Episode 183 – Imports, Exports and Empire with Bill Mitchell

Macro N Cheese – Episode 183
Imports, Exports and Empire with Bill Mitchell
July 30, 2022

 

[00:00:03.970] – Bill Mitchell [intro/music]

I became very interested in the early 90s when Japan had the largest commercial property collapse in history. Commercial properties in Tokyo collapsed. We’re not talking 2 or 3%, we’re talking 50% in some cases, and they had one quarter of negative GDP to follow.

[00:00:26.470] – Bill Mitchell [intro/music]

Modern Monetary Theory isn’t the theory of everything. It’s not going to tell me who’s going to win the football this afternoon, and it’s not going to give me a rich historical and philosophical understanding of world history.

[00:01:35.110] – Geoff Ginter [intro/music]

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43.130] – Steve Grumbine

All right. This is Steve with Macro N cheese. My guest is Bill Mitchell. We are going to be addressing the imports and exports conversation that we’ve had in previous episodes. MMT is on the record as describing the concept of imports and exports, not as an opinion, not as advice, but simply as a matter of fact. Imports produce goods and services that someone else created that you’re bringing into your country.

Exports are a cost because you’re sending your goods and services elsewhere. This isn’t a matter of whether it’s good or bad. It’s a simple accounting identity. And so there’s some confusion out there. It appears to be in good faith and I want to get everyone on board with this, get it correct and be able to move forward with a collective voice.

So I asked my friend Bill Mitchell to join me. His extensive knowledge, not only about Australia, but the global economy as a whole. And being one of the original developers of modern monetary theory and someone who clearly understands the theories he’s developed, I figured, why not ask him? So with that, Bill Mitchell welcome, sir. It’s been a while.

[00:02:51.730] – Bill Mitchell

How are you doing? Yeah, I hope you’re all well.

[00:02:54.910] – Grumbine

I’m well, I’m excited. I’d love to let the world know you’ve got quite a prestigious offer to go to Japan in the very near future. I wonder if you might be willing to tell our audience a little bit about that.

[00:03:09.540] – Mitchell

Well, I’ve got good contacts in Japan and good academic and government contacts. I last visited in 2019 and in 2020, the Japanese government offered me one of their very prestigious international fellowships, which I was very happy to accept. But of course, the pandemic closed borders and delayed that.

But finally, depending on the latest Omicron variant and how that goes internationally, we’re going to take it up in September and I’m going to spend some time in Japan, working in the university sector at Kyoto, but also doing a lot of work in Tokyo. So it’s a chance for me as an academic to interact with central bank and cabinet office types in debates and to really understand a lot of the nuances of the Japanese economy, which I’ve been following all my academic career.

And I think it’s a wonderfully illuminating economy. And with my Japanese academic colleagues, I hope we can come up with some really good output on understanding Japan, understanding it from MMT perspective and understanding its place in the global world. Why has Japan got low inflation at the moment? Why has it been able to run relatively large fiscal deficits, run zero interest rate, have the highest gross public debt in the world, yet low inflation?

So these are questions that any economist has to come to terms with and it’s not sufficient just to say, oh, it’s a cultural difference. Yeah, it’s very different culture. But the monetary institutions work in the same way as Australia, US, UK, all of them. And so it’s a real academic issue as to why they perform so differently.

[00:05:10.090] – Grumbine

It’s very important to me, as a lay person that follows you guys very closely. Japan is a bit of a case study, isn’t it? There’s a lot of opportunity there for us to glean things that we don’t get from other nations simply because they have close to 300% debt to GDP ratio and the US is complaining about it being just over 100% or so. Yeah, we have inflation here, yet Japan doesn’t. And there’s something to it. Japan is an island nation. They don’t have the productive capacity that many other nations do. They do rely on imports. It makes for a really good case study, I guess, in terms of an MMT perspective. Maybe we can start there.

[00:05:55.270] – Mitchell

I’ve been saying for years that Japan has been my real world laboratory. I became very interested in the early 90s when it had the largest commercial property collapse in history and had one quarter of negative GDP. Commercial properties in Tokyo collapsed. We’re not talking two or 3%, we’re talking 50% in some cases.

[00:06:20.080] – Grumbine

Wow.

