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A Response to Frances Coppola

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[Italicized text is a quote from the original article linked below, all bolded statements are Warren Mosler’s responses] 

How many countries can really claim to have full monetary sovereignty? 
 
The simplistic answer is “any country which issues its own currency, has free movement of capital and a floating exchange rate.” I have seen this trotted out MANY times, particularly by non-economists of the MMT persuasion. It is, unfortunately, wrong. 
It is just a definition. A definition can’t be wrong. So the piece begins with a logical flaw. 

This is a more complex definition from a prominent MMT economist: 
A more complex definition doesn’t make the prior definition wrong.  

1. Issues its own currency exclusively 
2. Requires all taxes and related obligations to be extinguished in that currency 
3. Can purchase anything that is for sale in that currency at any time it chooses, without financial constraints. That includes all idle labour 
4. Its central bank sets the interest rate 
5. The currency floats 
6. The Government does not borrow in any currency other than its own. 
 
This appears solid. But in fact, it too is wrong. 
Another wrong definition???

 The big hole in this 
A hole in a definition? 

is the external borrowing constraint – item 6 in the list. If a government genuinely could purchase everything the country needed in its own currency, then it would indeed be monetarily sovereign. 
Now we see the author’s definition of MS [monetary sovereignty] claiming this is the right definition, extending the absurdity. 
 
But no country is self-sufficient. All countries need imports. So item 3 on the list is a red herring. 
Elements of a definition are red herrings? 
 
A government may be able to buy anything that is for sale in its own currency, but that doesn’t include oil, or gas, or raw materials for industrial production, or basic foodstuffs. To buy those, you need US dollars. Indeed, these days, you 
I assume that’s the consumer. 

need dollars for most imports. 
No, most consumers buy imports with their local currencies. Currency exchange is generally done by the local importer or the foreign exporter. 
 
Most global trade is conducted in US dollars. 
Yes. That is often the numeraire. 
 
The only country in the world that can always buy everything the country needs in its own currency, and therefore never needs to borrow in another currency, is the United States, because it is the sole issuer of the US dollar. This is another way of expressing what is known as its “exorbitant privilege”. 
This definition demonstrates ignorance of the numeraire concept, and reads like there is a failure to distinguish between the currency of denomination and the currency of denomination of accumulated net financial assets. 
 
However, the dark side of this is that the US is obliged to run wide current account and fiscal deficits, 
That would be the bright side. Imports are real benefits and exports are real costs, and the net is known as real terms of trade. 
 
because global demand for the dollar far exceeds US production. 
Yes, a policy designed to support net exports at the real cost of the macro economy. 
 
When it attempts to close these deficits, 
(trade deficits) 
 
global trade and investment shrinks, causing market crashes and triggering recessions around the world. Sometimes, there is even a recession in the US itself. The US’s last attempt to run a fiscal surplus ended in the 2001 market crash and recession: 
As written, the author is presuming the US proactively targeted fiscal surpluses to reduce trade deficits. This was not the reason for the surpluses. Those were generated by the tax structure, along with rapidly increasing private sector deficits due to the tech, Y2K and real estate manias. 
 
MMT adherents like to cite this as evidence that eliminating the government deficit in any country will result in a recession. 
This is stretching things considerably. 
 
But this is stretching things considerably. FRED shows us that even in the U.S., only one recession in the last century has been preceded by a government surplus. 
Again, a gross error of logic. Saying that eliminating a government deficit can result in a recession is not to say that all recessions are caused by a government surplus.  
 
Of course, many developed countries do in practice pay for imports in their own currencies. Governments, banks and corporations meet dollar funding requirements by borrowing in their own currency and swapping into dollars in the financial markets. This diminishes the need for dollar-denominated borrowing, either by government or the private sector. These countries therefore have a considerable degree of monetary sovereignty. 
This is just a further expansion of the author’s definition of MS [monetary sovereignty]. 
 
But it is not absolute as it is in the United States. It crucially depends on the stability of their currencies and the creditworthiness of their borrowers, both of which are a matter of market confidence. 
No point in continuing, as the rest is a continued attempt to proceed in a logical progression with the same compounding breakdowns of logic. MMT is about ‘pure force of logic’ (as per Soft Currency Economics), which this author [Coppola] is apparently unwilling to or incapable of recognizing. 

Feel free to distribute. 

Warren 

Quotes from this article by Frances Coppola

1 thought on “A Response to Frances Coppola”

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