Do the major world economies tend to follow the Modern Monetary Theory?
Part 2 : The MMT and International Trade
Previously, we see the main pilar of the Modern Monetary Theory (MMT) know as State Money Monopoly. The MMT argues that Fiscal Deficit of State is not issues as Money issuance or printing can solve it without generating inflation. What a wonderful theory for the current indebted States.
However, one consequence is that State Debt should be labeled in local currency so … the question of international trade and financial flows arise.
The particular view of International Trade under MMT
Under conventional mainstream economics (both Keynesian or liberal ), the International Trade is considered as an opportunity to acquire both Goods from external world (Imports) and wealth (Exports). Then a surplus is “good” things compare to “deficit”. However, the MMT views are totally reversed: Surplus is bad and Deficit is good !
MMT advocates consider that currency is just a way to acquire goods for people welfare. Consumption are then the expression of people needs for Goods. In this case, Imports are a source of new goods to supports the local standards of livings. At the opposite, Exports are an output of Goods and Currency to external countries.
The State should Maximize ( Production-Exports+Imports) to maximize the people welfare in real term. Then MMT consider that a Export Policy seeking a positive trade balance, as implemented in some countries Germany, Japan or China, South Korea, is not profitable for people interest.
Noting, that State can decide to locally produce some strategics goods while import them to avoid a strong dependency to foreign countries or to support a birth industry. In addition, cheap imports can be damageable for local industries producing same Goods with higher costs and in fine unemployment. On this point, MMT indicate that a it is a subjective view of value realized by State and the nation to determine what is better or not between ‘’Cheap Imports support High Standard of Living’’ and ‘’ the Value of Employment lost locally” …
What about Exchange Rate ?
The MMT are supporters of Floatting Exchange Regime as in this case, the Trade Balance are the reflect of the Foreigners willingness to Save in the Local Currency. As Currency is the only way to buy Goods, if there are more foreign investors asking local currency then domestic investors, the foreign countries want to exports more Goods. The MMT suppose that a Currency Demand are the reflect of a Goods supply, the demand for currency means the availability to sell labor or goods or services in exchange for currency.
This reasoning is only valid in pure Floating Exchange Regime as Central Banks should avoid interventions in FX market to control the rate to vary in a band. In this case a Trade Surplus indicates a greater foreign demand for currency than domestic demand … while a negative balance is a net domestic demand of foreign currency!
Considering the MMT approach of Trade, the floating regime, as long as the Demand for Currency exists the State can never be insolvent if debt/bonds are issued in local currency whatever if the holders are domestic investors or foreign investors (as a Floating FX Market allows to freely change currency). However, State should not be indebted in foreign currency as State can’t refunds it by money issuance (State can’t create foreign currency).
In this case, the State should continuously keep its currency in high-demand by foreigners in the period of repayment! IF NOT the State can be in default in case of FX collapse, support an export policy or raise interest rate to attract foreign investors (and so create a demand for its currency form external). MMT considers that these policies create negative effects on economy.