[00:06:20.600] – Mitchell

And they had one quarter of negative GDP to follow. And so as a person who’s in an academic setting, who has mainstream macroeconomics rammed down their throat every day, you have to say well, how can that be? And then to have very large deficits in relative terms, sometimes above 10% of GDP. I mean, if Australia goes above a few percent, we freak out.

And same in America, of course. So then for the bank of Japan to basically be buying all the government debt. Which everyone calls money printing. I don’t call it that. But they’ve been doing that and for them to have low inflation but the thing that I’ve always told people to look at is their unemployment rate is extremely low and even in the depths of their property crisis, it only rose a little bit.

Even during the GFC, it only rose a little bit, and you go to Japan and you live there and you see that they have relatively good housing. Not the sort of housing Australia has because we’ve got more land, but they have good quality housing. They have brilliant public transport, excellent public health system. And you say to yourself, well, how can all this be?

It’s a laboratory, up until recently, the second largest economy in the world, delivering all of this stuff that invalidates mainstream macroeconomics. And so for me, as an academic, it became my laboratory.

[00:07:55.930] – Grumbine

When I hear about debt, and we talked about debt, I think for the average person, let’s be fair, most people that follow MMT know this answer. But for those who have been coming through the door, maybe new and maybe listen to other voices that are adjacent to MMT, this debt term is akin to printing money – tends to make people’s heads split wide open.

It’s a tough concept to get their head wrapped around because of the household narrative, we all know. But the way we talk about debt, the way we talk about borrowing, it’s not really debt and it’s not really borrowing. Not in any meaningful way anyway. Can you explain within the context of modern monetary theory, when we say debt, what does that mean?

[00:08:39.490] – Mitchell

Well, I would nicely contradict you.

[00:08:43.690] – Grumbine

Please!

[00:08:43.690] – Mitchell

It is borrowing in the same way that when I go to my bank and ask for a mortgage loan, the bank assesses me and gives me a deposit and I pay the builder or whatever, and I have to pay that back. And at regular frequencies I have to pay interest. And I’ve got a legal contract with the bank and I can be penalized if I renege on that.

Now, if the government issues debt, that is, sells debt to the non government sector, in one way, it’s an identical thing. It issues debt, it takes on debt, it agrees to repay that at some fixed schedule, in the same way that my mortgage has got 20 years or 30 years or whatever the term that is agreed is. And they have to pay regular interest payments to the holder of that debt instrument. It’s a legal contract.

And if they don’t do that, they face legal consequences. So at that superficial level, it’s identical to a private loan from a bank. But the important point to understand is that whereas I have to borrow from my bank to buy a house, because my current income and my current spending capacity is insufficient to buy the house, and so I know that over the course of my income earning life, I’ll be able to repay that debt and finally own the house outright.

From the government’s perspective, if you’re a currency issuing government, it’s totally unnecessary, and to borrow from the private sector is totally unnecessary. So then you have to ask the question from the point of view of that sort of government, they never have a constraint on what they can buy in their own currency, whereas I do have a constraint as a private individual, a financial constraint.

So then when you understand that, you then say to yourself well, why would a government continue to issue debt if it didn’t have to? Why wouldn’t they just go and buy the stuff? If they want a new hospital, why don’t they just sign contracts and credit bank accounts with the construction company and whatever?

And so that’s the fundamental difference that there’s another agenda for the household. Like me, it’s quite obvious why I go to the bank to borrow, to buy a home. But from the government point of view it may have held out to us that it doesn’t have the money, but from an MMT perspective you know that it does. So then there must be another agenda going on and that’s the important difference.

[00:11:38.240] – Grumbine

That’s an interesting way of saying it. What do you suppose that agenda is?

[00:11:43.190] – Mitchell

It’s not what I suppose it’s what I know.

[00:11:48.350] – Grumbine

Well [laughs]

[00:11:48.660] – Mitchell

That’s just semantics. But the point is that – and we’ve said this before and I’m hoping everybody eventually works this out – that in my lifetime we had a major change in the international monetary system. In August 1971, President Nixon closed the so-called gold window. In other words, the agreed terms where the US government would convert US dollar holdings, whoever held them, into gold at an agreed parity.

He closed that system off. So this was the fixed exchange rate system, the Bretton Woods system that had emerged after the Second World War as a consequence of the international desire to have stable international currency relationships, to not have boom and bust currencies, et cetera. And in August 1971 that was effectively ended.

