The UK, like USA, Japan and others, have a profound advantage with which to recover from the financial consequences of Covid, if they choose to understand and use it.
They are currency issuers, unlike countries using the euro and the dollar, which are currency users. Unlike currency users, e.g. Germany, Greece etc. financially sovereign nations can always meet future obligations: they can never run out of their money.
Increasing or decreasing “the deficit” neither makes future generations poorer nor richer. Consequently, the Government can and should, without excessive inflation, spend its currency to fully manage the problems and opportunities to maintain or increase the well-being of citizens and children. It neither needs, nor should, let the “deficit myths” restrict its management of the Coronavirus and its consequences.
The government’s ability to spend is limited by the economy’s ability to produce, not the debt.
Dean Baker
It should also be limited by care of environments which include, climate, ecology and societies.
Economics without contexts and compassion is a form of fascism
William Harris
Fiat money gains its authority through being the medium in which a government extracts taxes. Unlike commodity money, with intrinsic value and representative money, representing something with intrinsic value, it is intrinsically valueless. It is part of a government’s “spend, tax and borrow” practices. Taxation creates the demand for the government’s money and so is not a governing factor in governmental spending. Government spends first and taxes some back. The difference goes to the private sectors of the economy. Unless taxation is less than expenditure, private sectors suffer deficits and the economy under-functions. Insufficient taxation results in damaging excessive inflation.
A combination of rates of unemployment and inflation provide a practical indicator of economic efficiency. Full employment with modest controllable inflation is efficient. (With no inflation there is no incentive to spend, which harms the economy, as does high inflation.) The current orthodox/theoretical inflation rate, rarely reached in practice, is 2%. This indicates room for more employment. The ONS headline unemployment figure of 3.9%, also shows room for more employment.
With Fiat currencies, unemployment is people seeking paid work in the government’s units of account we call £s. Therefore financially sovereign central governments can eliminate domestic unemployment comfortably, by offering to hire the unemployed for public service work which must be organised locally for local benefits.
With permanent rights to to a good living-wage, a job-guarantee scheme competes with private low-paid work to raise the floor on low-wage work, reducing poverty, racial, health and life-expectancy inequalities, and builds stronger, individuals and communities.
As currencies are fundamental to the “Market”, governments are too. (They also regulate the “Market’s” society!) Fiat currencies can be democratic currencies managed democratically, if indirectly, by their citizens. Non-Fiat currencies, like the Euro, cannot. This changes perceptions of the government’s “Market” functions and demands the highest standards of democracy, citizen education and accurate public knowledge.
Quotes taken from “The Deficit Myth” by Stephanie Kelton: a book to read and heed!
* Steve Trevathan is chairperson of Lyme Regis and Marshwood Vale Liberal Democrats.
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The US is more or less a self-sufficient country, at least if push came to shove, whilst the UK is laughably dependent on imports, which in turn means it is dependent on the value of its currency… it therefore does not have free reign to print as much money as it wants and will the 350 billion printed for the virus has probably exhausted whatever “free” money was in the system for the next couple of decades.
‘We can never run out of money’. It implies, to me,that Cameron and Osbornes era of austerity was a DEFINATE IDEOLOGICAL project that was not necessary.It, and the way it was sold, put people in fear of’deficit’ in the economy A way of control.
Dean Baker implies that it is innovation to develop new (or reinvigorate old) industries. How about developing the lithium mines potential presumed to be in Cornwall and Devon for battery production,growing LEGAL cannabis for medical purposes etc. (hemp is being ‘researched’ to take out the harmful chemicals from it in England). The point is to develop new industries, jobs and for it to be financed by us ‘for we can never run out of money’.To be radical forward thinking.
By developing the green jobs that the party (and William Harris) says are required which can give an air of ‘peace of mind’ that we care about the planets environment.
I hope that POLICYLAB continues to invigorate the party by developing ideas that members produce into perfection.
