Episode 343 – Imports Are A Benefit, Exports Are A Cost? with William Mitchell

Steve Grumbine:
00:00:43

All right, folks, this is Steve with Macro N Cheese. My guest is Bill Mitchell. And folks, you know Bill because we’ve had him on quite a few times.

In fact, as I say, usually go back to episode number one to find out about the “T” in MMT. Bill has been with us from day one. Love having Bill on. And for those of you who have not heard, Bill Mitchell.

Bill Mitchell is a professor of Economics and director of the Center of Full Employment and Equity (CofFEE) at the University of Newcastle.

He is also the docent professor of Global Political Economy at the University of Helsinki, Finland, and a guest international professor at Kyoto University in Japan. Bill is also an author of several great books, including the Modern Monetary Theory textbook.

And he was also the right author of Reclaiming the State and many other books. The guy is just prolific. You gotta check out his blog, really amazing content. Go to BillMitchell.org and find his latest blog entries.

Now, I’ve had Bill on two other times to discuss a similar subject.

And as we get more mature and we grow in knowledge and we try to build up our understanding of the world in which we live, and as things change, the material conditions of the world change all the time. And they’ve really changed quite a bit here recently, obviously with the Trump administration and tariffs, which we’ve talked about previously.

But we’re going to talk today about a paper that Bill wrote in June of 2022, which is actually part of a book, an Elgar series book, and I’ll let him get into that here momentarily. But the paper was called the Modern Monetary Theory Perspective on the External Economy. And why are we talking about this?

Right, so we’ve got people constantly talking about balance of trade and how the United States doesn’t create anything, we don’t do anything.

But it’s not just the US. We’ve talked to Fadhel Kaboub about Africa and we’ve talked to Ndongo Samba Sylla about Africa, and we’ve talked to a bunch of different economists with the MMT background discussing their particular portion of the world. And this subject seems to be near and dear to everyone’s heart, even if they completely butcher it and don’t get it right.

The MMT community has been out front trying to get the details of the economy and accounting and understanding the capacity of currency-issuing nations and the constraints that go with that. I’m going to bring on my guest, Bill Mitchell. Thank you so much for joining me again, sir. I appreciate it.

Bill Mitchell:
00:03:19

Thank you. Thanks for having me and thanks to your listeners.

Steve Grumbine:
00:03:23

We love you, Bill, and just want to be honest here. I am very, very scared of the subject still. Even though we’ve talked at great length, I’ve read a lot of books.

I got the basics, I can say the basics in my sleep. Imports are a benefit, exports are a cost.

We’ve talked about this extensively from an accounting perspective and also in terms of real trade perspective.

But because people tend to go out there into the political economy and they tend to think of political rules or the choices different countries make as immutable laws of the world that cannot be changed, they conflate the base case that MMT posits with a lot of things that just ain’t so. And we have some really great explanations for the things that they think that just ain’t so. And we’ll get to those.

But I want to see if we can set the stage here. MMT theorists, and you being one of the granddaddies of them all, have posited this statement that imports are a benefit, exports are a cost.

Why don’t we get started with that explanation right up front and then we’ll go deeper into the paper.

Bill Mitchell:
00:04:32

That’s just a reality. And I’m surprised that conception of the way in which a nation sits with other nations and swaps resources with other nations, I’m surprised that it’s caused so much controversy. And in some quarters appears to be a major source of it’s an attack vector, if you like, on the credibility of MMT.

I’m just surprised by that because for me it’s such a mundane statement for us to make and it’s really just a preface to going into much more technical details and adding then political economy layers and discussions that I’m interested in about global power struggles, et cetera. So let me just start. I’ll read for your listeners a quote. It’s a very interesting quote and we’ll do a little quiz on it in a second.

Here’s the quote. It’ll take about a minute. I’m starting:

“In international trade area, the language is almost always about how we must export and what’s really good is an industry that produces exports. If we buy from abroad and import, that’s bad. But surely that’s just upside down as well.

What we send abroad we can’t eat, we can’t wear, we can’t use for our houses. The goods and services we send abroad are goods and services not available to us.

On the other hand, the goods we import provide us with TV sets we can watch, with automobiles we can drive with all sorts of nice things for us to use. The gain from foreign trade is what we import. What we export is the cost of getting those imports.

The proper objective for a nation, as Adam Smith put it, is to arrange things so we get as large a volume of imports as possible for as small a volume of exports as possible. This carries over to the terminology we use. I have already referenced to the misleading terminology of protection.

But when people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of view of our wellbeing, that’s an unfavorable balance.

That means we are sending out more goods and getting fewer in. Each of you in your private household would know better than that.

You don’t regard it as a favorable balance when you have to send out more goods to get less coming in. It’s favorable when you get more by sending out less.”

Now, the quiz element is think [who] said that.

And most people who are aware of MMT will say, “Oh, one of the MMT economists said it.”

