23 thoughts on “Vicious Disequilibrium, in the Los Angeles Review of Books 

  1. Stavros, Crossover, cesira, Sefer1965, alsefe
    You all are correct in correcting Yanis on this. But you all are talking about internal effects on countries while Yanis is concerned with exterior effects, with international balances.
    Yanis comes with microeconomic aplication on international trade which is correct for most international trade but not with trades that involve full sovereign countries USA, Canada, Australia, Japan and Switzerland. Every other country has to work with microeconomic rules because they trade in foreign currencies not in their own as those 5 countries.

    The problem starts with foreign trade agreements, these 5 countries have power to trade only in their currencies and imbalance starts there. Only solution is to never ask for full clearance of debts. Debts have to be free to keep accumulating or the house of cards will collapse on any hint of clearing of debts.

    Just as any economy internaly have to grow their debts, debts have to grow externally too. Asking for austerity by IMF, World Bank or BIS is calling for reduction of liquidity in trade internationaly. So Yanis is also wrong to call for austerity in USA in 1970’s.

    The world economy depends on irational exuberance just as internal economy which fuels debt growth. Any scare about balances is starting a selffulfilling prophecy of collapse.
    What can stop the workings of irrational exuberance? Level of incomes? Since 1970, capitalists started curbing incomes of populations that supported debt levels. At first, incomes are being replaced by easing up on credit terms. All that continous debt terms easing, requierd to sustain evergrowing debt was stoped by Zero Lower Bound. Interest rates could not go lower anymore. This is now happening to countries what happened to people in 2008. To people in USA, the stop was sudden but countries are falling down one by one, slowly and persistantly.
    It is the dissaperance of irrational exuberance that started a selffulfiling prophecy of collapse. And long decline of incomes that are needed to pay for evergrowing debt is the cause of such dissapearance. “Only thing to fear is fear itself”

    So, Yanis is correct in his conclusions but not fully correct in following mechanisms of the way we got here. Yes, you can have right conclusions even tough the road to there is not right one.

    MMT tells us that evergrowing debt is only way capitalism grows, and stoping that growth in debt is causing economies to fall. And income growth is what provides psychological cover for irrational exuberance that pushes debt growth ever further and keeps economies going and people/ countries consuming real goods and services while incomes are falling.

    • @ Jordan

      Then why China felt the need to peg its currency to the dollar?According to your comment the Yuan should not appreciate because China does not get paid in Yuan but in dollars.

      Countries with floating currencies DO NOT “pay” in foreign currenies.They EXCHANGE their currencies in the markets thus the rebalancing takes place through the change in the exchange rates.Otherwise there would be no point in floating fx rates.

      The drawback to this for the countries that do not belong to the group of countries you mentioned is that they need to hold foreign currency reserves in order to maintain their currency fx rate more stable than otherwise.But that does not mean they need foreign reserves to PAY for imports.

    • And by the way,

      What MMT tells you is that government debt denominated in the free floating fiat currency a sovereign government issues does not pose the same burden it would pose to a household or a corporation.In that sense the word debt is misleading.
      Thus when the private sector tries to increase its net saving in an attempt to deleverage the government should increase its own “debt” in order to maintain the previous levels of economic activity.

      This distorted view of income you propose ignores the fact that income = spending.

    • Crossover.
      You ignore the fact that spending => income. It does not go other way around; income+ (change in) debt (+ some of previous savings) = spending.
      And altough true that spending= income, that is true only in totality, in agregate. It does not say if that income goes to indebted ones or to equity rich one. This is the case where micro affects macro economic outcome. Distribution of that increasing income is important, hence Yanis talks about imbalances.

      Just as income distribution can lead to imbalance for people that is also true for countries. People and non corporations pay to microeconomics, also individual countries in international trading, since there is no World Central Bank. There is BIS, IMF and World Bank but they do not have the role as other CBs in sovereign countries. They have a role as other CB in countries with fixed exchange rates have; to prevent inflation and brake of fix, not to help individual states with liquidity problems.
      FED is recently taking more play in that but only with those 5 countries and ECB.