Govnt creates then obtains taxes from the industries and workers. It implies that that companies should be run by workers and managers and funders so ALL get the benefit of the industries for they then have the incentive not to allow that business to fail. When people become unemployed they should be given the incentive to retrain and/or be involved in life long learning to provide a widely talented pool of workers. This can be via our education policy or a UBI system. The ONS figures show,to me, that that lifelong learning or retraining will provide that employment.
It is essentially incorrect to say that a country can never run out of money.
International investors who buy government bonds actually loan money to the country whose bonds they buy. Those investors want to receive back – in THEIR currency – an amount of money equal to the sum they invested plus the interest they were promised at the time.
If the country they loaned money to turns on the printing presses in an attempt to evade those obligations, they are effectively trying to defraud those investors.
Unsurprisingly the currency of the country concerned will fall (thus making all imports more expensive and pushing up domestic inflation) and the interest rate demanded by investors for their new bonds will rocket (thus pushing up the amount needed to service government debt and also all domestic interest rates including those to domestic businesses).
Do that often enough and you end up in hyperinflation territory where the domestic currency becomes worthless as both international investors and domestic citizens realise that it won’t retain its value on even a short term basis. At that point the country effectively runs out of money as no one wants worthless money – and the story rarely ends well for any country that ends up at that point since there is no easy way back to normality.
What we know, if we think about it, is that money is a very strange thing indeed. We behave as if it exists independently of us and it affects us as if it is. Yet, it is clearly a creation of human beings, a sign of something rather than the thing itself.
Marx described this as reification, and that certainly makes sense. Up until the mid 19th Century the UK tried to only have as much gold as there was paper currency ‘Promising the sum of…’. The result of that is economic development is limited, so then there was a ‘fiduciary issue’, in which multiples of the gold stock could be in circulation, although still exchangeable for Gold.
The use of gold as an arbiter of value is, of course, based on humans giving that substance that value.
In short all modern economies are based on debt, Capitalism wouldn’t function without it. Money is a multi faceted creation of human beings, and yet our political, economic and social systems largely behave as if it lives without us.
I doubt that we can do anything we want with this creation of ours but I’m sure we can do much more.
Of course, the Coalition’s austerity was ideological, unnecessary and hugely damaging.
I am proud to call myself a neo liberal because, as I said elsewhere, history shows neo liberals always win and socialists always lose. And MMT is just cheap old socialism in a posh bow-tie.
Although it is true that currency issuing countries can’t run out of money. Just to prove the truth of that I have a one hundred trillion Zimbabwe Dollar note pinned on my notice board. See? it’s true. Zimbabwe had all the money they wanted.
Currency is nothing – its value is everything. We could move from sterling to cowrie shells if we had a high productivity, high energy, high value added economy. But we don’t. We have the opposite and it’s getting much worse.
Of course we can still borrow. But we all know that credit card companies will let you borrow too, until that fateful day when you look like you can’t repay and then it is immediately over and into the pit of irredeemable debt you go.
We can not buy the fuel, food and medicine we need using Zimbabwe dollars because foreigners won’t accept them in exchange Very soon now they won’t accept sterling either and that disaster will arrive in a heartbeat.
So forget such childish talk of ‘money’ and ‘currency’. It all comes down to intrinsic wealth no matter how you denominate it. And if you have no wealth, well you are poor.
‘The pit of irredeemable debt’, that’s really funny. You know what happens to such debt, in the end? It’s written off, evaporated because not to do is stupid.
One of the key parts of Capitalism is the Limited Company, now what’s limited? Exposure to debt. In other words one of the foundations of Capitalism is potentially and often actually ‘irredeemable debt’.
Debt is a social relationship, not a thing in itself.
My friend says ‘can you lend me £50, I’m skint’ I say, ‘here, have it, mate’, ‘No, I’ll let you have it back’ etc
The meaning is between us, not in the £50!
The creditor has no choice but to write off irrecoverable debt.
But he will let the debtor starve before he extends any more credit.
This situation, in the poorer parts of the world, already exists and they don’t find it all funny.
Go and look at the list of countries that have defaulted on all or part of their debt.