It didn’t really end until 1975 because they tried to rehabilitate it, but it was dead in the water in 1971 effectively. So at that point, when that system finally collapsed, our monetary system changed – the whole dynamics, the whole focus and opportunities. And what I mean by that in this context of our little discussion here is that during the fixed exchange rate system, the agreement between countries of course was that the US dollar would be fixed at a parity with an ounce of gold and then all other currencies would be fixed against the US dollar, which effectively meant they were linked to gold as well.

At some agreed parity, whatever it was between the exchange rates between the currencies and the central banks were committed and their main responsibility was to maintain those parities. And so if a country, for example, was importing more than they were exporting, in other words, having a current account deficit, then that would show up in the currency markets.

Because when you import, you are demanding foreign currencies and swapping your own currency, supplying your currency. And when you’re exporting, foreigners are demanding your currency and swapping their currency in the foreign exchange markets. So if a country is running an external deficit, a current account deficit, the supply of currency into the foreign exchange market is greater than the demand and that puts downward pressure on it. It’s a market.

The price of the currency starts to fall. And under the Bretton Wood system, of course, the central bank had the responsibility to obviate that excess supply in that context and they did that by buying their own currency and selling foreign currencies. In other words, they had to on a daily basis manage the amount of their own currency that was in the system.

And what that did then was compromised fiscal policy, taxation and government spending because the fiscal policy couldn’t for any length of time be inconsistent with the need for the central bank to manage the amount of liquidity in terms of their own currency in the foreign exchange markets. And so when the government spent money it was injecting currency into the system and when it taxed it was withdrawing currency in the system.

But the point was that it had to do that in a way that didn’t compromise the central bank’s management of the currency. And so there was a necessity then if the government was spending, it had to soak up the liquidity from the foreign exchange markets and they did that by issuing debt. And so in a way the system required the governments to issue debt to match their deficit.

If they are running deficits spending more than they were taxing, it really required them to issue that debt not to fund the spending, but to make sure there wasn’t too much of the currency in the system that would undermine the central bank’s management of the currency to defend the exchange rates. Now, once the fixed exchange rate system was largely abandoned in the early 1970’s, of course the central bank was then freed from its responsibility to manage the currency.

The currency could just float and go up and down depending upon demand, supply and the foreign exchange market. And as a consequence the need for fiscal policy to be tightly constrained, to be consistent with monetary policy in the same way as it used to be lapsed, that was no longer the case. And so the question then was well, the government then didn’t really need to issue debt to match any deficits it was creating in fiscal policy.

So then the question was okay, well, why does it keep issuing debt in what we now call this fiat monetary system where exchange rates are floating? And a clue, I found this very interesting document in the Australian context which really you could find in any country, I’m sure – and I have – where it related to rather technical shift in the way in which debt was issued by the Australian government once it floated the exchange rate.

And the official from the debt management agency said that public debt continues to be issued because it serves as a discipline on government. Now, what that meant was that he knew damn well that they didn’t need to issue debt any longer to match any deficits because the fixed exchange rate system had gone anyway.

But what he was saying was that the build up of psychology among the population during that long period of fixed exchange rates where it was built up in our psyches that public debt was somehow an onerous burden on the government and would require higher taxes eventually and all of that political stuff. He knew that if they continued to issue debt they could always pull that string and the governments then politically would be under political pressure not to run very large deficits.

And this was of course the era when neoliberalism started to emerge in the academy. It was monetarism but in the broader political philosophy sense it was neoliberalism. And of course this was a period where they were attacking the rights and the utility of fiscal deficits. So they saw that by continuing to construct this debt issuance machinery and they could then continue to put political pressure on governments not to run very large deficits. And so that’s the purpose. There’s no other functional reason for them to issue debt. It’s political.

[00:19:16.490] – Grumbine

So when you say you’re issuing debt we’re talking about bond sales and other types of debt instruments. In that sense I know that the average retirement and pension fund in the United States is heavily leveraged in that space as a secure safe thing to anchor the pension programs that support it. But otherwise is this just a safe bet for people or is this just another way that the rich have found to get a basic income? Every time we try and do something nice for the people the rich ensure they get a cut of it. Is that how it works?

[00:19:50.630] – Mitchell

Depending on the country but every week or every fortnight or something the government has bond issues and they typically will have a relationship with a number of so called market makers. Now what does that mean? That’s a group of big banks basically the main commercial banks and some other investment banks, non-retail investment banks, and they are the ones that make the bond market.