      Considering trade in dollars, yen and pound. Other countries do not have to earn those currencies to pay for imports, they borrow it. Get it? They pay with borrowing from foreign banks and then corporations and traders play with FX, mostly traders.
      Also reserves in foreign currencies do not pay for imports, they are invested in foreign central banks. So those reserves you talking about and which small countries accumulate can never be used, because they are tied in investments.
      I know since Croatia has about € 8 Billion in foreign obligations and € 13 in reserves. Funy how that works, isn’t it?. Croatia will never use those reserves no matter how badly it needs it, because Governor is saving it for “rainy days” and 22% unemployment is still sunny for him.

      This is how state finances are set up, and there is a lot of mitology going around about it and all in service of austerity and enriching rich ones..

    • “You ignore the fact that spending => income. It does not go other way around; income+ (change in) debt (+ some of previous savings) = spending.
      And altough true that spending= income, that is true only in totality, in agregate. It does not say if that income goes to indebted ones or to equity rich one. This is the case where micro affects macro economic outcome. Distribution of that increasing income is important, hence Yanis talks about imbalances.”

      My whole point was directed towards your claim that “debt growth ever further and keeps economies going and people/ countries consuming real goods and services while incomes are falling.”

      When incomes are falling then spending will fall too and vice versa.How are you going to avoid a balance sheet recession if not by boosting government (deficit) spending which will in turn should boost income?

      ” Other countries do not have to earn those currencies to pay for imports, they borrow it. Get it? They pay with borrowing from foreign banks and then corporations and traders play with FX, mostly traders.”

      You must have never heard of swap and forward contracts then?Or you assume that they are merely tools used by traders right?Well they’re not.Greeks would not have to borrow dollars to pay for net imports from USA when we had the drachma.They could swap their drachmas for dollars.This trade imbalance would be reflected as a change (drop) in the exchange rate unless the Greek authorities wanted to avoid the drop in price and they would need to go in the markets and buy drachmas with their dollar reserves!

      Ofcourse someone could very well choose to borrow dollars if he believed that the drachma would appreciate in the future thus he would actually repay the debt with less money but this would merely be a matter of choice, not some situation that has no alternative.

      “Also reserves in foreign currencies do not pay for imports, they are invested in foreign central banks.”
      I did say they do not pay for imports.They are used as a monetary policy tool to manipulate the exchange rate.There’s no other use for them.Ofcourse they are invested.They could very well choose to let them sit at the CBs as cash and earning nothing.Instead they choose to buy government debt to earn interest.That doesn’t mean they are locked and cannot be used.They can sell their securities any time and free them up.Just because the CB of Croatia does not want to do that doesn’t mean it can’t.

      “This is how state finances are set up, and there is a lot of mitology going around about it and all in service of austerity and enriching rich ones..”

      Seriously now? Post Keynesianism is a mythology in favor of austerity ?

    • Crossover
      USA and UK have huge trade deficits, for decades, where are their foreign currency obligations? If I am incorect and you correct, where are their foreign currency liabilities?
      They have none. Because they do not trade in foreign currencies.
      Mitology is about FX representing such trade. It does not.

      PostKeynesians is about macroeconomics not about micro, and international trading is mostly micro economic based except for those 5 countries, it does not affect them, they play trade by macro rules – they are sovereign, internationaly sovereign and they do not have foreign currency obligations..

      “When incomes are falling then spending will fall too and vice versa.How are you going to avoid a balance sheet recession if not by boosting government (deficit) spending which will in turn should boost income?”

      By incresing debt. get it?
      spending(present) = income (previous) + change in debt (present) + some (previous) savings, It is not time linear.
      Spending(present) => income (future)
      Spending (future) = spending (present) + change in debt (future) + some savings (previous)
      Can you see that spending and therefore incomes are affected by change in debt and spending savings?
      Debt replacing income was happening since 1980. 2008 was the end of increasing debt replacing increasing income, therefore balance sheet recession happened. Greece was able to grow its debt untill 2009 and crisis happened then. people in USA could not increase their debt anymore to replace falling incomes since Democrats took control of Congress in 2007 and started regulating banks again and subprime credit market.
      Democrats triggered USA recessions by looking at shody financials, which would be triggered anyway at some point but they did it, intentionally or not is no point.

