Episode 212 – A South American Currency Union? with Daniel Conceição

Macro N Cheese – Episode 212
A South American Currency Union? with Daniel Conceição
February 18, 2023

 

[00:00:00] Daniel Conceição [intro/music]: For a supra-national currency to work, really what we would have to achieve would be for national interests to be somehow resolved at a supra-national level, and that’s very hard to do.

Just the very contradiction of a government that’s claiming that it’s broke and all of a sudden finds the money to spend close to a trillion reals of our taxes to fight the pandemic should have made it clear that they were lying before.

[00:01:08] Geoff Ginter [intro/music]: Now, let’s see if we can avoid the apocalypse all together. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43] Steve Grumbine: All right. This is Steve with Macro N Cheese. Recently in Reuters, and pretty much any publication out there announced that Brazil and Argentina were sparking some excitement over the possibility of a potential currency union. Though the two countries are unlikely to ditch the real or peso anytime soon, we brought our friend Daniel Conceição.

He’s a Brazilian economist. He studied his economics at the Federal University of Rio de Janeiro. In Brazil and his postgraduate studies were at UMKC under Professor Randall Wray and Stephanie Kelton, et cetera. He also is a professor of macroeconomics and public finance at the Federal University of Rio de Janeiro.

So with that, welcome Daniel. I’m glad to have you back, sir.

[00:02:34] Daniel Conceição: Yes. Thank you for having me. It’s always a pleasure.

[00:02:37] Grumbine: The Reuters article said some interesting things. I’ll just read a little bit of it. I sparked off chatter about a European Union style zonal currency for South America. Though officials have since played that down and analysts say a full-on currency union is a distant prospect.

Lula has since said that early talks are focused on developing a shared unit of value for bilateral trade to reduce the reliance on the US dollar. Brazil’s Executive Secretary of Finance Ministry, Gabriel Galipolo told Reuters that the regional unit of account would come alongside expanded credit to support exports to Argentina through banks that operate in that country.

He also went on to say that Brazil’s government would offer guarantees to banks that help provide financing while Argentina, a major grains exporter would have to provide collateral via hard assets like grains, gas, or oil. So with that, what’s going on with this? This sounds kind of interesting.

[00:03:44] Conceição: Yeah. I think the most interesting thing is that it forces us to reflect about different monetary and financial arrangements for bilateral relationships. that we foster I wouldn’t put too much on this plan of monetary integration, I think at this point, there’s nothing really that suggests that this is something that is really being discussed and planned for the near future.

But just to think about ways of making it easier for the two countries to exchange goods and to engage financially is very useful, especially if it means that we’re finally going, to rely a little less on other people’s currencies like the. dollar That is a welcome discussion.

[00:04:39] Grumbine: Why don’t we start with that. Currently, I know that the US dollar has been used to great detriment in many ways by being able to control not just the flows, but control policy overall the relationships between the countries. Can you describe the impact that being so closely tied to the dollar has had on Brazil and the rest of South America?

[00:05:04] Conceição: Yeah, so if you think about the reliance on dollars and what it means there’s this one instance when you really have no escaping, having to acquire dollars before you make a purchase, which is if you’re buying something from the US. So that’s one instance when you need dollars.

The second instance is because the dollar is so widely accepted Everywhere else in the world it usually means that other countries also accept dollar payments. So you might also wanna get dollars to buy from those countries. And in most cases, the dollar becomes an intermediary between different currencies.

So in order for you to make a purchase, let’s say, to purchase something that is produced by Argentina, instead of exchanging reals or pesos, you would acquire dollars with your reals, then use those dollars to acquire pesos and make the payment in Argentina. Now, there is already a payment system in place that allows for direct currency swaps to occur so that you can already purchase pesos with reals.

And this is the thing that I think should be strengthened whenever you can escape. Having to use dollars as an intermediary to make a purchase in a foreign country, you should seek that opportunity because if anything, there’s an administrative cost, you need to pay a premium to whoever is selling the dollar so that it makes sense for the dollar seller to sell it so that they’re buying the pesos.

And again, you’ll need to make that purchase interesting for the seller of the pesos. So if you can just exchange for pesos you eliminate at least one party in [inaudible] and you don’t need to make it worth their while. So that reduces cost, but also it means that if you can’t acquire dollars, you can still make a purchase now because you have the reals to pay for the pesos.