And of course they’d fail the quiz because that statement was made on April 27th in 1978, and it was made during a lecture at Kansas State University. And the presenter of that famous annual lecture, the Landon Lecture, was none other than Milton Friedman.

And the point we make is that understanding from a consumption point of view of the concept of exports and exports, which is now pure MMT of course, was held by everybody, and as the lecturer Milton Friedman said, it goes back to Adam Smith even in the late 18th century, that everybody has understood for years that if you send out more than you get back, then that’s an unfavorable balance from a resource point of view and from a consumption point of view, we buy imports to consume or to be inputs into other productive things that produce consumption goods.

And we don’t produce for the sake of production. We produce to consume.

And so it’s just a basic reality that if you are sending things away that you could consume yourself, then that’s a cost to you, and the only reason you’d want to do that is to get things that you can’t produce yourself. Or you can’t produce them at a price that is viable. So that’s the MMT position and I’ve just been totally surprised that’s been denied.

Steve Grumbine:
00:08:56

I think a lot of the denial comes from conflating the base understanding of what you just said with political economy and understanding power dynamics that we discussed.

And how do you keep an empire at bay when it’s predating upon a defenseless country that is desperate and in a balance of payments spiral that is just consuming them and they take on IMF debt loan to pay it off.

And now they’re having to sell the thing that they make, they’re having to export that, and then they have to import the very thing that they made because they didn’t have the ability to refine it, et cetera, et cetera. These are all very, very important relationships, but they’re conflating the base. Can you talk about where the difference is there?

Because it is frustrating because people weave in those kinds of power dynamics and they say “MMT doesn’t touch power dynamics. It doesn’t talk about inflation. It doesn’t talk about balance, It doesn’t talk about imports. What happens if the US is no longer the world reserve currency, et cetera, et cetera, et cetera?”

I mean we got some of our favorite left tubers out there constantly decrying the death of the dollar and how, “It’s just going to die on the vine and so on and so forth.” And they don’t take a step back. They don’t want to know it. They don’t really necessarily know they need to know it.

So they just skip it and they just jump straight to political economy. Can you help me divide that?

Bill Mitchell:
00:10:24

I think we’ve spoken about it before.

There’s layers of analytical understanding and when we are focusing on resources of consumption in the quite independent of the political circumstances, then it’s just to me a self-fulfilling fact that if you send your resources to somebody else, you can’t use them yourself. That’s a cost to you because you could use them yourself. Now there’s nuances in that.

People say in the context of Australia, which is a primary commodity exporter, which means that it exports iron ore and coal and things like that, then they say, “You can’t really consume iron ore, can you?” So how much of a cost is it to send it to China and to get back things from China that they make with the iron ore, steel.

And that’s a nuance, but it’s not an abrogation of the basic thing. If you’re sending your resources to another country so that they can use them, then that’s a cost to you that can’t be denied in my view.

And anybody who tries to deny that is running a self-serving type of agenda that’s not based upon fact.

And equally from a consumption perspective, the things that you import that you can’t make yourself at either at all because you don’t have the know how or the technology or you can’t make them at an affordable price to consumers because you don’t have the skills or technology, they are benefits. From a consumption point of view, why do we consume, to have wellbeing?

Now I’m a long-standing critic of the mass consumption that western countries engage in and that’s environmentally unsustainable.

But even within a sustainable degrowth type environment we’re still going to have to consume because we’ve got to eat and we’ve got to dress and we’ve got to move around and whatever. And we see consumption as desirable. Obviously it is.

If we can have food security, decent public transport and we can have clothes that keep us warm or cool depending on the season, that’s desirable. They’re benefits.

And so from that perspective it’s undeniable that imports [are] benefits and exports are the costs that the investment of resources that you engage in to get the benefits that you can’t produce yourself. Now then you’ve got overlays. So for example, geopolitics centers the situation.

And so people argue, “Well you’ve got to have a manufacturing industry. You can’t just import all your manufactured goods.” So then the question then is why do you want a manufacturing industry? Well, there’s advantages in having a manufacturing sector.

What are those advantages in a geopolitical sense?

People argue that it provides you with national security because during the Second World War, for example, or the manufacturing sector shifted from producing cars and whatever to producing tanks, guns and bullets and bombs.

And so having a manufacturing sector gives you a capacity, an independence, a self-sufficiency to build military goods in the case of some sort of threat from another country. Now that’s a valid reason and how much you want to buy into that depends upon how paranoid you are and the state of the geopolitics.

And at the moment everybody’s very scared of various nations and so they’re spending a lot on military equipment. I think that’s probably wrong, but that’s what they’re doing.

And other times, at the end of the Cold War, for example, the late 1980s, we all got this warmth that the world was a much more secure place. So defense spending fell. But the point is that that’s a reason why you want to have a manufacturing sector and not just rely on manufactured imports.