And what that means is that they are the ones that participate in what’s called the primary issue. And so the primary issue is the government announces on a weekly basis we want to sell $15 billion worth of debt. We want to sell that to the bond market. And the market makers then go in and typically will say well to buy x billion we require X percent yield.

That is returned and then the auction process happens. So the government will get all the tenders from these market makers and they’ll obviously issue as much debt at the lowest tender yield as they can and then they just go up higher yields as they need to exhaust the bond issue so that debt then is created the government has in its central bank somewhere or its financial system gets some number put in there and these characters, the market makers have these financial instruments and then of course they sell them and speculate with them into what’s called the secondary bond market.

And that’s where you and I could buy a bond if we really wanted to. And the big pension funds buy bonds in the secondary markets and then they just get traded around until they mature. And when they mature whoever’s holding the bond at that point gets repaid by the government. Now the reason why pension funds buy the bonds in the secondary market is because they’re effectively risk-free in terms of credit risk.

Unless there’s an extraordinary political motive the US government will never default on US Treasury bonds, Australian government will never default on Australian government debt. So in that sense there’s zero credit risk. Now that’s not the same as saying there’s no risk because there’s also risk in terms of inflationary effects can undermine the principle when it’s matured but we’re talking credit risk here. You’ll always get paid back the amount on the face value of the bond.

And so what that means effectively is that all other financial assets issued by the commercial banks or by firms to benches all these bonds and debt instruments they all carry credit risk of different proportions. Some financial bonds are very high risk and some are relatively low risk but they’ve got risk. And what the bond market speculators and the big investment banks do is they obviously seek highest return for their asset structure and at times they perceive that the non-government financial instruments become too risky and so they can immediately shift their portfolio and buy government bonds and wait out their uncertainty.

And in that sense if you think about it that’s just corporate welfare. The government’s bonds are really just corporate welfare. They’re providing the speculators with a risk-free annuity that is a risk-free payment to allow them to span a period of uncertainty. Now the other thing that the government bonds do is allow those investment speculators – and this is a little bit more tricky to understand but it’s not that hard – is that because they’re risk-free government bonds they become the benchmark on which to price all your other assets.

So these investment banks are creating all these loony financial products that they try to flog off on unsuspecting people and they can price the yields on those riskier assets off the benchmark zero risk asset. Once again the government bond market provides a service to profit seeking gamblers, speculators. And so the only way I would urge people to understand government debt is that it’s corporate welfare.

And we complain bitterly about giving a pittance to an unemployed person or someone who is in poverty and needs a “hand out” – and I’ve got inverted commas here – yet every day we’re pumping out billions of dollars’ worth of corporate welfare to these gamblers who have got no social purpose. And that’s the way I think about government debt.

[00:25:11.810] – Grumbine

And that’s a very good way of thinking of government debt because it pulled together a lot of important things. In particular, as we talked, you made mention about how the exchange markets are free floating now. The dollars and pounds and yen and yuan are floating around in the markets. And I guess my question to you, Bill, is in the vein of this imports and exports mindset, what impact does the foreign exchange and free floating concept have on the currency itself and the ability for countries to run a net importing position without concern based on this bond arrangement in each country? And the free floating exchange rates, what does that do to a country’s ability to acquire things from other countries? How does that impact them?

[00:26:01.790] – Mitchell

Well, the conventional approach, the mainstream approach – I know you should never start by using the mainstream framing, but I am. When I was at university as a student doing international trade and finance and those subjects as an undergraduate, we were always taught that current account deficits are a problem and the government should do everything they can to reduce the deficits. Now this was during the late 1970’s when I was in that student status.

And the argument was that under floating exchange rates, a current account deficit, as I explained a little bit earlier today, means that you’re supplying more of your currency into the foreign exchange market than is being demanded. Your currency is being demanded by people buying your exports. And when you buy their imports, you’re supplying your currency.

And what the conventional argument was, and it was a very dominant argument, is still there today. And the other part of the story, of course, is that the way you can meet that shortfall, that excess supply of currency is creating a shortfall. You can stop your exchange rate falling. The balance of payments has a current account and a capital account. Current account is about goods and service flows.