So that part of the arrangement, which already exists, that portion of the proposal is already in place. It needs to be strengthened. Because it’s not as widely known and as widely utilized by those two economies, but that’s in place and that’s the real key element of whatever innovation we want to seek to help those countries engage economically and financially

[00:07:44] Grumbine: We talked to Fadhel Kaboub and Ndongo Samba Sylla about trying to unify Africa to produce a collective collaborative symbiotic relationship there. And we’ve seen Europe try to do this as well. And the initial efforts at the Euro were Incredibly bad. You had extreme differences between net importers and net exporters, and you saw the toll it took on countries like Greece in particular, the southern portion of Europe, and there’s some lessons that have been learned from building the EU, and they are slowly backing away from a European Union style arrangement.

If you were to produce a currency union within these two countries or the larger continent, how would you do that? Or would that be an absolutely terrible move to make giving up sovereignty and giving it over to that common currency?

[00:08:44] Conceição: Yeah, so I think whenever I hear discussions about the currency union, it makes me worried exactly, because the tendency for people is to copy the most horrible experiment with currency unions that you can imagine, which has been the Euro. Well, the thing with the Euro is that it was implemented based on a completely flawed understanding of money and fiscal finance.

It basically was implemented by people who believe that austerity was needed for countries to engage economically responsibly within a continental arrangement, and the very existence of trading balances between those countries because they were using the same currency. Would no longer be reduced or eliminated the uh, exchange rate variation.

What you usually have is if a country is persistently net importing from another country, it needs to get the other country’s currency. Then in order to achieve this you either borrow in that currency and that usually comes with a limit, or your currency will depreciate relative to the other currency and then reduces the incentive of importing from that country because imports will become more expensive.

So that creates a little bit of a regulating elements. That’s not the ideal mechanism, but it reduces potentially explosive moments such as what happened in the Euro Zone, because what happened there, the trading balances were being accumulated as public debts. because the private debts would be much more quickly unsustainable.

So Greece was turning their net imports into basically growing public debts, and that could have been perfectly acceptable for both countries. Let’s say that you have a very simplistic structure where basically you have Greece and Germany and no one else. So that we can think about it more simply.

Well, if Germany is net exporting to Greece, and Greece is net importing from Germany, basically they could be very satisfied because Germany has a greater productive capacity and is benefiting from the demand that comes from Greece in order to keep selling their goods and producing and generating income domestically.

And Greece is purchasing more goods than it would If it couldn’t net import from Germany, so that could be perfectly accepted. The only reason why it wasn’t sustainable is because the accumulating debt for Greece’s government couldn’t be validated by a currency issuer because the European Central Bank had no instruments of absorbing excess public debts from the Greek government.

That became unsustainable because the private sector said, Well, this debt might be getting too great and we don’t want to buy that debt. And since the European Central Bank was also not a purchaser of Greek debt that became unsustainable. Now there was a very simple solution for all of that mess which would be for the European Central Bank to create mechanisms to absorb excess debt from treasuries, from, uh, federal governments, as long as that was compatible with the healthy continental economic system.

And this is actually what federations do. So every national economy that has many regional economies put together, like states like the US for instance has imbalances between states. They get offset by the actions of the federal government. They basically inject income and then create net wealth for states that are net importers from other states And that creates way more sustainable situation.

So the problem with the European Union and the Eurozone wasn’t so much that it cannot work. But instead, if you’re going to combine monetary sovereignties from many countries into a supranational monetary sovereignty arrangements, you need to have offsetting mechanisms at the continental level, which didn’t exist in Europe.

So that just created that huge mess. And my concern is that we copied that very flawed system that’s a recipe for disaster. It would be for Brazil.

[00:13:57] Grumbine: Why don’t we take a step back.

[00:13:59] Conceição: Sure.

[00:14:00] Grumbine: Because one of the things I think that is often misunderstood as we try to forklift models from region A to region B are the impacts of the society and the norms of South American countries in particular. And so while we look at Europe and we understand much of history and much of the traditions of money came out of a Eurocentric view of money, it seems like in South America, a lot of the predation that has occurred from the global North on the global south has been trying to infuse these models within the South American countries.