Now another reason is that manufacturing historically has been a source of innovation and productivity growth.

And because manufacturing is where new technologies are introduced and higher value adding occurs and that spreads out in the form of higher real wage gains for workers. And there’s definitely validity in that argument.

If you just have a service sector and you import all your manufacturing goods, well, maybe you don’t benefit from the gains of the innovation in the way in which we produce things. So there’s reasons why you want to subsidize an export-based manufacturing sector.

I understand that, but that still doesn’t get over the basic fact that exports are a cost because you’re sending resources that you could use yourself away so that others can use them and imports are a benefit. Now another angle to it is the argument, and this is particularly relevant to the debate between the metropolitan and the satellite world.

In non-jargon terms, that’s the powerful first-world advanced countries and the non-powerful, somewhat dependent poorer countries in the world which are essentially running extractive economies. And that means is that they extract raw materials, raw primary commodities and export them to the first world, the rich countries.

Now the question is how has that been effective as a model for economic development and growth? And the answer is, well, it hasn’t been very successful for many countries.

And one of the reasons is that the poorer countries, if all they are, are holes in the ground, and the holes in the ground are being dug by first-world capital who have gone and built some mining capacity, some railroads to ports, and then shipping out the commodities to the First World who then manufacture it, add value to those primary commodities and then ship them back in the form of high-value exports which are imports to those countries. And we’re thinking cars or technology or whatever, well then that doesn’t really help the poorer country very much at all.

The profits disappear. They don’t get paid very much for their resources and then they’re stuck having to buy back the value-added goods at high prices to consume. And meanwhile back at the ranch they are burdened by IMF and World Bank debt and so they just can’t get ahead. Why is Africa still poor?

It’s incredibly wealthy country in resource terms, yet it’s still very poor. And the reason is that their exports are low value, but high value to the value-adding nations in the advanced world who then export the goods back.

It’s a sort of double whammy for the poor country. So there’s all those issues too, that are layered on top of the basic MMT understanding.

Steve Grumbine:
00:17:33

One of the things that you go to some significant length explaining that I think is important because we deal with it every single day as just a layperson and activist trying to interact with people both on the phone, in real life and online. Most people haven’t quite gotten it through their heads that we do not live in a fixed-rate pegged currency regime.

We live in a free-floating fiat currency. And a lot changed there. And that happened in ’71 when the Bretton Woods Accord ended.

Would you mind just quickly going over the Bretton Woods Accord and what changed in ’71 and why that impacts our ability to do imports and exports in a significantly different way.

Bill Mitchell:
00:18:20

Sure, most of us live now in a flexible-exchange-rate world, but that wasn’t always the case. So what’s an exchange rate? An exchange rate is just the rate at which you sell US dollars to Australia against Australian dollars.

And after the Second World War, there was a major conference, the Bretton Woods Conference, that brought all of the victors together. You know, all the large nations that had participated in the victory.

And the war came at the end of the Great Depression, of course, and there was huge financial instability that really started in the 1920s, and the famous stock market crashes in 1929 were manifestations of that. But there was a lot of currency instability. In other words, currencies would fluctuate quite wildly.

And that’s somewhat undesirable because if you’re a manufacturer that’s exporting commodities to the rest of the world, for example, and your export revenue is determined by the exchange rate, yet your costs are determined domestically.

And so if you have these wild shifts in the value of your revenue because the exchange rate is shifting, yet your costs are not as unstable, that makes it very hard to plan.

And in very short spaces of time, if there are wild fluctuations in exchange rates, a company that’s financially viable can become, within weeks, financially unviable. So that’s a reality.

And it was considered that at the end of the Second World War, once the peace had come and nations got together and decided, “How are we going to run peacetime now that we have stopped bombing the hell out of each other? How are we going to do it?”

And one of the things that was decided upon was to try to stabilize the global financial system to attenuate these wild fluctuations in exchange parities between nations. And then there was a meeting at Bretton Woods [New Hampshire] which is in town, in the east part of America, and they agreed on a convertible gold standard.

Now, what that means is that they decided that the US, and the US were bully boys in this process by the way. Other nations were bullied by the American representatives at Bretton Woods.

And as a consequence, the US dollar became the center piece of this system.

And there was some logic in that, by the way, that given the trading strength of America, the manufacturing strength, and the way in which the dollar had permeated the global financial system, the US dollar I’m talking about, the US dollar was at the center of the system and it was tied at a fixed rate to an ounce of gold.

And then all other currencies were fixed against the US dollar at agreed parities that were sort of worked out to reflect their trading relationships with each other. So all the currencies then had a value against each other as a consequence of that. And the Bretton Woods system decided that the role of the central banks in each of our countries would be to ensure that those agreed parities between the currencies were kept. Now, how would that happen?

If you think about a country that’s running a trade deficit, which means that it’s importing more than it’s exporting, that also has implications for the demand and supply of its currency via the other currencies.

