Who’s running the smarter economy: the UK or Germany? #2

What’s the rationale of a country like Germany wishing to run a perpetual current account surplus?  That desire seems to be causing a lot of trouble in the Euro Zone right now. Of course, everyone knows surpluses are good and deficits are bad. But, is that really the case?

If the Germans sell more to the UK in one year, that then gives them more ££ in their kitty to buy more stuff from the UK in the following year, which would of course be fair enough. But what is the point of their wanting to continue to do that year in year out? They are just building up large reserves of UK government securities denominated in ££ which they won’t ever spend. That is, until they decide to become a net importer, but that seems totally contrary to German economic “philosophy.” If that’s the right word!

Its the same story with America and many other countries too.The Germans like to accumulate US$ which they can never spend.

The Germans could do just as well by selling cars to the fictitious state of Atlantis. They could sell as many BMWs, Audis and as much of whatever else they make as they liked, then just dump the lot in the middle of the Atlantic ocean. They would get paid in pretend Atlantis dollars which they could never spend of course. (Except perhaps with the Chinese?) But, as they seem happy to accumulate large reserves of other currencies which they have no intention of ever spending, what would be the difference?

There needs to be a general rethink of how countries should balance their trade. It seems to make little sense to wish to have a perpetual surplus of exports for the exporters. If the importers were wise to the ways of MMT then they might not worry about their deficits, both external and internal, quite so much as they do. That doesn’t seem likely to happen any time soon, unfortunately, so the next best thing would be for everyone else to be challenge the big exporting countries like Germany, Austria, Singapore, Switzerland and China and ask them why they are so keen to earn money which they can’t or won’t spend.

MMT Humour – Money and Babies

  Money and Babies #1


  Money and Babies #2

budget def

  Money and Babies #3

budget def2

 Money and Babies #4

budget def3








Loan repayments destroy credit money. Right? Wrong. They don’t. (Part2)

Part 1 on this topic seemed to generate a lot of discussion both on the comments section  here  and  here

The consensus being that I was wrong !   So, what’s the correct view?

Let’s make it all as simple as possible. Let’s consider the example of  someone walking into the Royal Bank of Scotland to borrow one of their £10 notes. The RBS are one of those banks ‘north of the border’ who are allowed to print their own banknotes. They are essentially their IOUs . So these notes are the type of credit money we have been talking about. They tend to be well accepted in Scotland but less so in England.

So they borrow £10 and spend it on whatever!  When the time comes to repay the RBS the borrower could , leaving aside the complications of fees and interest payments, give them a Bank of England £10 note, the BoE being the Central bank of the UK, and the debt is cleared. The credit money is still in circulation. It isn’t destroyed.

Alternatively, they could repay with a RBS £10 note in which case the credit money is destroyed.

I probably should have said  “not necessarily” rather than “they don’t” but I think that’s all there is to the argument.

The Japanese own their own debt so they don’t have a problem. Right?

Wrong.  Even though those of us who argue that National Debts are not quite the huge monsters of popular neo-liberal supposition often point to Japan.  Japan manages to function very effectively with a debt to GDP ratio which is over 200%,  and more than double the US and UK’s national debt ratios.

All debts and deficits are caused by people, organisations, and countries wishing to save ££, $$ or Yen or whatever. If money issued by the US, UK or Japanese governments ends up being held by the central banks of the big exporters, or by their own citizens,  and who don’t wish to spend it, then these countries have to be in debt in accounting terms.

The only solution, if indeed there is a problem of debts owned by foreign countries, is to go back to countries imposing tariff barriers to protect their trade zones and prevent the build up of these kinds of financial imbalances. That caused wars in the past and would again in the future. It isn’t a good option.

It is usually pointed out by supporters of the neo-liberal orthodoxy that Japan manages to have such a high state debt by also having lots of savers who lend the money to the government. It is, therefore, not external debt and so is a lesser problem  True, Japan usually has a trade surplus and “pays its way” abroad.

However, internal debt can be more destabilising than external debt. If Japanese savers get spooked about a potential inflation they would all start over-spending simultaneously which could set off the problem they most fear. It would be politically very difficult for the Japanese government to control that by applying taxes on its own citizens. So whereas the debt isn’t at all a direct problem for the Japanese Government, the ownership of too many financial assets by the Japanese population could give them one.

On the other hand, if their debt were owned by a foreign country, say in the form of Japanese treasury bonds, it would be somewhat different. All that country could do , if it wanted to spend its Japanese Yen, would be to give large orders for real goods and services to Japanese industrial companies. It would boost Japanese exports tremendously. That too could be inflationary, but the situation would be more manageable. The Japanese government would be able to negotiate with its foreign creditors to spend at an agreed rate. As a last resort it could even impose a tax on its own exports.

That’s essentially the position the USA is in with regard to its Chinese creditors. If there is really a problem with debts,  it is China who has the bigger one than the USA. Japan has a bigger problem too. Not so much because it has a larger debt but because it is, rather than isn’t, largely owned by its own citizens.