You see neoliberalism as a whole, wiping out cultures and ways of life and looking for homogeneity I guess is the word I’m looking for. What makes South America different? What makes Brazil and Argentina different? What problems would we be solving in the South American countries by doing this that maybe are a little different than the European?

[00:15:06] Conceição: Sure. So if we had all of the opportunities to really challenge economic orthodoxy and come up with a functional supranational monetary arrangements, the reason for doing that really would have to be to reduce our reliance on foreign currencies, especially the dollar and other developed country currencies.

That’s something that really, really plagued South American economies in the past, and the reason for that stands from a technological reliance. So we are heavily dependent on importing capital goods and technology from more developed economies in order to keep growing So that means that our economic growth becomes dependent on acquiring other people’s currencies, which is hard because if you’re not exporting enough to get that currency, it means you need to borrow in that currency.

But when you borrow someone else’s currency in their currency, it means that you now become committed to getting more of that currency in the future to make that payments. And if you can’t get the currency, you really are screwed because if you’re heavily indebted in dollars, say in the case of Argentina, that’s very clear.

They’re heavily indebted in dollars. And so they need to keep getting dollars no matter what, because they need to make their payments And whenever there’s not enough dollars for them to make their payments, it means that the price of dollars explodes. And when the price of dollars explodes, the price of everything else than they import by paying in dollars becomes that much more expensive.

And that produces a huge inflationary shock that is oftentimes politically unsustainable. Because if you have a large inflationary shock, and if that shock is large enough for income receivers, especially wage earning workers to have their purchasing power hugely depleted, they’ll get pissed and they usually become very angry with their government.

And the government usually either loses an election or even gets deposed. So that’s usually the economic and then the political cycles go together. And so this is actually why most South American governments are so worried about high inflation because usually that means that their adversaries will gain power and that can also mean very bad things for them. So it’s tricky that way. If you don’t get the dollars, you could find yourself in hot water

[00:18:18] Grumbine: The IMF International Monetary Fund is famous for coming to these global south countries and saying, we’re here to help strip your country of all your public works, all your protections for local development and protections for local exports, and free market reigns supreme, and we’ll give you access to US dollars and we’ll give you loans payable in whatever so that you can reinvigorate your economy, make yourself more business friendly.

And they sell it like it’s a great thing, but they’re creating neo-colonial debt slaves. Is this what the supranational currency would be aiming to prevent that kind of scenario from occurring? Or does it have other practical uses?

[00:19:07] Conceição: So I would only advise for Brazil and other South American countries to work towards a supranational currency if they actually intend to achieve that. And in order for them to do that, they need to abandon the austerity myths that currently have contaminated pretty much everyone in our governments, even leftist governments. Right now,

I wouldn’t trust anyone to come up with a functional supranational monetary arrangement, but if we were in charge, the two of us, I think that could be a way of trying to end–I love how you called it–this neocolonial monetary slavery, because that’s what it is. Or you could even use the analogy of getting someone hooked into a terrible drug.

You allow them to have a taste. For the drug that in this case allows you to get quick access to technologies that you don’t have, which can allow you to grow faster. Cuz it could increase your productive capacities by importing so many of those capital goods that you can’t currently produce.

But once it comes the moment of paying for those laws, you have to deliver pretty much everything you have to keep making payments. So that’s how they get you. And the funny thing is, the dream of any monetary sovereign is to get their money accepted abroad, as widely as possible. This is the dream. Now the US has achieved close to the perfect dream, which is to have everyone in the world accept a dollar.

What that allows you guys to do is basically get anything in the world that you want to make yourselves comfortable, and to have your economies grow. And the way to achieve that goal of having everyone accept your currency could be to get them hooked into your currency. So in that sense, even something else seemingly generous and philanthropic as the Marshall Plan, and let’s say, well, this has been something that was basically given funds for Europe to reconstruct itself after World War 2.

We’re just giving you the dollar. Well, even something as similarly positive and generous as that creates a demand for dollars for the future because everything that those countries are purchasing has to be replaced and kept. By buying more things that are sold in dollars. So even something like that creates demand for dollars in the future.

Now it’s even more effective if you lend the dollars so that you have to get dollars in the future to make payments now that really makes you a slave of someone else’s currency. So it’s been a project, it’s something that maybe a few of those things have been unintended consequences, but there might be a wider plan, a grander plan for the dollar to become so widely accepted, become the hegemonic currency in the world.