So in the very simple example would be, let’s say that Australia is running a deficit against, China wasn’t in the system, but a deficit against Britain, for example. Then that means it’s importing more than it’s exporting.

And what exports leads to in terms of financial flows is a demand for your currency, because the country that’s importing your exports has to get Australian dollars.

So in this case, British people who were buying Australian exports would have to buy Australian dollars in the foreign exchange market to pay the exporter in Australian dollars. And so that created a demand for your currency.

But also the Australian importers who were importing from Britain would have to buy [British pounds] sterling in the foreign exchange market to pay the British exporters for the imports that we were getting from them.

And so you can see that if a country is importing more than it’s exporting, then on all the balance of transactions, the supply of their currency will be greater than demand for their currency. And as a consequence, there would be downward pressure on the Australian dollar in that example.

Now, under the Bretton Woods system, there were very narrow ranges in which a currency could fluctuate, but essentially the central bank had to maintain the parity. So in that example, there would be downward pressure on the Australian dollar vis-a-vis the sterling.

And the Australian Central bank, the Reserve Bank of Australia, would have to resolve that imbalance of that excess supply of Australian dollars by buying up the Australian dollar in the foreign exchange market and selling foreign currencies. Because you’ve got to buy the Australian dollars up. They would have to buy them with, in this case, British sterling. And that was the system.

And what it meant was that the domestic policy was always compromised because if fiscal policy was too expansionary, in other words, issuing too many Australian dollars into the economy.

Now remember that the supply of your currency is not just the amount that’s floating around in the domestic economy, it’s also the amount that’s in the foreign exchange markets.

And so if the government was trying to maintain very low unemployment, for example, by using fiscal deficits, spending more Australian dollars than it was bringing back out in taxes, that would add to the supply of Australian dollars.

And in a case where there was an external deficit, a trade deficit which was putting downward pressure on the Australian dollars, the Bretton Woods system demanded that the central bank withdraw those Australian dollars by buying them up.

And so you can see that there was a conflict between the responsibilities of the central bank to the Bretton Woods system and the domestic policy aspirations to maintain wellbeing and low unemployment and economic growth. So you had this circumstance where it was referred to as stop-growth patterns.

So for Australia, for example, which was running trade deficits, the government would try to stimulate growth and reduce unemployment, but that would increase imports and cause downward pressure on the exchange rate, that the Reserve bank then had to withdraw those dollars and increase interest rates to attract foreign capital investment, which increased the demand for your currency. And as a consequence, the growth in the economy would come to a halt and unemployment would start rising.

So you had this period during the ’50s and the 1960s where countries that ran trade had what were called in those days, weak trading fundamentals. In other words, they ran trade deficits and they were importing capital or consumption goods.

Well, they were always up against it because they were always facing periods of economic stagnation brought about by the central bank having to withdraw their currency from the foreign exchange market and the fiscal authorities, the treasury and finance authorities, having to run tighter fiscal policy, in other words, reduce the size of deficits to stifle imports and push up unemployment and cause recessionary-type biases. And that system became unviable. By the 1960s what you had were countries engaging in what were called “competitive devaluations.”

Oh, and by the way, one of the other problems was that, of course, the Australian government doesn’t produce sterling or US dollars or French francs or any of the other currencies.

And so the central bank, the Reserve Bank of Australia, only had finite capacity in which it could defend an exchange rate that was facing downward pressure.

And so then the question was, under the Bretton Woods system, what happens when the central bank runs out of money, a foreign exchange in which it could sell to buy up its own currency to bolster its value towards the parity? The answer in the Bretton Woods system was the creation of the IMF.

And the International Monetary Fund was created as a body that would make loans to nations that were running short of foreign exchange, so that it had plenty of currency, foreign currency, in which it could conduct its interventions. Now, then you had the problem that countries would become burdened with debt through the IMF.

And by the late 1960s, the IMF then started to attach conditionality to that debt, which has now become their common practice.

And that conditionality was the sort of monetarist ideology started to take over in the academy and the forebears of neoliberalism, the IMF started to become very aggressive in the conditionality it imposed upon nations that were seeking bailouts in terms of foreign exchange loans. And those conditionalities were always biased towards beginnings of the privatization, the beginnings of tight fiscal policy, increased unemployment.

So nations in those circumstances were facing social instability. It was becoming politically unviable for nations to operate within this system.

And so in the 1960s, under the IMF agreements, a nation could approach the IMF if its trading fundamentals were so configured that it was always facing downward pressure on its exchange rate. Obviously, that was unviable, not sustainable. So it could approach the IMF and get approval to revise the parity that it had been originally agreed.

Now, by the 1960s, there’s a strategic practice called competitive devaluation, where Britain would go to the IMF and devalue the sterling. And then, of course, that would then give it a competitive advantage against all the other nations. So then France would go and get a devalue as well.