It’s impressively long and the consequences are mixed, often essentially non existent, not a ‘pit of irredeemable debt’ that you can’t escape from. Usually countries that default do that because it’s a better way forward, and it usually is.
What happens your debts when you die and you have no money? It dies with you, because it’s a social relationship.
Much of what you call ‘value’ is created by debt and the weirdness of money.
In this country there is even a legal way to write off debt, called bankruptcy. It isn’t that it has no downsides but within a few years you can start again, if you want.
What’s the alternative to seeing national, personal and other forms of debt as contingent and not absolute?
@ Frank West,
“The US is more or less a self-sufficient country, at least if push came to shove, whilst the UK is laughably dependent on imports, which in turn means it is dependent on the value of its currency”
The value of the both currencies, the pound and the dollar, is in the longer term entirely determined by the level of inflation in both countries. The fall in the value of the pound relative to the dollar since the 60’s when I can remember an exchange rate of $2.40 to the £1.00 is completely explicable by the UK having a higher inflation rate than the USA. It’s really nothing to do with any notional level of self sufficiency.
This is not to say that the speculators won’t have a go at testing the resolve of the UK government now and again. There will be some short term movements of the currency which can’t be explained by an inflation rate.
@ Paul R.
“It is essentially incorrect to say that a country can never run out of money. International investors who buy government bonds……”
It’s totally correct. Providing its a currency issuer like the UK and not a currency user like Ireland. It’s not just international investors who buy Govt bonds or gilts. There is a domestic market too. Including the sale of Govt bonds to the BoE. From the POV of an “international investor”, or more correctly someone who is wanting to park their money in the UK, it matters that the inflation rate is not too high (the Govt sets a 2% target and not an upper limit), and also that the economy is functioning well.
Therefore the Govt has to do what it takes to keep it functioning as well as it can without letting inflation become too high or too low. When it doesn’t do that, we end up with riots in the streets and anyone with any sense will look for an alternative parking spot.
@ Not so Innocent Bystander,
I don’t know where to start! Maybe you could start by reading some of Keynes’s works. Just on a point of information: He wasn’t a socialist. Although he was quite posh and possibly wore a bow tie. He was a member of the Liberal Party.
Peter,
Thank you but I would rather you go and talk to the citizens of countries that have gone bankrupt. They might get angry when they are told the consequences are non-existent.
Like their pension, life savings, standard of living.
I am sure they would come out of their squalid favellas and would be relieved to be told that their situation is just ‘ mixed consequences’.
Bankruptcy in the UK is benign because of our in built safety nets. They, of course, will fall to the level of the third world average because we are turning ourselves into a third world country due to our profligacy. In many parts of the world, personal bankruptcy does not just mean JSA. It means a life of crime or begging.
The point I’m making is that your description of debt and indebtedness is inadequate. You describe it in absolute terms, when it is contingent, as separate from people when it is in fact a social relationship.
So, Germany had its debts written of after the War. How’s it doing? Japan? China defaulted on historic debts after the revolution.
Our ‘safety nets’ around bankruptcy are the result of people seeing the futility of thinking about debt in the way you do. In fact many people who are bankrupt have jobs, JSA isn’t their only source of income.
So, we have the legal basis of capitalism as based on potentially writing debt off in the limited company, we have personal debt capable of being written off, Unpayable national debts are either reduced, written off or defaulted on.
None of that is without consequence, but in the real world your description of how debt is dealt with is not what happens, but then neo liberalism, free market capitalism, is an economic system that has never existed and could not exist. Even command communism did function in its own dysfunctional way.
This is because the economy is social and in difficulty that shapes what happens. The Covid crisis comes and the ‘free market’ quite properly is shunted aside. People who can’t pay their rent (debt) are protected from the supposed consequences, because mass evictions would be stupid, for example.
Debt is a human creation, which we have human power over.
@ Not So Innocent,
I’m really not sure what you are complaining about. Yes we all agree that inflation has to be kept in check. High Inflation can destroy savings and pensions.