And this means that it possibly has made a lot of people worry, especially if this has been a grand plan. Now, if I was the one responsible for that grand plan, I would be very worried today. As the dollar has been somewhat challenged by many different currencies as an international reserve currency. Central banks are keeping a lot less dollars now than they used to as reserves.

There’s way more bilateral swap arrangements like the one between Brazil and Argentina, like the ones that Russia is establishing with China and other countries, since the war in Ukraine started. So many things are happening that challenge the position of the dollar as the main currency in the world , and that could be worrisome, for whoever understands how powerful that is.

[00:23:50] Grumbine: Let’s take a look at that because normally we hand wave at people, and I’m guilty of this, because the Petrodollar concept, which prices petroleum purchases in US dollars, creates additional hegemony of the US dollar. Based on Warren Mosler’s statement, that it’s really not a big deal because in the end, the petrodollar is a numeraire.

It’s really more important what the country is saving, but if what they need to save in is US dollars to be able to make these purchases, that by extension gives more ubiquity and add to hegemoney. As an MMT person in Brazil, what are your thoughts on the impacts to South America based on this concept of the petrodollar that came shortly after Bretton Woods.

[00:24:42] Conceição: I would actually tend to agree with you very strongly on that. I think it’s hugely important. And this might be an instance when our attachments show the fundamental of the theory might be too great. Cause when we claim that taxes are the main driver of currency acceptability, what we really mean is that necessity is the main driver.

And since taxes make you need the currency to make tax payments in order to avoid being punished, then you give acceptability to that currency that is used to make tax payments. The very exact same way, if there’s a commodity that is hugely needed for your economy to function, everyone needs to purchase that.

And if that commodity is only purchasable in a particular currency, then also necessarily will give acceptability to that currency. And there’s actually a very good paper that has been written by a colleague of mine, Caio Valella, and with another economist that I can’t quite recall her name. And it’s a shame, because I’m friends with Caio, but she should also get full credit for this.

And they actually wrote a piece showing that the moment when the dollar became the currency used for denominating contracts in oil was hugely important for consolidating the hegemonic position of the dollar. I tend to think that this is very important, but also if we understand this, it allows us to identify those things that make you rely less on the dollar because if your goal is to rely as little as possible on other countries currencies, what you really should do is to boost your capacity to supply those things that are most important for your economy domestically.

And if you’re a country like Brazil that has huge oil reserves, that has tremendous capacity for producing food, that has water self-sufficiency, energy production is very easy to do in Brazil. So all those things should be used to reduce their dependency on the dollar, and it’s something that I think MMT helps us understand. Actually, I think Fadhel Kaboub is someone who’s been stressing that very well.

[00:27:36] Grumbine: Absolutely. I frequently have downplayed the role of the petrodollar simply because in the end, if the petro dollar vanished, it would not change the fact that the United States government could purchase anything for sale in US dollars. Japan doesn’t have a petro yen. There’s not a petro pound sterling, so these countries seem to be able to handle their business.

We have a very different thing. 900 military bases around the world and a whole host of other aspects of it that allows us really, by economic terror, control countries. Destroy their sovereignty with sanctions and being tied to the dollar system, which is a very undemocratic currency to begin with. What are your thoughts there?

[00:28:25] Conceição: Well, I think you said something that is hugely important here and it helps us really understand what’s at stake. So, any government can purchase anything that is for sale in the currency that they create. So that’s true for any country. The problem is how large is that space of things that are for sale in the currency that your government creates, and the tools for increasing that space, for increasing the vastness, the size of the supply of things that you can purchase from your currency.

Those tools are as wide as political and military and all of those arrangements that we were describing, such as the fact that oil contracts are denominated in dollars. So every government that creates the currency that is used in their country is equally sovereign in that sense. So, the Brazilian government is equally monetary sovereign as the US government because they can both create the money that purchases anything that is for sale in their currency.

The problem is the US has come up with a whole bunch of ways of increasing the size of the space where dollars are accepted in exchange for goods that goes way beyond their territory. And I think that’s what we need to understand is how do you get your currency to be accepted outside your borders, and how can you come up with that global system that makes these arrangements fair?

Because in many ways it’s really not fair that the US can purchase so much more in the entire world just because their currency is so widely accepted. But that’s the way of the world right now. It might be actually a good thing that the US hasn’t really made use of that power to its full extent because it keeps thinking that it doesn’t have the dollars to buy things.