And you’ve got these leapfrogging devaluations which just made the system unviable.

Intermission:
00:28:56

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Bill Mitchell:
00:29:09

And so by the end of the 1960s, it was quite clear that the system was becoming unviable.

The American government was running large external deficits, and in part because it was prosecuting the Vietnam War and spending so much and importing so much.

And of course, under the Bretton Woods system, ultimately, the US Government stood ready to convert all US dollars into gold at the fixed parity if nations wanted to.

So nations that were running trade surpluses against the US in the 1960s, all the European nations mostly, they were accumulating large foreign reserves denominated in US dollars.

And of course, by the end of the 1960s, with a huge spending on the Vietnam War effort that the US Government was making, the volume of US dollars floating around was huge. And the French and other nations, but the first ones were the French, started to worry about the value of their US dollar reserves.

And so the French decided that they were going to, through the Bretton Woods system, go to the US Government and swap the US dollars that they were holding because of their trade surpluses for gold. And the US Government started to form the view that they were going to lose Fort Knox reserves.

They were going to have to hand over huge volumes of gold stocks to countries that were holding these US dollar reserves who legitimately under the Bretton Woods system, could convert them into gold. And that is why President Nixon in August 1971, decided that was unsustainable for the US, that they were not going to send their gold to France.

And at that point, he withdrew from the Bretton Woods system. And it took a few years and a few hiccups and a few retries of the Bretton Woods system under the Smithsonian Agreement.

But by 1975, most of the world agreed that it just wasn’t a sustainable system to have all the exchange rates fixed between countries with quite different industrial structures and quite different trading strengths. And most of the world floated.

The European nations didn’t, and that’s a separate story, but that’s a legacy of decisions that they had made in the 1960s as part of European integration.

But most of the world floated, and once we floated, of course, that trade imbalances didn’t have to be resolved by causing shifts in domestic economic activity to stifle inputs and push up interest rates to attract foreign capital. The way in which a trade imbalance could be attenuated was through the exchange rate.

And so if a country’s running a persistent trade deficit, importing more than it’s exporting, well, then under a flexible exchange rate system, its exchange rate will just start to depreciate somewhat.

And the depreciation then makes its exports much cheaper to foreigners, makes imports much more expensive in local currency to the consumers, and over time, that creates forces that reduce the imbalance.

The domestic policy then is freed to pursue domestic objectives like full employment and prosperity, good health systems, good education systems, they don’t become compromised, as they were under the Bretton Woods system, to defending the exchange rate. So that’s sort of, in a nutshell, Bretton Woods 101.

Steve Grumbine:
00:32:54

Obviously, that was an Important piece of history that we kind of really need to wrap our heads around, because that is the world that we live in today. One of the things that jumps out is this fear of the bond vigilantes and the money markets rebelling.

You touched on it in there as one of the things that were particularly challenging during the Bretton Woods system. But today, what kind of power does money markets and these kind of “bond vigilantes” have on currency issuing nations?

What difference does it make?

If a country has a high import to export ratio and they also spend heavily domestically on infrastructure and healthcare and education, et cetera, what could they do?

Based on the fears of “losing confidence in the dollar” and the bond vigilantes and these money market folks going nutso, do they still have this power or is it largely, we assume they have the power, but they really don’t have the power of currency- issuing nations understood. What are we dealing with there?

Bill Mitchell:
00:33:58

Well, certainly the vigilantes, as you call them, they could really cause havoc under the fixed exchange rate system, because they knew under that system that the central bank had the responsibility to defend the exchange rate. And so they could make bets on what they were able to anticipate what the government would do.

Now, under a flexible exchange rate, they’ve got less capacity to do that. Now, there’s celebrated examples, Black Wednesday in 1993 in Britain, where this was the [George] Soros attack on the British pound.

What Soros was betting was that the British government would be forced to push up interest rates. And of course, he was betting, causing lots of instability in the British sterling relative to other currencies.

And he understood that under a fixed exchange rate, because Britain was tied to the European Exchange Rate Mechanism, which they were part of the fixed exchange rate system. And Maggie Thatcher had really opposed that. And John Major took them into it after Thatcher had gone.

But what George Soros knew was that the British government under that fixed exchange rate system would try to defend the pound, and that if he undermined the pound’s value by selling it short, in other words, anticipating that the pound would drop in value. And so in the speculative markets he is entering contracts of that ilk.

Then he knew that the British government had no option if they stayed in the system. And in that case he was correct, he could cause havoc.

And what happened on that Wednesday was that by late afternoon it became quite obvious that the British government pushed interest rates up, I’d forgotten, 17% or something in a day or something, desperately trying to stay within their fixed exchange system. And they couldn’t. And so they withdrew and they never re-entered that system. And they floated to sterling after that.