The capital account is about financial flows. So countries get foreign direct investment and they also invest in other countries. And that’s recorded in the capital account. And so the argument was that, well, if you’re running a current account deficit, the only way you can stabilize your currency in the short term is if your capital account is in surplus.

And what that means is that historically that you had more foreign direct investment coming in than was going out. So there was net foreign direct investment inflow. And what that meant that you would be increasingly becoming indebted to the rest of the world because they would be buying your land and factories and equipment and all the rest of it.

And eventually the pressure on the currency would become so great because you were trying to run continual current account deficits, that the foreign exchange markets would start to sell off your currency and as a consequence you would go into freefall and you would have a currency crisis. And so the argument was that you couldn’t run an external deficit for very long on the current account.

And this led to, of course, all of the stuff that the IMF pursues about export led growth and the way it’s ravaged African and Latin American countries and Caribbean countries, that they had to export a lot, blah, blah. Now, the reality is that the evidence is that economists don’t really understand what determines exchange rate movements.

The evidence doesn’t support the view that you’ll have a currency crisis if you run a current account deficit continually. Australia has ran up until very recently with the recent commodities boom. But up until then, Australia ran external deficits on the current account about 4% of GDP. That’s quite significant since the 1970’s. Now our currency goes up and down, it’s true.

But we’re one of the wealthiest countries per capita in the world. So how come? Why haven’t the currency markets completely sold off the Australian dollar and destroyed it and turned us into a third world country? Well, the answer is that there’s much more to currency stability and the desire by foreigners to hold your currency than what’s going on on their current account.

And what we know from the literature, the sensible literature, is that if a country has stable government, so orderly democratic shifts – we’ve just had a shift in government. There were no riots. It was very orderly. If it has orderly transition of democratically elected governments, if it obeys the rule of law, in other words, there’s contractual certainty in financial transactions.

In other words, debts and things like that are honored in a systematic legal way. If you have high levels of education, if you have good public infrastructure that can be leveraged off by private sector and all of those things that are typical in a wealthy advanced country, then your currency will be very unlikely to enter a crisis. And so the idea that the balance of payments becomes a constraint is not borne out by the reality.

The reality is that countries can run external deficits on the current account, consistently import more than they export for decades without a currency crisis. Now, that’s not to say that there’s not considerations that bear thinking about the things that arise from that that aren’t of concern and need careful consideration. But that’s the reality.

[00:31:46.610] – Grumbine

So when China comes to the United States selling manufactured products, goods and services, et cetera, and they receive US dollars in that transaction, I don’t fully understand who is at the central bank making the decision to say we’re going to take all those US dollar holdings and we’re going to buy US. Treasury bonds with our existing dollars. Explain that process. What goes into that? How does that play out?

[00:32:19.400] – Mitchell

Well, just think about the transactions at the most basic level. There’s the old thing “follow the money” isn’t there? But most of these things can be just analytically constructed by just thinking about it at the most basic level and then building through. A lot of this stuff is obscured by fancy talk and political scare mongering, but really just start thinking about it at the most elemental level.

So what’s going on here? So some Chinese manufacturer, let’s say they’re making a car that they want to sell in the US market. So they’ve probably got a group of companies who they franchise in the US. The car dealers. And so they make this car and they ship it across to the car dealer, and the car dealer sells it to a US customer. Now at that point of sale, what happens?

The US customer says, okay, I like that Chinese car. Here’s some US dollars for the car, and drives off happily with their car. And so those US dollars are sitting in the wholesaler’s bank. They’re in the US monetary system. Because they are US dollars. The monetary system doesn’t have to be within the borders of the country.

When you travel abroad and you’ve got a few yen in your pocket, that’s part of the Japanese monetary system. I’ve got a little box of a few yen from previous trips in my drawer at work. That’s part of the Japanese monetary system. Okay. So then the wholesaler obviously has contractual liabilities to the Chinese manufacturer.

And so the wholesaler probably does a bank transfer with the Chinese manufacturer’s US bank, which would be the typical case. And so some US dollars get shifted from the wholesaler’s account to the manufacturer’s account at some US bank. Now it might be a branch of the US bank in Beijing. It might be in New York, it might be anywhere.

And the Chinese manufacturer then has US dollars in a bank account. So then what’s it going to do with those US dollars? Well, there’s a number of things it could do. One thing it could convert them into Chinese currency. And typically they would do that in some circumstances because their costs will be in Chinese currency.