And then it says you guys are self-sabotaging your capacity to acquire a lot more stuff from the world because you are also contaminated by austerity belief.

[00:31:08] Intermission: You are listening to Macro and Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT, or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube, and follow us on Periscope, Twitter, Twitch, Rokfin, and Instagram.

[00:31:58] Grumbine: We don’t look at it that way. My tagline on Twitter is austerity is murder. And people in the US don’t even understand what that word means. The rest of the world does, but the US is still trying to figure it out. Let me go back to South America. Years and years ago, before I fully got on the MMT train, I had read Confessions of an Economic Hit Man.

[00:32:22] Conceição: Oh yeah.

[00:32:23] Grumbine: And I’ve heard different things where they say, this has been debunked, but the further I get in this MMT, the more I see from the IMF and look at the structural adjustments imposed. Even digging into Thomas Sankara in Africa, you realize that maybe it wasn’t a fiction, maybe he dramatized some things, or maybe he added a little flavor so that it read better.

But regardless of whether his exact story is true or not, it seems to match up with everything that I’ve seen from people that look more at a geopolitical MMT frame than say maybe folks that focus largely on the domestic side. What are your thoughts on that.

[00:33:06] Conceição: I think that if it’s not exactly as he described, something like that has to occur. And we can talk about Chang’s Kicking Away The Ladder as a description of the same type of economic assassination. The fact of the matter is mainstream economics is a tool to preserve both domestically the interests of the ruling class, but also internationally.

It allows for stronger countries and more developed countries to keep their claws in less developed ones and to retain access to their resources. So I think maybe the mistake in the analysis has been that we tend to think of these economic hit men as if they’re working to secure the interests of the entire country.

So let’s imagine those people go to South America to make sure that American interests are being secured. That’s not what happens at all. I think what’s happening is they’re securing the interest of a very select group of people that are also working against the interests of the majority of the American people.

So, it’s not as if you have countries against countries. I think you have the elite of particular countries buying the influence of economic commentators and the lobbyists that go abroad and convince governments of those countries to embrace self-sabotaging policies. Because those policies make sure that whoever has the money to buy those services are being favored by the results.

Because that allows us even to understand that maybe the interests of the majority in both countries both developed and developing countries are more aligned than it makes it seem by those, descriptions. Because if it’s not the entire United States of America using economic hit people to make sure that South America submits to American interests.

I think it’s just the elites in the US that are using their power to keep both the US economy from producing results that would be more satisfying for the entire population, but also make sure that they can exploit less developed countries in a way that is profitable to them.

[00:35:59] Grumbine: Within the context of a complimentary currency. Not necessarily the currency union, but even the downgraded one that Lula backed into in recent reports. What do you see in terms of, we’ve had Scott Ferguson and Ben Wilson of the Modern Money Network, come on and discuss the concept of the uni, which was a university based complimentary currency. Is it similar to that or something totally different?

[00:36:32] Conceição: Well, those classroom currencies and university currencies, they’re useful analogies for us to imagine any monetary arrangement. I actually use a similar exercise, both to teach my students how money gets accepted by having a tax that is payable in the money that I issue. If they don’t pay the tax, they lose a part of their grades.

And that’s the buckaroo experiment, that Warren Mosler devised for UMKC. And I have adapted it to my students, but also I’ve been trying to use it to explore open economy issues by having different classrooms use different currencies, and have them purchase from one another, having to engage in exchange rate issues and all of that.

But for a supranational currency to work, really what we would have to achieve would be for national interests to be somehow resolved at a supranational level. And that’s very hard to do. In many instances, countries, especially given the current state of economic debate, would tend to seek to become net exporters.

And you can’t have everyone be a net exporter within the currency union and there will be punishments for net importers that are accumulating debt in the supranational currency. So that’s something that you need to resolve. You would have to negotiate the size of imbalances that are acceptable for all parties.

And maybe that’s doable. Maybe that’s not. But an analogy that works, I think it’s a good analogy because it helped me understand the Euro situation is a poker analogy with the bank be played by either an MMT informed house or an austerian. So let’s suppose we’re playing poker the two of us, and you’re a terrible player, I’m much better than you.