But the last time I checked inflation was ultra low, about 0.5% pa, and well below its target. So what’s the problem?
Sorry to leave such entertaining company but just packing the car for a weekend with son no. 3 in Bath.
I will have to leave a world where you can spend far more than you earn, where national bankruptcy and collapse is fun for all and where hyperinflation gives us years of warning to react. And anyway, grateful creditors will be eager to bail us out and keep our lifestyle going by lending us even more which they will never see again.
Enjoy the weekend.
And yet the story of Capitalism seems to be largely in that territory…
What is QE? And what is it’s relationship to ‘wealth’.
What happened to the UK national debt after 1945? How come?
Why did the debtor countries write off Germany’s debts in the 1950s? What was the effect of that on its economy and the debtor economies.
Ditto Japan
What is the function of a Limited Company?
Why is so much of the world richer, when the world money supply is so loose? Why was it poorer when it was tighter?
So far, it seems all you have to bring to the table is assertions about what happens, rather than evidence.
Many here seem to imply that the euro is bad for countries thatuse it. But surely this is a false concept? The whole point of the European Union is to merge nations into a larger block, to break down “national borders”?
The EU is getting there slowly as they are moving towards a shared debt, aren’t they?
Seems to me that UK left out of this merger is the most foolish future we could possibly have.
Thanks to all contribution contributors!
Perhaps a vital economics message, could be called “The Goldilocks Law”? Her wisdom in managing porridge heat and seating comfort could be usefully applied to inflation?
Perhaps “conversations” such as these brings to mind Noam Chomsky’s “Propaganda Model” which urges us to be alert to the creation and use of vigorous debate on a narrow issue or set of issues whilst avoiding questions which interrogate the current ideologies and promoted beliefs?
F. W. – Yes, the U. S. A. is in the strongest economic position because of its post- W. W. 2 advantages and its [perceived] military power, but all currency creators have real national powers if they care to use them. Might Japan be a relevant comparator?
n h -Yes! The [Alleged] “Deficit” is a massive control ignorance. As the nephew of a Cornish tin-miner, your mineral suggestions are most interesting! Allegedly, Henry Ford did a lot of successful car manufacturing using hemp. Hemp is also said to be great for climate improvement!
More anon!
The progressive Left’s refusal to be honest with voters in their need for much higher taxes on income and wealth, preferring to offer to print more money until it all goes bang, makes them weak in elections as it is easy to take them down on their voodoo economics. From a socialist point of view, reducing the country to ground zero where all become dependent on the State and are paid equally (with lots of power and tax free perks for the political cadres) has obvious benefits for the Progressives but the history of other such countries is unlikely to inspire many voters.
Hello again!
PR – Might the willingness of investors to buy government bonds also depend on the economic health of a nation? Might the use of M.M.R. insights make our economy more robust which is better for us and for investors?
PK – Yes, our financial system is debt based and has been since 1971. As indicated in the article, nations with sufficient wit, self-discipline and nerve can use it to raise social and economic standards for all their people.
IB – You might find “—and forgive them their debts” by Michael Hudson informative.
PK – Ditto! You might find it supports your views!
PM – Thank you for your informative contributions!
An – Whilst I hope for a coherent, powerful independent Europe, to exert a benign influence on its constituent nations and the wider world, the treatment of Greece shows that the Euro, as currently set up, is anti-democratic and exploitative of the weak.
FW – Yes, the tax set up needs reform as do many other financial tools. Perhaps we might start with increased taxation of property which has increased in price because of the publicly funded infrastructures which have caused that increase? Might we tax to encourage the development of skills?
Steve – this is an important contribution and I broadly agree with it. I wrote a piece with a similar message earlier in the pandemic – http://thinkingliberal.co.uk/guest-post-young-people-have-plenty-of-things-to-worry-about-the-long-term-effects-of-the-coronavirus-shouldnt-be-one-of-them/#comments. Can I also recommend Anne Pettifor’s ‘The production of money – how to break the power of the bankers’. Although she is critical of Modern Monetary Theory (MMT), I think she would a agree with the fundamentals you have set out here.