Now, in a flexible exchange rate system, the capacity of the speculators to cause havoc is less obvious. And in the modern sense they talk about the Truss moment.

A couple of years ago when Liz Truss became, for the shortest period possible, Prime Minister of Britain. The financial markets turned against her because she was proposing spending increases.

The problem for her was that she had such a tenuous hold on the leadership and the financial markets formed the view that if they put pressure on the sterling that she would reverse her position. And she did because she did have a tenuous hold on the Prime Ministerial position.

They were betting that the sterling would depreciate and they won out because the government folded. Now you think about Japan. Japan runs huge deficits and has the largest gross public debt of any country.

Historically, that has been the subject of massive short selling.

What that means is people are predicting that the government will roll over and increase interest rates and reduce government spending and kowtow to the financial markets bets who are betting that interest rates will rise. Well, all of those financial market speculators have lost billions over the years, billions in those bets.

And the reason is because the Japanese government is confident in its own position and is resolute and does what’s best for Japan. Whereas the Liz Truss moment was because Liz Truss wasn’t confident. She didn’t have a hold on power, she didn’t have a defined economic strategy.

It was just all over the place. The Tories were in chaos and the financial markets knew it. And think about the other example, Iceland during the global financial crisis.

Tiny little volcanic rock out there.

During the buildup before the global financial crisis, it had a huge reconfiguration of its financial system, its banking system and all these foreign banks went in there and manipulated the system and took the most unbelievable speculative positions and were offering ridiculous returns to depositors and the full neoliberal catastrophe. And of course, when the global financial crisis came, Iceland’s banking system, which was heavily foreign owned, collapsed.

One of the largest collapses in history. Now the Iceland currency started to depreciate. What did the Icelandic government do? It introduced capital controls.

In other words, it prevented the financial markets from taking out currency and swapping it for other currencies as a way of reducing losses. And the big hedge funds in America were exposed to this and they couldn’t get their money out. They went into international courts.

They made all the sort of standard threats, “We’ll kill your currency. We’ll destroy your economy, we will wreck your financial system, blah, blah, blah.” The Icelandic government stood firm under presidential edict not to bow to the pressures of the global financial markets.

And the international courts ruled that the sovereignty of Iceland was the prime thing and that the financial interests of the hedge funds was a secondary matter. And so they wouldn’t rule against the Icelandic government.

In other words, establishing the sovereignty of the elected legislature in Iceland. Soon after the problem for them was that it started to appreciate too much and in the currency value during the early days of the GFC prompted a massive tourist boom. And everybody wanted to do the loop of Iceland.
That’s the famous tourist loop. So its currency started to get stronger again.

The government of Iceland successfully defended itself against some of the largest American hedge funds. So that’s an example that shows you that the legislature has the jurisdiction the financial markets don’t.

You know, the financial markets tried to hijack Icelandic ships in French ports and things like this to get back money, and they couldn’t. It was ruled that the Icelandic government had legislative jurisdiction and were operating within that jurisdiction.

So the point of that example is that that was a sensible decision by the Icelandic government under presidential edict to defend the interests of Iceland against the interests of foreign capital. It was hugely successful and a role model for others.

The other example I could give was Argentina in 2001, when the Argentinian economy had foolishly borrowed a lot of money to build export capacity denominated in US dollars.

And for a time that seemed to be a good idea because the mining and primary commodity sector was booming during the ’90s, the primary commodities boom that a lot of extractive countries like Australia benefited from. And of course, that came to a halt in the late ’90s and the export revenue started to dry up.

Of course, if you borrow in foreign currencies, you’ve got to be able to earn foreign currencies through exports to pay your loans back.

And when your export revenue starts to dry up, which it did in the Argentinian case, they realized that they were running out of the capacity to service the public debt. And as a consequence they had the financial meltdown in December 2001. And what did the Argentinian government do?

It sensibly brought in basically a job guarantee, a sort of modified version of an MMT job guarantee. I had some doing in that indirectly, but they also defaulted on all of their foreign currency denominated debt.

Now when they did that, the IMF and all of the hedge funds threatened them with extinction basically and that they would never get another penny from anywhere. Now soon after they stabilized their economy through this head of households employment program, they started to recover from the crisis.

Suddenly, foreign direct investment started to come back in again.

Now it wasn’t from America or the first world sources, it was from Venezuela and other countries that typically were seizing an opportunity to recycle their own trade surpluses into returns because Argentinian economy was resuming growth. And then exchange rates started to appreciate again, wasn’t destroyed.

By 2005, the central bank in Argentina was struggling with an excessively valued Argentinian currency. And of course, the first-world investors started to flood back in.

And I recall a press conference where the Minister for Finance was asked a simple question: “How do you explain the fact, sir, that you defaulted on all foreign currency loans, yet five years later investors are coming back?”

And if my foreign language translation is accurate, he replied one word, “Greed.” And the point he made was that all of the commentators and economists, they’re ideologues.