So I keep winning. Now if I keep winning, you eventually will run out of chips. Well, possibly we could end the game, but if the whole purpose of us playing poker was to keep playing poker because that made us satisfied, because say that kept in a real economy, that would mean that we would keep producing goods and selling to each other.

There would be no use to stopping the game. And if we were perfectly satisfied with me winning and you losing for a while, the perfect solution would be for the house to say, well, I’ll give you the chips so that you keep losing to me. And if that’s satisfying for both parties, then let’s just keep giving the chips, so that Steve can keep losing to Daniel.

Or another situation would be, well for Daniel to lend Steve the chips. So basically you would be paying me in a different currency, which would be your debt denominated in the first currency. That’s fine too. But the problem is the tendency given that everyone thinks about these issues as if money was the scarce resource, I wouldn’t be willing to keep lending you the chips because I would realize that you’re a terrible player.

But not realizing that my winning was the reason for you losing. So the one thing that can’t happen, which is what happened in Europe, is for the winning player to complain that the losing player is losing too much, which is exactly what Germany was doing. Germany was saying, well, Greece, you better stop losing because you’re a terrible player.

But Greece should have said, well, I could stop losing if you stop winning. You wanna stop winning? And so any arrangement that works would have to establish an arrangement in which both the winnings (the trade surpluses), and the losses (the net imports), would be equally satisfying to all parties.

And the way that you validate those is to allow that whatever financial stock is being created by those imbalances, which could be public debts, I think it’s the best way to do it, is just to allow public debts to be at the level that makes those imbalances possible.. And in order for that to happen, all it takes is for the currency issuer, in this case the supranational central bank, to purchase the excess public debts that are being issued.

Now, if that’s achievable, then it could work. But if that’s something that we can’t imagine happening, then I think the best possible scenario is for currency swaps to be established, in which the participating central banks basically say, well, I’m willing to acquire a given quantity of the other party’s currency so that it allows for trade deficits to be financed in a way.

So basically, you would have the adjustments occur at the level of reserves being accumulated by the net exporting central bank, and the size of those increases in reserves could be adjusted to the level that the central bank of the net exporting country deems acceptable, because that’s easier to do.

All it would take is for the government to say, well, we’re glad that we’re exporting to Argentina and we’re willing to accumulate pesos. So the central bank just accumulates the quantity of pesos necessary for those exports to taking place, and I think that’s the more realistically functional arrangement.

Anything that creates a supranational currency would have to have such a fair supranational authority acting on behalf of every participant, and I think it would make it too hard.

[00:43:05] Grumbine: From an international perspective or beyond your country’s borders perspective, the swap lines make sense at the central bank. But what about internally? I envision concentric circuits, and at some point the local currency would need to transition somehow back to the other currency, whatever the national currency is.

How do you control that relationship? Can you explain how that internal swap occurs?

[00:43:36] Conceição: Yeah, so from the point of view of the importing party, let’s say you are an importer of Brazilian goods, you’re Argentinian importer. What you need to do is to buy reals from someone, and in order for a trading balance to occur, those reals would have to come from more than just the imports that Brazil is buying.

Let’s get back again. So we’re saying that you are trying to buy reals and you are offering pesos. Now, one way of Argentina acquiring those reals will be for Brazil to import from Argentina, that very value. So the same value of reals that is being sought by you is being given to Argentinian players that are selling to Brazil.

So you have a perfect trade balance between the two countries. Now, in that sense, those reals that you’re trying to buy will be available for you because there’s other people who are equally trying to buy pesos in exchange for reals. So in that sense, all you need for functional exchange foreign currency market to operate, you’ll have intermediary banks doing the heavy lifting with the support of the central banks.

But basically you are using the currency that is being offered in exchange for the other currency just for a trade to occur. Now if Argentina doesn’t get enough reals from its sales to Brazil, it could also try to sell financial assets, debts to Brazilians. And if Brazilians are willing to buy those debts, then you’ll get a trading balance that will be compensated by a financial capital account imbalance of the same size.

So your net imports will be compensated by your net exports of debts and property. Now, the problem with that is if you are borrowing and your debt is denominated in the foreign currency, your obligations in the future will require that you get more reals in the future. And maybe those reals are not as easily available, whereas now, so in the future when we’re trying to make net payments, the price of reals will be too high, and that will mean an inflationary shock that you might not find acceptable.