The workers and some of the raw materials, not all, because some of them will be denominated in other currencies if they’ve had to import real resources, they may do that. And they do that obviously to some degree. Now then, if they’re running huge surpluses with the US, they’ve got a lot of US dollars, and they’re not going to convert all of those. And so then they’ve got a decision to make.

Will we buy a real resource that’s denominated in US dollars, like land or a factory or something else, real estate? Or will we buy a financial asset, a government bond, or invest in a private financial asset like invest in a US company? So they can do that. Now then the question is, what happens if they sell off all those bonds really quickly? Well, when you think about then the next thing, who carries the risk then?

Well it’s the Chinese that carry the risk because if they liquidate all the US dollar holdings, whether they’re financial assets or not, and try to convert them into some other currency, if they’ve got massive amounts of US dollar holdings, well then they’re not going to do that very quickly because they’d be stupid, they’d make losses because that would create downward pressure on the US dollar and the depreciating dollar would mean that their wealth holdings in US dollars would evaporate somewhat.

So they’ve got the risk then. So there’s the transactions. It’s pretty straightforward sure. But then the question is, well, do you really want foreigners being able to buy strategic assets? And so think about London, the London real estate market and all the Russian oligarchs. I don’t know if you go to London very often, I don’t think you do.

But if you do and you go out past Notting Hill to those very salubrious suburbs down to Chelsea way bit further south in the city, southwest of the city, these huge mansions are owned by Russians. And that’s because they were able to use currency power to buy those big real estate complexes. Now the question is, is that desirable?

Well I think it’s terribly undesirable and you don’t want foreigners being able to buy strategic assets at the expense and to the detriment of domestic residents. So what can you do about that? Well a sovereign government can always legislate to stop that happening. In Australia. We have, for example, the Foreign Investment Review Board.

It’s a federal government body. Now, it’s been corrupted over history but its purpose is to stop foreign currency holders being able to buy strategic assets. So for example, you as an American cannot come and buy an existing home in Australia. You can build a new home but you’re not allowed to own an existing house. Now that’s an example of a government regulation to restrict the rights of foreigners to buy strategic assets.

So you can stop that happening if you want to. So then that overcomes that sort of problem. But that’s about all there is to it. I mean there’s no fundamental fear in the Chinese having US dollar holdings. They’re not funding the US government, they’ve got US dollars because they sold more stuff to you than you bought from them. Then the question is will I sell more things to you than you bought from them?

The US citizens who ultimately ended up with those goods and services, did they benefit from that transaction in material terms? And that gets to the hub of this exports are a cost, imports are a benefit issue. Because when a country is running a current account deficit, it means that in real terms, not currency terms, in real goods and services, that country is receiving more goods and services and resources from the foreigners than it’s sending to the foreigners.

And for most parts because we have a system that we appraise benefits and costs on consumption possibilities. If you can consume more goods and not sacrifice as many consumption opportunities, which is effectively what an external deficit is, then in real terms, material terms, you’re better off. And that’s the nub of this issue.

Now, there’s lots of nuances and qualifications we can go in on that about whether we really should be consuming a lot of cheap, low quality plastic, synthetic items, textiles from China. But that’s a separate issue. In general, if you’re able to enhance your consumption possibilities by getting the foreign sector to export more to you than you export to them well then in material terms you’re better off.

[00:41:07.910] – Intermission

You are listening to Macro N 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.

[00:41:33.730] – Grumbine

 So it seems like I’m having an epiphany as we’re having this conversation. The things you’ve said I’ve heard you say before, I’ve said them before, but there are things that get mixed up in the explanation. And I think the key is understanding that MMT is describing the system and not conflating the system with political choices.

And political choices some people accidentally or purposely confuse as permanent must-be situations that influence the monetary policy. And as I’m thinking through this problem, ultimately foreign direct investment, is it good, is it bad? It’s a political decision. MMT can describe what will happen if you choose either way, but it’s not advising you what you as a government should allow for foreign direct investment.

An MMT informed individual may come up with a policy that would give their preference, but that is not specific to MMT, because MMT is not imposing the political, it is analyzing the concept of fiat currency and how it works and operates. The reason why I bring that up is because there’s an adjacent issue to that, and that goes to the concept of banking and public banking. Warren would clearly say that in the United States, for example, we already have public banks.