Whereas the bond and foreign investment community don’t invest on ideology, they invest on margin. With the economy growing again so strongly by 2005, 6, 7, the investors could see margin and arbitrage opportunities.

It’s what drives them, not ideology. Now the Argentinian economy since has been mishandled, but that’s another matter.

But I think those are illustrative examples of why the idea of bond vigilantes is just a preposterous notion for a nation that’s well managed. The research evidence is very clear what provides for exchange rate stability.

It’s a well educated workforce, stable government, well articulated and enforced rule of law with respect to contracts. Foreign investors [are] scared of investing in countries where they’re not sure they’re going to get their money back.

But for countries like Australia, Australia’s been running external deficits of about 3.5% of GDP since the 1970s. You know, not small and our currency fluctuates a bit.

But by and large we have no trouble attracting foreign direct investment because they know they’re going to get their money back because we have stable laws, stable government, well-educated workforce which provides the sort of stable environment for investment security. Various times our exchange rate fluctuates from $0.50 US dollar to a dollar US dollar. Most of us don’t even feel the difference.

BMW and luxury cars go up in price because we import them. Snow holidays to the Swiss Alps go up in price.

But for the average camper in Australia, the average citizen who doesn’t have a BMW car or a Mercedes or a Maserati and doesn’t have annual ski holidays to the Swiss Alps, it’s really water off a duck’s back. It doesn’t really matter. Some things get a bit more expensive and then they get cheaper again.

We’re an economy that has a fluctuating exchange rate and we’re one of the wealthiest countries in the world.

Steve Grumbine:
00:45:35

I would be remiss if I did not ask you this final question, and this is to me what a lot of people are worried about. We touched on this with Bretton Woods when the dollar was the global hegemon, if you will.

Now we’re dealing with a basket of reserve currencies and floating exchange rates. And obviously, yes, the dollar is the primary, at least within the, I think it’s the G10 countries.

But ultimately, what does the reserve currency at this point have to do with trade and balance of trade? Obviously the US has let its dollar kind of matriculate through all these different countries and it’s been widely just saturating around the world.

But what does that do at this point? I mean, people don’t actually use dollars typically in their country. Maybe they do offline, but it’s not like they’re used per se.

I mean, these are facilitating trade. So what does that do, if anything?

Bill Mitchell:
00:46:30

The fact that a significant proportion of foreign trading contracts are denominated in US dollars, that’s a fact. Now, that proportion has declined significantly and it’s not inevitable that it will remain as high, and it definitely won’t.

The Euro and the Chinese currencies are expanding in importance in world trade, but the reality is that since Bretton Woods, since the end of the Second World War, the US dollar is used as the denominator for a significant proportion of trade in contracts. Now what that means is that people then have to get hold of the US dollar to engage in trade.

Now it’s not just trade with the US, it’s trade with everybody.

The fact that people in that context are required to get hold of US dollars in order to facilitate and execute trading contracts that gives the US dollar a particular status.

And it means effectively that the US nation can run larger deficits at the same value of the dollar than it could otherwise if there was less demand for its currency. So that’s a fact. Now what does that mean? It means it can run larger external deficits for longer without experiencing loss of value of the dollar.

That’s a fact. Now what does that mean for domestic policy? Well, not much. The rest of the world doesn’t issue the US dollar.

The US government issues it as the only institution in the world that issues the US dollar. And so in terms of its domestic policy ambitions, it has no financial constraint on how many dollars it can spend in the domestic economy.

So it can always ensure that all the productive resources that are available to it domestically can be fully utilized. Then think about, say, Australia, can Australia enjoy that same capacity? And the answer is Australian dollar isn’t a reserve currency.

Not many traded contracts are denominated in Australian dollars.

But does that undermine the capacity of the federal government in Australia to ensure that all productive resources are fully utilized within Australia that are available to it? And the answer is, of course it doesn’t undermine that.

The Australian government issues the Australian dollar and it’s the only institution that issues the Australian dollar. Just like the US government in terms of the US dollar, the Australian government has no financial constraints on its spending.

Now all it means is that there will be less demand for the Australian dollar than there is for the US dollar in the world foreign exchange [forex] markets which means that the size of the external deficit that the Australian government can run at a stable exchange rate is probably less than the size in relative terms than the US nation can run. That’s all it means.

It doesn’t reduce the capacity of the Australian government to ensure that all of its domestic available resources are fully employed.

Steve Grumbine:
00:49:38

MMT has two primary purposes similar to the Fed, ironically. You know, we want price stability and we want full employment.

With that in mind, when you think about the fact that most countries don’t have full employment and most countries are experiencing either inflation because of monopoly power, et cetera, but they also experience import pass-through inflation as well. And I don’t believe these are immutable, that they can’t be solved.