      For countries, change in debt has been forever and will stay forever positive, but spending for countries is also affected by trade balance. Spending(c)= income (interior) + change in debt + trade balance.

      International trade is under micro economics, mostly. Not under PK and MMT. MMT applys to EZ but they refuse to apply it, they want to play under micro rules and finding out about Greek derivative trades was the shock that started to regulate non sovereign Greece. If someone can regulate your country then it is not sovereign, it has obligations in foreign currency.

      You guys mostly talk about future, about solutions for GFC while Yanis is talking about past in this post, about what lead to this GFC. And you applied MMT/ macro to it while it is mostly micro that applys to trade.
      And Yanis is mistaken to apply micro to those 5 countries when macro applys.

    • “USA and UK have huge trade deficits, for decades, where are their foreign currency obligations? If I am incorect and you correct, where are their foreign currency liabilities?”

      Huh ? When did I say that they incur foreign currency liabilities in order to trade?
      What I said was that ALL countries with a free floating currency can use their own currency to trade.I also explained why someone might choose to borrow instead of converting from one currency to another.Additionally they might borrow in order to keep the currency from dropping its price.

      “Mitology is about FX representing such trade. It does not.”
      Are you kidding me? So if you want to go to USA you’re going to ask for a USD loan?
      You’re not going to visit a bank where you will exchange your HRK to USD (which the bank has already acquired by TRADING at FX markets like banks do) ?
      And how are Chinese workers get paid? They don’t get paid in Yuan?Even if a Chinese firm accepts dollars for payment from its exports, doesn’t it have to convert at least part of this $ income to Yuan to cover domestic payments?
      For all I know people in Greece were paid in Drachmas,even those working at exporting firms.

      “PostKeynesians is about macroeconomics not about micro, and international trading is mostly micro economic based except for those 5 countries, it does not affect them, they play trade by macro rules – they are sovereign, internationaly sovereign and they do not have foreign currency obligations”
      I’m sorry but you’re using the terms macro and micro in a way I cannot comprehend.
      Trade and its imbalances is a field studied by macroeconomics no matter if you are a Post Keynesian, a Monetarist or whatever and no matter which country’s trade balance you’re examining.Still foreign currency obligations have nothing to do with the ability to trade using your own currency.It is highly possible that a currency can depreciate when large and persistent trade deficits exist but the depreciation happens precisely because the currency is now accepted at a lower exchange rate.Key word is ACCEPTED.The way to tackle this “problem” other than improving the trade balance is either via borrowing (in other words you receive foreign currency without increasing the supply of your domestic currency offered for exchange, thus the exchange rate is not affected) or through the use of foreign reserves by the CB.So if country A has a trade deficit with country B that puts a downward pressure to the price of currency A vis-a-vis currecy B, then the CB might go out and buy currency A while selling currency B from its foreign reserves.

      The advantage the 5 countries you mentioned have is that their currencies are not so closely correlated to their trade balance than other countries because there exists external demand for them for transactions for certain goods or services such as oil.This only means that they can run larger trade deficits without worrying about their exchange rate.And this is the reason these countries may need to have less foreign currency obligations or hold less foreign reserves beucase there is less need for intervention.Still even the US have foreign currency obligations: http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/debtb2013q4.htm

      “Debt replacing income was happening since 1980. 2008 was the end of increasing debt replacing increasing income, therefore balance sheet recession happened.”
      You seem to have a weird view on debt and financial transactions.Every financial asset has a corresponding financial liability such that they ALWAYS net to zero.The only reason you have a positive net worth is because someone else has negative net worth.Someone’s income comes from someone else’s spending.Thus saying that debt replaced income makes no sense.

      “USA could not increase their debt anymore to replace falling incomes since Democrats took control of Congress in 2007 and started regulating banks again and subprime credit market.
      Democrats triggered USA recessions by looking at shody financials, which would be triggered anyway at some point but they did it, intentionally or not is no point.”