Her central message is that the way we manage money, through the various levers we have at our disposal, is intimately tied up with management of the economy. Neoliberal ideology has persuaded us to surrender much of our economic sovereignty to the world of finance. Unless we take back control (to coin a phrase) she sees little hope for a successful transition to the sort of economy that gives everyone the chance of a good life without wrecking our planetary life support system. Among other things she proposes the restoration of controls on the international flow of capital. She is critical of mainstream economics for its neglect of monetary theory.
Thanks for raising the profile of this issue within the party. Our understanding of money will be vital if and when we get anywhere near government again.
It has long been said that when America sneezes the rest of the world catches a cold. This has much to do with the dominance of the US dollar as a means of settlement in international finance and trade as this economist explains https://www.economist.com/schools-brief/2020/08/29/global-trades-dependence-on-dollars-lessens-its-benefits
“During the East Asian crisis of 1997-99 South Korea, Malaysia and Thailand all experienced currency depreciations of at least 60% relative to the dollar—and saw their export volumes stagnate or fall. With prices set in dollars, devaluations did nothing for their export competitiveness within the region. And demand for imports from elsewhere in the region—also priced in dollars—plunged. ”
“Dollar dominance means trade is vulnerable to the global financial cycle, too. A study by Valentina Bruno and Hyun Song Shin of the Bank for International Settlements found that a dollar appreciation leads banks reliant on dollar funding to shrink their credit supply. Companies reliant on those banks—and their dollar-denominated financing of trade—then slow their exports, an effect particularly marked in companies with longer supply chains. Trade is a finance-hungry business.”
The UK is highly dependent on international trade in both Dollars and the Euro. It is the fundamentals of International competitiveness that ultimately determine the standard of living of its citizens. There is no secret to it. Those countries that are able to trade and compete globally in high-value goods and services enjoy a higher standard of living than other countries around the world regardless of their currency arrangements. Germany and other Northern European counties are in a position to maintain financial support to their economies in the form of extended wage and furlough support for two years or more as a consequence. These Nordic and Northern European countries also consistently maintain a higher level of welfare support than has been typically the case in the UK or the USA.
Money and financing flows from trade and economic activity. You can’t have one without the other.
An,
the Eurozone has consistently proven more robust than many critics and harbingers of doom would have us believe. Last week the economist carried an article https://www.economist.com/finance-and-economics/2020/08/20/americas-fiscal-federalism-is-less-superior-than-you-might-think arguinf that America’s fiscal federalism is less superior than you might think.
“On the surface, the staggering stimulus package enacted in America in the spring, worth about 13% of gdp, looks a far more potent contribution than the eu’s fiscal package, agreed in July. That recovery fund, supported by collective borrowing, will spend nearly 5% of eu gdp over several years. But America’s stimulus is largely exhausted, and its dysfunctional Congress has been unable so far to pass additional measures. Cuts to state and local governments are already weighing on the economy, subtracting 0.4 percentage points from the (annualised) growth rate in the second quarter. The euro area, by contrast, agreed that fiscal rules should not apply during the pandemic, allowing members to provide economic support on a par with America’s federal response.”
“No one will mistake the euro area for an exemplar of federalism. Some member states, such as Italy, Spain and even France, will exit the crisis with huge public-debt burdens. The suspension of borrowing rules could deepen anxiety about moral hazard, and lingering hardships could yet trigger a crisis that threatens the entire European project. But conventional wisdom could use some revision. American fiscal federalism, so often cited as a model for the euro area, looks ever less clearly the superior system.”
“It has long been said that when America sneezes the rest of the world catches a cold. This has much to do with the dominance of the US dollar as a means of settlement in international finance…….”