We just didn’t create the proper regulatory environment to keep them constrained, and now it’s gone amok. They’re still public. You could re regulate them instantly. That’s a political thing. Creating public banks as a way of skipping the point of reforming the banks you’ve already let run amok, as opposed to fixing the creature that you created. Am I close in that assessment?

[00:43:28.990] – Mitchell

Well, yes. The thing about it, if the country is running an external surplus against you. In other words, you’re running a deficit against them. They are building up financial claims in your currency. That’s the point. So the little example we used about the car manufacturer, they built up stores of dollars within the US banking system initially. So they had claims against your resources because they held US dollars.

So that’s the transactional reality. And any time a country exports more than it imports from you, they’re building up financial claims in your currency. Now, the question then arises, well, is that desirable or not? And I use some ways in which they can exercise those financial claims. Do you really want external countries having financial claims on your assets?

Because ultimately they can, if you allow them, convert those US dollar stocks into ownership of real resources that the nation in question has. And they could be strategic assets. Like so they buy up electricity companies or water systems, or tollways, or any number of things that could and have wreaked havoc on domestic residents welfare.

And the other aspect of that to understand is, and this is a point that’s often made as a scare, but you need to understand this. A country running an external deficit is allowing foreigners to build up financial claims in that domestic currency. Now, the point I made was that in material terms, while the foreigners are getting those financial claims, the domestic residents are getting real goods and services that they couldn’t get hold of before.

So for the time being, it looks like that’s a good thing for the domestic residents and they can get better cars or iPhones or anything that they couldn’t produce at the same quality or price. So for the time being, that looks good and that’s the “imports are a benefit” type reflection. But that can only persist as long as the foreigners are willing to accumulate those financial claims in your currency.

And, at various points in history, the taste for accumulating those claims has changed. And at that point they stop wanting to accumulate your assets. And the terms of trade then shift against you and they can rapidly force you into a currency crisis. And therefore the ability for that nation to run current account deficits becomes reduced.

So that’s the sort of juxtaposition there that as long as you can keep convincing foreigners to accumulate financial claims by delivering you these real benefits, you’re sweet. But it could change, and sometimes in history it has changed rather rapidly. And the cost of adjustment then away from that import dependency can become quite severe for a nation.

Just look at Germany at the moment with its gas imports from Russia. If Russia closes Nord One, Germany’s toast. Germany will need  a structural adjustment that it’s ill equipped for at the moment. So that’s the reality. Now the question is the nuances of all of that and the political questions you have to ask are, well, yes, we’ve got all these foreigners with financial claims on our currency, do we want to restrict what they can do with those claims?

And I mentioned that before about what assets they can buy and what assets they can’t buy. And the other question about it is, is it desirable always to judge wellbeing by material benefits? Now, what am I getting at there? Well, forever, nations have agreed that they will forgo material benefits to achieve other purposes. What am I talking about?

Well, the whole protection of manufacturing industry argument, tariffs and all of that, to ensure that you have a manufacturing sector. Why would a nation want a manufacturing sector? Well. Typically the arguments have been for external security purposes. That if suddenly you find yourself in a wartime situation. You want to be able not to produce cars anymore, but to produce tanks and howitzers and bullets and things like that.

For national security purposes, which are a political type assessment, you may be willing to not import as many nice, cheap cars from overseas and produce your own cars and maintain your own manufacturing capacity. Even though the products are more expensive to produce. Higher price to sell. And maybe not as even good quality.

But you’re doing that because you understand that there are other motives that are just pure consumption possibilities and benefits for doing that. And so it’s not straightforward that you’ll always see that imports are a benefit, but there are other considerations as well that may lead you to forego those benefits and incur costs to maintain a domestic manufacturing capacity.

[00:50:02.170] – Grumbine

So within the laboratory of sorts that we got to experience with the pandemic. And since then, with the war with Russia and Ukraine, we’ve got to see the impact on petroleum as well. We talked offline about how Australia is a huge liquid petroleum producer and Australia is currently short of that product. And we have a similar thing in the United States.

We’re a huge oil producing country, but we’re exporting it like crazy. We have no meaningful energy policy. That is a political decision. And it’s also because they have bought into the pseudo free market system. They don’t put any real structure around making sure the domestic demand is filled and then sending whatever’s left over abroad. They just let them do whatever they want.