      USA had a private debt problem and the recession happened because the prv. sector started to paying it down.Ceteris Paribus this by definition means income/output would take a hit since a larger part of income would be directed towards paying down debt rather towards consumption or investment.The only solution to this would be for the public sector to increase its deficit and thus to maintain the previous levels of output/income until the balance sheet of the private sector was healthy again.This means that the US government would have to increase its “debt”

      “You guys mostly talk about future, about solutions for GFC while Yanis is talking about past in this post, about what lead to this GFC. And you applied MMT/ macro to it while it is mostly micro that applys to trade.
      And Yanis is mistaken to apply micro to those 5 countries when macro applys.”

      No I am not talking about the future.Professor Varoufakis treats the US economy the same way both in the Bretton Woods/gold standard era and after it.He correctly understands that in a fixed currency regime such as the gold standard, trade imbalances create problems for the deficit economies because they are loosing base money.Being fixed currency regimes it is impossible to replace this leakage precisely because the quantity of money is fixed.Thus in such regimes a surplus recycling mechanism is vital for the sustainability of the system.
      The problem with eurozone is the same.It’s a fixed currency regime for the eurozone members and their relative trade balances vis-a-vis each other thus the Eurozone too requires a surplus recycling mechanism.

      Where I disagree is in the way he treats the US and the world economy after we abandoned the Gold Standard.There was no longer a need for a SRM because we were no longer under the gold standard.Trade deficits did not cause a reduction of base money.Countries could replace the “lost” money by issuing more and the balance would manifest through a change in the exchange rates.That is the essence of a floating currency.You determine the quantity and you let the price adjust.
      For that reason I don’t agree with the idea that the US had a need to recycle the surpluses of China or Japan or Germany in order to sustain its deficits after 1971.Similarly these countries should have no need to rely on the US to keep their economies afloat.What should stop them from generating the needed demand internally?If the real resources exist why money should be a problem in a free floating fiat currency regime?

  2. “Gold was the monetary medium that checked America’s ability to run balance-of-payments deficits without limit. As the dollar ceased being ‘as good as gold” in 1971, the US Treasury put pressure on CB’s to demonetize the metal and finally drove it out of the world monetary system – a geopolitical version of Gresham’s Law, using the US Treasury bill to provide the US with a free lunch by financing the federal budget deficit via Japan, China, and other East Asian countries rather than by US taxpayers.” This is well documented in Thomas Hudson’s “Super Imperialism ” and a series of articles on Henry CK Liu’s website and published in Asia Times online, entitled “Dollar Hegemony” (a title my pun-loving mind loves as Hedgemoney is barely disguised). This dynamic results in the trade partners of the US accumulating tremendous stores of US liabilities, the value of which, they know upon purchase, the Fed is actively deflating away. The sucking sound which Perot, running against Clinton, referred to is actually a two-way street: they get the jobs he warned would follow Nafta’s passage out of the country, but the US, in return, vacuums up the world’s resources, not by virtue of the productivity of its economy, but by the over-arching dominance of its militarized financial system. May The Market Forces be with you.