But what is it about MMT and deficits and understanding capacities at home versus the import side that folks focus on? “Wwwhen the US dollar is no longer this, you guys are going to collapse, blah blah blah.” There’s no one else that gets this.

Literally everyone out there is running around with their hair on fire. And the analysis is almost unbearable to listen to. Correct me if I’m wrong, but MMT is not really dealing with the individual purchases on Amazon.

They’re talking in aggregates. Because MMT is really macroeconomics. That’s the textbook macroeconomics, MMT.

What is it about MMT that people really need to understand as they try to evaluate full employment, price stability and this import/export kind of world that consumes?

Bill Mitchell:
00:50:58

It’s understanding what the capacities of the currency issuer are and what constraints the currency issuer faces.

For the mainstream analysis that you read in all of the papers every day and watch on TV and all the stupid programs on the TV, et cetera, they start with a fiction that, “The national government is like a household.”

And once you frame it in that way, then you’re really invoking all of our personal experiences as households, as a means of creating an understanding of the way in which the national government can operate its capacities and its constraints. And of course my experience as a householder provides me with no intelligence as to what the capacities of the Australian government are.

Nor is your experience as a householder any guide to what the capacities of the US national government are. It’s that false starting point that leads to obsessions about financial constraints that aren’t there.

There are no financial constraints on the US dollar. There are political constraints on the US government, there are political constraints, self-imposed financial constraints.

But in raw intrinsic monetary terms, the central banker of the US government can type whatever number it likes into bank accounts and that will be validated, funded spending. That’s the reality. There are no financial constraints. And so mainstream just get obsessed at that level.

And they have all sorts of complex discussions about sustainable financial ratios and fiscal space and all of this stuff. But once you get beyond the fact that the US government has no financial constraint, then the question is, what are the constraints then?

Can it just spend to infinity? And of course the answer is definitely can’t do that. And the reason is because the constraints are resource constraints, not financial constraints.

And that throws the attention of an analyst and the reader or the listener or whatever into a totally different logic space and a totally different comprehension framework.

Because if we’re worried about, oh, if there’s resources that are idle, that can be brought back into productive use, then if a government has no financial constraints, it can always do that. And if it doesn’t have resource availability, then its fiscal options are much more limited.

And if it tries to buck against the lack of resources available, then it will cause inflation. And that discussion then leads to discussions about what’s the purpose of taxation?

Well, if the government doesn’t need to be funded through taxes, why do you tax? Well, you tax to stop us having money so that we can’t spend as much and that creates idle resources.

And so you get a totally different comprehension of what taxation is in a modern monetary system.

So if you start off understanding that’s where the mainstream go or go wrong by thinking in terms of financial constraints that determine the constraint a household decision makes, if you start off at that level and make that mistake, well, then you can’t retrieve from that situation. And that’s really the contribution of modern monetary theory.

Steve Grumbine:
00:54:24

Well said, Bill. Well said. Thank you so much for this. This was very nicely done. Do you have any new books coming out here soon?

You got any other work that we should be aware of?

Bill Mitchell:
00:54:33

We’re working on a revised version of the textbook and that’ll be out early next year, I hope. And our publisher Bloomberg Press has now approved a first-year principles MMT book. So the current textbook is a two-year sequence.

So it goes from beginner to somewhat sophisticated. We’ve now got a second book that will be delivered in 2027.

It will just be a really easy book in your context, college students, but non-economic majors. So a basic principles book. And I think that book will be accessible to all sorts of people, not just university students.

And then there’s another book I’ve got simmering away that will come out next year on degrowth and sustainability and empire and colonialism and all that sort of stuff. And there’s another project that will be out later in the year. I hope it’ll be in Japanese language on the challenge of Japan.

So that’s another project I’m working on with my colleagues at Kyoto.

Steve Grumbine:
00:55:38

Wow. And you are really busy, sir.

Bill Mitchell:
00:55:40

You only live once, Steve, so you gotta pack it in.

Steve Grumbine:
00:55:44

Amen, brother, Amen. All right, well you make sure you tell your wife I said hello. Thank you once again for always making time for me. I really am excited about this.

I think this is a really compact, tight, on point talk. So thank you for all of us. Folks. My name is Steve Grumbine. I am the host of Macro N Cheese.

I’m also the founder of Real Progressives, the nonprofit that sponsors this podcast. We are a 501[c]3 not for profit organization and that means that we survive on your donations, which by the way are tax deductible.

So please consider donating to Real Progressives. Real Progressives has put Macro N Cheese out every week for almost seven years. Think about that. Seven years without missing a week.

And we keep going because we feel that this is the most important information that you could get your hands on. And thanks to guests like Bill Mitchell who provide their time so graciously. I can’t even begin to tell you how much I thank you for that.

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And with that, on behalf of my guest Bill Mitchell and myself, Steve Grumbine, Macro N Cheese, we are outta here.

End Credits:
00:57:23

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