There is some truth in this if we have what some Keynesians would term “sticky prices” set in US dollars, and written into contracts, but it is nowhere near as significant as many claim. The usual point made in support of this argument is that oil is priced in dollars. But that really doesn’t matter at all. It wouldn’t make any difference if it were priced in Vietnamese Dongs. If The Russians sell oil or gas to the Germans they’ll want roubles to pay their workers, taxes and other expenses. The Germans have euros. The oil and gas can be priced in dollars, or dongs, but there is no stickiness. The price changes continuously. So any transaction can be completed without any dollars, or dongs, changing hands at all. All that is needed is a calculator to do the currency conversions.
The USA, for all its other faults, isn’t mercantilist by nature. It is generally imports more than it exports. This pulls the world’s economy along quite well most of the time. If they were like the Germans then we’d all be in big trouble! But when they sneeze, so to speak, the US market is naturally less of an driver to world prosperity and we all feel the consequences.
As per the linked economist article (that reviews actual empirical evidence from research papers):
“America enjoys what is described as a “privileged insularity”. Its adjustment to a dollar depreciation happens almost entirely through exports, which immediately become cheaper in foreign markets. Devaluations against the dollar in other countries, by contrast, see them suffer. It becomes harder to afford imports while they don’t get the added export oomph the old models suggested. Exporters’ dollar earnings will be worth more in local currency, which might tempt some of them to expand. But that takes time. And the benefits are often offset by the higher cost of imported inputs.”
“Around the world invoicing imports in dollars means that it is devaluations against the greenback, rather than against the currency of the country you are trading with, that count. Emine Boz of the imf, Ms Gopinath and Mikkel Plagborg-Muller of Princeton University found that prices of imported goods were relatively unresponsive to bilateral exchange-rate movements. Over short-term horizons they were six times more sensitive to the dollar exchange rate. The price of Brazilian-made football shirts in Mexico will stay the same if the peso depreciates relative to the real, but not relative to the dollar. If the peso drops with respect to the dollar, though, those shirts will become less affordable and may no longer be sold.”
“During the East Asian crisis of 1997-99 South Korea, Malaysia and Thailand all experienced currency depreciations of at least 60% relative to the dollar—and saw their export volumes stagnate or fall. With prices set in dollars devaluations did nothing for their export competitiveness within the region. And demand for imports from elsewhere in the region—also priced in dollars—plunged. Ms Boz and her co-authors have found that, after accounting for the business cycle, a 1% appreciation in the value of the dollar translates into a 0.6% decrease in the volume of trade between countries in the rest of the world.”
Again, thanks for the conversation contributions!
JM -. Thank you for your encouraging comments and your interesting and informative article! A copy of the book has been ordered.
JB – Yes, the U.S.A. has great trade advantages including military and financial World dominance. It has also been skilfully protectionist whilst presenting itself as not following this policy. Perhaps we could learn from the U.S.A. and Germany? Economic activity and trade are indeed crucial. And so are policies which keep internal costs low and the performances of infrastructures high. Can this be done with policies which increase housing cost inflation and under-finance infrastructures? Perhaps job guarantee schemes are the best way to cope with crises such as Covid as they would provide integral stability. Might such be more available to nations which are currency issuers? Might rules which are suspended to address emergencies, call into question the worth of those rules?
PM – Might the use of force by the U.S.A. and its willing helpers, including us, to destroy economies it does not like, such as Libya, count as a form of mercantilism?
@ Joe B,
There’s nothing special about the dollar. If the dollar falls in value Americans will be able to afford fewer imports according to the same arithmetic formula as we can afford fewer if the pound falls. There’s no reason, anyway, why the ROW should price everything in dollars. That’s a commercial decision to be made by each manufacturer. Possibly Rolls Royce have a list price for their jet engines in dollars too. If they do, they will be making a higher margin when the pound falls. This will then mean they have more leeway to offer discounts in the bargaining process. Very few sales will go through at list price. Conversely if the pound rises…..
It will be the same for Brazilian made football shirts. The manufactures may choose to have a list price based in dollars which they will review from time to time. There will be upwards pressure on them to increase their dollar prices if the dollar falls or if Brazilian inflation is high. On the other hand if the Real falls there will be a downwards pressure. There’ll be a variable margin which will allow them to negotiate with their overseas customers such as UK buyers from the big retailers. But when the negotiations get tough they Brazilians will always have more bargaining space if the Real is not too high.