  3. Yanis: You write beautifully and most of your analysis is incisive and enlightening, but you keep on getting things wrong when it comes to trade flows and how money works… the simple T accounts behind it all.
    1. The process begins with a Chinese Bank extending a loan to a Chinese Manufacturer. This is done essentially from think air. The Chinese Central Bank (CB) will accommodate any new demand for money by providing/lending the needed reserves.
    2. The Chinese Manufacturer then buys supplies, pays its workers, and produces a car. Say it attaches a 120,000-Yuan price tag to it, and does some marketing in the US.
    3. A US consumer likes what he sees, and goes to his bank, and as per step 1, obtains the needed US dollars (say 20,000).
    4. The car is exported, a purchase and sale transaction takes place, and the US branch of the Chinese Manufacturer obtains the dollars.
    5. However, the Manufacturer needs to pays its loan, and so enters into the FX market. Simplistically, the end result is that the Chinese CB will end up with the US dollars in its account at the US Fed, and the Chinese Manufacturer will end up with its Yuan (120,000) in China. The loop generated in 1. above is closed.
    6. The Chinese CB, now holding the US$ (20,000), will want to earn some interest. Essentially, it will therefore switch the money from its “checking” account at the Fed, to its “savings” account at the Fed (i.e., buy US Treasuries).
    7. One day, a Chinese consumer decides he wants to buy a US good or service, say a trip to Disney with friends and family. The cost is US$ 20,000. When that happens, the above process will in part repeat itself, and more loops will be closed.
    Note how in each step above, there is always balance. A loan is matched by a deposit. A purchase is matched by a sale. Balances in T Accounts always balance. What changes are the savings desires of societies, in part driven by Government industrial and exchange rate policy.
    Considering the above, you are not really correct when you write “…the world was in an equilibrium sustained by two counterbalancing forces…goods that sailed across the oceans [and]… the torrent of capital that gushed in the opposite direction…The two were thought to cancel each other out…Of course, it was all nonsense… banks were building inherently unstable pyramids that could tumble down with a great thump.” You are also incorrect when you write “Every crisis generates two distinct mountains: one of debts and losses, another of idle, fearful savings. Unless they start “eliminating” each other, talk of a new “balance” or of a world that is “rebalancing” is unfounded. For such a verdict to be valid, the currently idle savings need to turn into investments”.
    The current crisis is rooted in the US banking system, excessive lending, and too little regulation. Trade flows are at best a byproduct of all that. Savings don’t create investments. No money will have ever crossed any oceans. There is no balancing act per se to worry about. I find that (Frank Newman) a former Chairman and CEO of Bankers Trust, as well as former CEO of the Shenzhen Development Bank, is the one who best details all of this in his books.

  4. Yanis: You write beautifully and most of your analysis is incisive and enlightening, but you keep on getting things wrong when it comes to trade flows and how money works… the simple T accounts behind it all.
    1. The process begins with a Chinese Bank extending a loan to a Chinese Manufacturer. This is done essentially from think air. The Chinese Central Bank (CB) will accommodate any new demand for money by providing/lending the needed reserves.
    2. The Chinese Manufacturer then pays its workers, etc. and produces a car. Say it attaches a 120,000-Yuan price tag to it.
    3. A US consumer likes what he sees, and goes to his bank, and as per step 1, obtains the needed US dollars (say 20,000).
    4. The car is exported, a purchase and sale transaction takes place, and the US branch of the Chinese Manufacturer obtains the dollars.
    5. However, the Manufacturer needs to pays its loan, and so enters into the FX market. Simplistically, the end result is that the Chinese CB will end up with the US dollars in its account at the US Fed, and the Chinese Manufacturer will end up with its Yuan (120,000) in China. The loop generated in 1. above is closed.
    6. The Chinese CB, now holding the US$ (20,000), will want to earn some interest. Essentially, it will therefore switch the money from its “checking” account at the Fed, to its “savings” account at the Fed (i.e., buy US Treasuries).
    7. One day, a Chinese consumer decides he wants to buy a US good or service, say a trip to Disney with friends and family. The cost is US$ 20,000. When that happens, the above process will in part repeat itself, and more loops will be closed.

    Note how in each step above, there is always balance. A loan is matched by a deposit. A purchase is matched by a sale. Balances in T Accounts always balance. What changes are the savings desires of societies, in part driven by Government industrial and exchange rate policy. Considering the above, you are not really correct when you write “…the world was in an equilibrium sustained by two counterbalancing forces…goods that sailed across the oceans [and]… the torrent of capital that gushed in the opposite direction…The two were thought to cancel each other out…Of course, it was all nonsense… banks were building inherently unstable pyramids that could tumble down with a great thump.” You are also incorrect when you write “Every crisis generates two distinct mountains: one of debts and losses, another of idle, fearful savings. Unless they start “eliminating” each other, talk of a new “balance” or of a world that is “rebalancing” is unfounded. For such a verdict to be valid, the currently idle savings need to turn into investments”.

    The current crisis is rooted in the US banking system, excessive lending, and too little regulation. There may be other factors, but those are the main ones. Trade flows are at best a byproduct of all that. Importantly, savings don’t create investments. No money will have ever crossed any oceans. There is no balancing act per se to worry about. A book written by (Frank Newman) a former Chairman and CEO of Bankers Trust, as well as former CEO of the Shenzhen Development Bank, does an excellent job of explaining all this.