So that’s the arrangement without central banks intervening. Now, how could we help those imbalances to keep taking place by using both monetarily sovereign central banks if both Brazil and Argentina feel like it’s desirable for those net imports from Argentina to keep happening because Brazil is happy being a net exporter. Then all it would take us for the Brazilian central bank to purchase the excess pesos that are being offered within the foreign currency markets.

And just offer the necessary reals in order for the exchange rate not to deviate from whatever level it finds desireable. Now it could be either a fixed exchange rate or a dirty floating exchange rate, but the key here is for the central bank to provide to supply enough reals so that the peso doesn’t devalue when you are trying to keep the net import going into the future, then that’s very easy for both central banks to achieve.

All it takes actually is for the net exporting country central bank to be willing to do it in order for that to take place. That’s actually what explains the US imbalance against China For a very long time, the only thing that was happening in order for that imbalance to keep taking place was for the Chinese Central Bank to be willing to accumulate dollar reserves.

That forces the net imbalance to keep occurring. So any central bank is capable of validating the net imports of a foreign country using its own currency. Now, this is an arrangement that involves both Brazil and Argentina. It would mean that Brazil’s government, Brazil central bank, would have to be willing to allow that imbalance to take place.

Now, if you want to have that take place within a continental space involving many countries, and for many imbalances to be validated by many central banks, that’s when you might want to introduce a supranational currency. And you might also want to have a supranational monetary authority doing that work.

Because now each net importing country would have to get the supranational currency, and as long as the supranational central bank was willing to offer that currency, you could still make that work almost in the exact same way. The problem is, everyone would have to be happy with those imbalances.

[00:49:07] Grumbine: Gotcha. I guess my final question to you, and this seems like a strange dialectical position, I guess, in the US we are the hegemon and people here are just used to hearing we don’t have the money. But in South American countries, do you think regular people that are in the global south, would you say they’re more aware of these kind of arrangements?

Because it seems like the people in the US have absolutely no clue except for the elite. This seems like the kind of thing that everybody would need to know just simply because you have to wonder how and why the kinds of inflation and tragic economic conditions that come through US manipulation through their own geopolitical strategies, leveraging the dollar.

You have to wonder that they would be hyper aware of this. What are regular people thinking about when they hear this stuff down there in Brazil, for example?

[00:50:12] Conceição: Well, it’s actually not good. It’s as bad as and possibly worse than what you get there, and that’s something that I struggle to understand exactly what’s the difficulty in understanding that money is just another public debt that should be created functionally in order to achieve the most out of our monetary economies.

What’s the problem here? I think partly it has to do with economic hit men that we were trying to identify, because in reality what we’re talking about when we described the economic hit men, really we’re describing professional liars that are paying substantial amounts to advocate against the policies that would make it so that governments eliminate poverty, eliminate unemployments, and put their economies in a sustainable growth band.

And why do these people sabotage our governments like that? Well, they make a lot of money doing that. So who benefits from lying so much. In the light… if anything, the pandemic should have taught us that there’s no financial limits to governments spending. During the pandemic, all governments just pretty much abandoned any fiscal rule, any fiscal limit, any fiscal target that was described as necessary for the economy to function and pretty much spent as much as they needed so that their economy survived the pandemic shock.

In Brazil, we came close to a trillion reals in primary deficit spending during 2020, and that was by a government that had openly argued that it was broke right before the pandemic. Now just the very contradiction of a government that’s claiming that it’s broke and all of a sudden finds the money to spend close to a trillion reals over taxes to fight the pandemic should have made it clear that they were lying before.

So it’s not ignorance, it’s not lack of understanding, it’s dishonest. Then we need to point that out. Who is making money from all the dishonesty? Basically, we know the answer, right? Anyone who earns higher than needed interest rates. Will argue for higher than needed interest rates. So if the way of achieving those higher than necessary interest rates is to claim that the government is broke, that’s what they’re gonna do.

Anyone who gains from forcing governments to privatize every public service, because again, they’re saying that the government can’t pay for those things, will argue for the privatization of those things. And within the international system, anyone who can make sure that they’ll have access to cheaper resources from developing countries and they’ll have access to those markets in a much easier way will argue for the governments of developing countries not to embrace a more interventionist approach to their economy.

