains NOT applying MMT or functional finance, by not accommodating.”

      In the first place, these problems are caused by imports, not by supervillains.

      If I were a rustbelter I would rather have a job that I wanted and not a job picking up discarded rubbish along the local creek – I would do that for nothing.

    23. Jerry Brown says:

      Thanks for the discussion SG. I really have no disagreement as long as each factor is taken into account one at a time as you suggest.

    24. Henry rech says:

      Some Guy

      “So with this clarification, do you think that anybody can reasonably disagree with “(Unpaid) exports are a cost, (unpaid) imports are a benefit”?”

      What? Where does MMT use the word “unpaid”?

      You’re making this stuff up as you go along.

    25. Peter says:

      Though I consider myself an mmt’er when it comes to government deficit spending, job guarantee and the basic accounting I think they don’t give enough credence to industrialization as development and the role trade surpluses have played in the industrial policy of China, Japan, Germany, etc. It’s true in the immediate sense that exports are a cost imports a benefit in the immediate accounting sense but our long term economic health is dependant on productivity and if you can devalue and run a trade surplus you can heavily support a growing productive manufacturing sector. Similarly if you run a deficit you may consume more in the short run but you’ll speed lower productivity gains, lower investment, and deindustrialization. (At least as far as I understand).

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