    • I’m glad you highlight the importance of keeping things stock-flow consistent.
      And obviously savings don’t fund/create investments.
      The problem however is that we are in a situation where both gvt and prv sectors are trying to net save/deleverage and there’s nobody to make up for this demand leakage through directing funds towards consumption and investment.

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  6. Yianis, This is an excellent analysis of the causes of 2008 crisis and the current status of the world economy. However it lacks the answer to the question on what should be done to get out of this.

    Following your important data and statement in your article …. “Try to imagine the mountain of cash on which corporations in the United States and Europe are sitting, too terrorized by the prospect of insufficient consumer demand to invest in the production of things that society needs. We now have it on good authority that some $2 trillion of surpluses are slashing around within corporate America. Another $700 billion is loitering within the United Kingdom’s circuits of finance, refusing to be channeled into productive investments. A further $2 trillion is “lost” in the no man’s land of idle savings, which circulate in continental Europe, Asia, and Latin America. Nearly $5 trillion of idle money is hardly a sign of a world in the process of “rebalancing.” …I would like to see more emphasis in your analysis on the wealth and the disposable income inequality as the cause of the imbalance between savings and investments. It is a political issue to rebalance this disequilibrium which I do not think currently any government has the will to take really robust measures to tackle. The governments in US and EU represent the interests of the classes who are clinched on their wealth and their life style blinded by their greed, even if they shoot themselves and all of us at the same time. Seeing the real income of the broader population diminishing with the paradox of increases in the price of the necessities, I am very pessimistic for the future. Hopefully the people will understand rather soon than late this unjust and deteriorating unequal distribution of income and force the political change absolutely necessary.

  7. “While it is true, literally speaking, that foreigners did not pay for the US deficit, they certainly financed it through their purchase of US debt paper.”

    They “certainly” did NOT. They switched from a non-interest bearing U.S.D denominated financial instrument to an interest-bearing U.S.D. denominated financial instrument. They “financed” bupkus.

  8. To invest in dollar-denominated debt instruments, you need to procure dollars. To invest in dollar-denominated equities, you need to procure dollars. To purchase goods and services offered in exchange for dollars, you need to procure dollars. One way to procure dollars is to sell goods and services to willing buyers in exchange for dollars. The U.S.’s trade-account deficit by definition implies a ‘surplus’ of dollars for the exporters to the U.S.. Accumulating U.S. dollars does not entitle you to compel anyone to part with anything in exchange for your dollars. All that it entitles you to is dollars. Non-convertible means non-convertible. You are entitled to convert dollars, even interest-bearing dollar-denominated instruments, into . . . dollars. That’s it.

  9. “The question is whether the US economy (here metaphorically speaking) is capable of honouring its debts-that is pay the interest due and redeem the face value of the bill or bond purchased.”

    It’s not the U.S. economy (literally or metaphorically) that honors (pays) the U.S. government’s obligations denominated in U.S. Dollars. It is the entity that issues U.S. Dollars. The U.S. Government is the monopoly issuer of HPB U.S. Dollars. Thus, IT can never be forced exogenously to “fail” to pay the interest due and redeem the face-value of the U.S. Government debt instrument (bill or bond) denominated in U.S. Dollars. The U.S. economy, literally or metaphorically, does not produce U.S. Dollars.

  10. I have a few questions professor.

    1)Do you share the loanable funds theory view?
    2)Do you agree with the view that gvt. deficits cause financial crowding out ?
    3)When a country runs a trade deficit, its foreign sector is accumulating the domestic currency.In cases like the Eurozone these savings can be spent in other countries that use the same currency but in cases like USA or Greece when it issued the Drachma these savings can only be spent in the domestic economy on anything that is for sale in this currency (i.e. goods,commodities,services,securities,other financial instruments,fdi etc).Doesn’t it follow then that it’s only natural for these savings to return to the domestic economy at some point?Not because there was a SRM in place but because those who accumulated these savings in the first place, did so with the intention of spending them in the domestic economy later on.

    If I am right on my 3rd point then your whole global minotaur – SRM argument is invalid when it comes to the US and any other economy with a free floating currency.However it makes perfect sense for the eurozone countries.