Exporters will also have an eye on the going rate in different markets. The price of DVDs, video games and even downloadable music was higher in Australia than it was in the USA when the Aussie dollar was riding high nine of ten years ago. But this wasn’t because of any “privileged insularity” on the part of America in general. It was simply that the suppliers had decided that Aussies could afford to pay more at the time and were taking their chance to make extra profits.
But this didn’t apply to everything. Aussie pineapple growers, for example, just couldn’t compete with Asian imports at the time. The high Aussie dollar caused big problems for the electronics industry I was working in at the time and was instrumental in my decision to bail out of what I was doing and set up my own business. Essentially I stopped designing and making stuff, and started to sell imported products instead.
@ Steve,
Mercantilism has a precise meaning. It’s not usually connected with invading foreign countries.
https://en.wikipedia.org/wiki/Mercantilism
PB- Thank you for the reference. Is there an “Economics” word or phrase for the use of conflict/war for real and/or projected economic advantage?
Apologies!
PM -Thanks for the reference! Is there an “Economics” word or phrase for the use of conflicts/war for real and/or projected economic advantage?
@ Steve,
Possibly ‘Economic Militarism’. There’s also ‘Military Keynesianism’ which means that the State spends freely on military projects which help maintain a high level of employment in relatively well paid jobs. Sometimes known on the left as the ‘Permanent Arms Economy’. There’s a wiki entry on these terms.
“It (the USA) has also been skilfully protectionist whilst presenting itself as not following this policy.”
No country allows totally free trade. There’s always an element of protection involved. Just why the EU sees the need to impose 40% + tariffs on cheese and some other agricultural products is perhaps best left to others to explain. But the USA is much less protectionist than most. It only, for example, applies 3% tariff on most motor vehicles from the EU but the EU applies a 10% tariff the other way.
In the New year we’ll see just how well the Northern Irish border arrangement works. It’s not a good idea to retaliate in kind if the EU imposes tariffs on UK agricultural and other products. Better to keep tariffs low on our side and let the EU worry about Cheddar Cheese and Welsh Lamb smugglers.
PM – Many thanks!
Peter Martin,
“There’s nothing special about the dollar.” The evidence, as detailed in the economist article, suggests otherwise.
“The amount of trade carried out in American dollars vastly exceeds the amount that America imports and exports. A growing body of evidence suggests that the dollar’s prominence in trade undermines the advantages which flexible exchange rates are meant to offer. And when the dollar strengthens, global trade tends to contract.”
“Exporters borrowing in dollars will want to price their foreign sales in the same currency, to protect against a sudden devaluation which would increase the value of their debt. Assets denominated in dollars offer their owners more security, because they will hold their value relative to imports priced in dollars.”
” In America sticky prices set in dollars mean the demand for imports is impervious to exchange-rate shocks. A Colombian light aircraft priced at $50,000 will cost the same when the dollar is worth 3,000 pesos as when it is worth 4,000. The change will eventually have an effect—but it will be partial, and slow. One study has found that two years after an exchange-rate shift only 44% of its effect would be seen in prices in America. Another found that just as prices did not change much, neither did the volumes importers chose to buy. After a 1% dollar depreciation, they found that the volume of imports into America fell by a measly 0.003%.”
“All this allows America to enjoy what Ms Gopinath describes as a “privileged insularity”. Its adjustment to a dollar depreciation happens almost entirely through exports, which immediately become cheaper in foreign markets. Devaluations against the dollar in other countries, by contrast, see them suffer. It becomes harder to afford imports while they don’t get the added export oomph the old models suggested. Exporters’ dollar earnings will be worth more in local currency, which might tempt some of them to expand. But that takes time. And the benefits are often offset by the higher cost of imported inputs.”