So we need to figure out who gains from all the lying and we need to be brave enough to denounce it too. I think this is something that a lot of people are doing, and just to finish here, but fortunately, even our leftist leaders here in Brazil haven’t really realized this, and I’m not sure if they really believe it.

Maybe they do because they’ve learned mainstream economics a little too hard, but they still buy into this whole idea that government spending and government debts are a bad thing because they’re exhausting the resources of the government that could be used for other things. So you have things like people arguing against public debts, as if that’s something that takes away from more useful spending.

And those are leftist leaning people. You have people arguing that in order for us to increase spending, we need to have a tax reform that increases tax revenues. And even if that’s aimed at taxing the rich more just the conditionality is too, you shouldn’t make it a conditionality for you to tax more in order to spend.

Now I’m all for taxing the rich, but that shouldn’t be a condition for you to spend if there is excess capacity in the economy. So all those things are very frustrating and sick.

[00:55:35] Grumbine: One of the frustrating things for me in the United States is there’s a proclivity to call truly awful people, people that are doing horrible things, “my good friend”. And it happens ridiculously so in the United States, and for me, I have a real problem with that because I know that people that are not living that life, that are suffering mightily, that are worried about their existence.

And there’s a lot of anger and rage in just the US at these elites that maybe know the truth, but placate rich and powerful people as opposed to speaking on behalf of those suffering the most. It seems like that’s not unique to the United States. It seems like that, dare I say cowardice, is global. What is important to take away from this potential currency union?

[00:56:28] Conceição: I think that just the exercise of imagining functional monetary arrangements that go beyond single currencies for single national economies. I think that’s useful in a lot of ways. We took the terrible, terrible experience of the Euro as if it means that something like this is impossible. And I think functionally it’s still possible to imagine something that works, that brings together many monetary sovereignties.

Because basically what we will be doing is not so much eliminating monetary sovereignties, but bringing monetary sovereigns together in a cooperative arrangement that has to be useful for all of them. And I think we’ve touched on a few ideas that could be useful, that can be taken from MMT, from a functional reasoning about economics.

So that in a sense, I think is a positive thing. Now, I wouldn’t trust the current leaders even as progressively leaning as they are in Brazil, to come up with something that doesn’t replicate a lot of the austerity limitations that are imposed on national governments. If we had a separate national arrangement and I think if anything, it would increase the limitations.

So I wouldn’t touch it for that reason alone. Now I think something is said that is super important. It has to do with the way we treat professional liars. I think we need to be braver than we are. I think if there’s one huge mistake that can be identified with Lula’s presidency, over this month or so is its unwillingness to challenge the current economic orthodoxy.

Lula has done that. It needs to be pointed out that his speeches are very aggressively anti mainstream. The problem is that once he starts something, the financial markets get their professional liars mobilized, and they all go on rants either on TV stations or they write pieces. And people in the government get very scared of it.

They’re terrified of being accused of being fiscally responsible. They’re terrified of being accused of not being serious economists. And I think what we should do is to make sure that people understand that people who work in finance are not better economists than us. In fact, they have every reason to lie and to be worse at macroeconomic analysis and policy making than we are, because their vested interests are opposed to what works for the majority of the people.

They’re interested in keeping earnings for banks and financial institutions as high as possible. And that means now the opportunity cost of producing, of investing productively will be higher. So they’re not there to help us achieve a functioning economy. They’re there to sabotage us. And if we’re listening to those people, we’re making a huge mistake, which we are.

[01:00:09] Grumbine: Could not agree more. And with that, Daniel, you are a breath of fresh air, my friend. I really appreciate the candor. I appreciate you didn’t smooth talk those things into downplaying them. Those are very serious issues and it fills my heart with joy and sadness both here, that there are people that are willing to say the truth and also sad that the truth is so bleak.

And I want to thank you once again for joining me. This is Steve Grumbine with Macro N Cheese. Please check out the rest of our episodes. We’ve got over 200 episodes. You can go back, you can listen to them. There’s transcripts, there’s extras, there’s hours of work going into the backend of these podcasts.

So by all means, support the organization if you can become a donor. We appreciate it. Help us get the word out to even more people. And with that, Daniel, one more time. Thank you so much for joining me today on Macro N Cheese. Folks, we are outta here.

[01:01:16] End credits: Macro N Cheese is produced by Andy Kennedy. Descriptive writing by Virginia Cotts and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.