  11. “n 1971 US policy makers made an audacious strategic decision: faced with the rising twin deficits that were building up in the late 1960s (the budget deficit of the US government and the trade deficit of the American economy), Washington decided to turn a blind eye to them.”

    In 1971, the U.S.A. became a true monetary sovereign, a non-convertible (to anything other than more U.S.D.), freely-floating currency-issuer. The implications of that change (which completed the non-convertibility of the U.S.D. into gold or any other precious metal or currency, initiated domestically by FDR in 1934) for what happened subsequently are not taken into consideration in your piece, Yani.

    “The question, of course, was: who would pay for the red ink on America’s trade account and federal budget? In my book, The Global Minotaur, I propose a simple answer — the rest of the world. How? By means of a permanent influx of capital, which would fund America’s ever-increasing twin deficits. And why would investors from around the world send their money to Wall Street to finance American deficits? Because Washington has pursued policies that reliably appeal to non-US investors (who choose to put their money on Wall Street), ensuring higher and safer returns than they could secure elsewhere.”

    There is no such question that is capable of being legitimately posed after August 15, 1971. One wonders what you intend to convey by this question. “Who would pay for the trade account red ink?” Certainly no influx of foreign capital would ‘pay’ for the trade account deficit. That just doesn’t compute. “Who would pay for the U.S. federal budget deficits?” Those who have been “buying” US Treasuries have certainly not been “paying for” the U.S. federal budget deficits. The monopoly producer of fiat, non-convertible, freely-floating U.S. Dollars does not need anyone to lend it U.S.D. (or to ‘contribute’ them via taxes). And global investors did not ‘send their money to Wall Street” to “finance American [trade account and federal government budget] deficits”.

    You have not established a ‘link’ between the trade account deficit, the federal budget deficit, and the influx of foreign capital into Wall Street. Thus, your alternative explanation for “Wall Street’s greed and the laxity of regulation by the US government” does not appear to be supported by either evidence or logic.

    • While it is true the willingness of foreign sources to purchase US debt paper does not mean these sources ‘paid’ for the debt, it is also true, these were the sources who financed it. The question is whether the US economy, for the foreseeable future, can honour its promises to service (and retire) the debts incurred. Some bet no, so sell their bonds at a discount to others who have the opposite view or a different currency preference etc etc.

      What is obvious to me is there is no archimedian point from which it is possible to form an objective view of the current situation; there are various perspectives, each of which shines light on one or more dimensions and thereby on one or more spaces for possible solutions. So unlike Yannis, I do not discredit the remarks made by Eichengreen about regulation; from a certain ‘middle distance’, they are apposite and the issue of regulation needs to be addressed. We shall see if there is the political courage to do so–especially on the part of the creditors who would seem to have a strong motive to do so.

    • While it is true, literally speaking, that foreigners did not pay for the US deficit, they certainly financed it through their purchase of US debt paper. The question is whether the US economy (here metaphorically speaking) is capable of honouring its debts-that is pay the interest due and redeem the face value of the bill or bond purchased. Some think maybe not so they sell these bonds at a discount to people who they they will pay the debt. The coordinated ‘low interest rate, quantitative easing, no inflation/pretend away deflation environment appears to be working in favour of US debt paper. But this is a fragile peace, no? Can further austerity be imposed in the US without injury to the duties of the global hegemon? This is another vulnerability. All in all, the metaphor used in the Global Minotaur might mislead through a simplification which, on the other hand, highlights the political dimension of the crisis which need to be brought clearly to the fore.

    • “Can further austerity be imposed in the US without injury to the duties of the global hegemon?”
      Further austerity is not needed for the US precisely because it does not need anyone – foreigners or domestic savers in order to finance its spending.
      However it is foolish to believe that for example China will by definition suffer if the US decides to “tighten its belts” for whatever stupid reason.It would only need somebody else to provide the demand that the US generated previously.This somebody could be the Chinese prv sector or the Chinese government.And especially the Chinese government since it too would be unconstrained in spending the currency it issues.It would have to let the Yuan float freely at the markets however.

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