@ Joe B,
The US economy is the world’s largest and the dollar is therefore an important currency, the most important, but there’s still nothing special about it. The dollar is an IOU issued by the US govt in exactly the same way as the Yen is an IOU of the Japanese Govt.
Say a UK company sells North Sea Oil to a German company with the price set in US dollars. The Germans have euros, they change it into in dollars and the British company then changes it into pounds. The dollars have only ever existed momentarily in the banking system as a creation of the banks and are really nothing at all to do with the Americans. You’re always telling us how the banks can create money. Well, they can create dollars too – even if they aren’t American.
If there is a problem with sticky prices it would be exactly the same if the transaction had been priced in terms of an amount of gold. Just like there are no real dollars involved neither would there be any real gold involved.
If the Americans benefit it is because of the size of their economy. Both parties to any transactions are more likely to be American and want to use US dollars. So American companies will have a more predictable economic environment than say an Icelandic company. They’ll always have the problem of the volatility of the Icelandic króna. But it’s not an insuperable problem. Iceland has a GNP per person of $73k dollars. Their growth rate is 4.6%. Unemployment is 3.8%. (2018 figures). So they do OK!
They have recovered well from the 2008 crash and much better than, say, Cyprus which didn’t have the same benefit. So individual floating currencies do have their drawbacks. More drawbacks for Iceland than the UK. More for the UK than the USA. But the alternative of a shared currency, euro style, is much worse.
I’m surprised you should quote such “statistics” as “After a 1% dollar depreciation, they found that the volume of imports into America fell by a measly 0.003%”. Trade is normally growing increasing year on year in any case. If the dollar had stayed level would imports have increased by 1.003%?
Peter Martin,
all bank settlement transacrions in US Dollars have to be conducted via a US regulated financial institution. Only US banks can create American dollars. The US banks predomoinantly play two key roles:
1. US Dollar Clearing (Correspondent Banking Relationship or CBR as it is known)
2. International Money Transfer to/from the United States.
In the first instance, the US Banks that are authorized to provide US Dollar Clearing, act as Correspondent Banks for other financial institutions worldwide for US Dollar Clearing.
As the US Dollar is printed by the US Government, the US licensed banks are the only banks that can do clearing for it. So when two banks in say Manila and Tokyo are settling in US Dollars, this transaction has to reflect through a ledger maintained by some US Bank (contrary to popular belief, the US Dollars in the banking system, all of it, the ledger entries are in the US with US banks and regional Federal Reserve Banks).
So, in plain English, if you have to clear a US Dollar transaction, it has to go through a US Bank.
In the second instance, if US Dollars need to be send abroad (either as US Dollars or as a foreign currency), a US bank will play the gateway role in it.
The same is true if US Dollars or another foreign currency is coming into the United States. When banks don’t operate in the US, they open a bank account at a US bank and they do their USD settlements through that account.
International transfers originating from the UK are as large as those from the US in terms of volume and number of transactions as a consequence of London’s dominance in foreign exchange markets.
As the economist article notes,” Colombia does not trade in pesos. It trades almost exclusively in dollars; 98% of its exports are invoiced in them”. China also prices and conducts much of its International trade in USD. “Chinese data suggest that in 2013 only 17% of Chinese trade was settled in renminbi, and in 2012 only around half of such settlements were invoiced in renminbi.”
The bottom line is that evidence suggests pricing in dollars means demand for imports in the USA are largely unaffected by dollar devaluations; while other countroes will experience a fall off in demand for imports priced in dollars when their home currency devalues against the dollar with a potential fall in exports to the rest of the world outside the US.
@ JoeB,
The term Eurodollar refers to U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks. Because they are held outside the United States, eurodollars are not subject to regulation by the Federal Reserve Board, including reserve requirements.
So does this mean they aren’t ‘real’ dollars? It really doesn’t change anything if they are or they aren’t. Providing the bank can provide real dollars on demand, or convert them into other currencies when required, their customers will be happy.
The US doesn’t impose any obligation on Colombian companies to invoice in US dollars. That’s their choice. They can choose whatever currency they like.