That, again, is a political decision. The government, being neoliberal, has made a decision in the favor of businesses and a more Laissez-faire approach to markets. But that doesn’t have to be that way. And I guess this is that dividing line where I was trying to make the case that you’ve got real resources that your country can produce, but without the political framework for regulating exports or regulating energy production, there are no guarantees. So that is not an MMT problem about exports or imports. That is a problem of politics and policy.

[00:51:43.390] – Mitchell

Sure. Just to reiterate it, Australia is one of the largest producers of liquid petroleum gas.

[00:51:51.430] – Grumbine

Yes.

[00:51:52.310] – Mitchell

And we export gas and we use it domestically, of course. And I’m hoping that soon we stop using gas altogether because of the carbon implications. But when Putin invaded the Ukraine and the gas supplies to Western Europe were disrupted, of course, these European countries, Germany and France and Spain, and whatever, started looking for other sources of gas to try to substitute away from Russian gas.

And the gas prices started to really go up because there was quite a substantial shortfall. And so the Australian gas producers saw a windfall and decided to divert gas output into the export market away from the domestic market. So we’ve got this absurd situation where we now have a shortage of domestic gas even though we produce multiple times the amount of gas that we would need domestically, because of the profit seeking of the gas producers – and a lot of them are foreign owned.

So the price of gas in Australia domestically has gone up ridiculously high and it’s creating insolvency in some companies who rely on gas for their production processes and it’s really killing a lot of low income households that still use gas for cooking and heating. And we’re in winter now and it’s been a very cold winter because of climate change.

And so we’ve got this absurd situation and just last week, the regulator of the whole system has invoked a very rarely invoked regulation that they have commanded the gas companies, forced them to divert export gas into the domestic market. And the point I’m making here is that this clearly is an example where exports are a cost and that the government always has the jurisdictional authority to override the raw motivations of the market.

Because if the regulator last week hadn’t commanded the gas producers to ensure that the domestic market has got sufficient gas, in other words, just diverting it from the export market, then the market would have just kept gouging the domestic price because of the shortfall and shifting the gas into Europe at booming prices because of the shortage created by Russia.

And so the two lessons are that exports are a cost, but the government, the legislator, the regulator, as long as there’s real resources available, can deliver whatever configuration of real resources they so desire.

[00:55:02.530] – Grumbine

Russia has basically made the US look rather silly. They have the real resource and Germany, to your point, absolutely needs it. If they don’t get it from them, they’re hurt. Russia? It’s just an asset sitting there with no one that can buy it. But they need gas too. Right? So it shows that the money part of this is the least important part of it. It’s the real resource. And that brings us full circle to this concept of imports are a benefit because you’re getting the real resource.

[00:55:38.290] – Mitchell

Absolutely. The thing about MMT is that once you understand that the currency issuing government has no financial constraint, which jettisons a major beachhead in mainstream economics that most students can’t get through. Once you understand that, then the focus then shifts. What are the constraints on government and what are the constraints on a nation? And they’re real resource constraints. That’s it.

And so you start building your analytical framework from there. Well then, in that context exports have to be a cost because you’re foregoing real resources that you could use yourself. And imports have to be a benefit because you’re getting real resources from other countries that you didn’t previously have, which allow you to expand your consumption possibilities. Now, the question then is, well, does that mean that exports are bad and imports are good? Well, not really. That’s where people get tripped up.

[00:56:37.230] – Grumbine

Right. This is not advice.

[00:56:39.230] – Mitchell

Who tried to challenge that introductory notion based upon real resource availability, they get tripped up because they somehow get some sort of moral outrage or some sort of good and bad type argument emerging as cost and benefit. But the point is that we incur costs to gain benefits. So when I take out a mortgage, that’s a cost to me.

But I’m investing in the ability to own a house and have accommodation freedom ultimately in an older age. So we understand the concept of investment. We incur costs as an investment to something greater in the future or even now in the present. So to get foreign currency that’s required to buy imports, you have to export.

So export is a cost, but it’s an investment and ultimately it can expand your consumption possibilities. And without those exports you may not be able to do that. And so that’s the sort of more sophisticated way of transcending the costs and benefits of exports and imports. Now, the other question then is well, and this relates to your question, the pandemic reference that you made as we got into this part of the talk.

What the pandemic has demonstrated, I think, apart from a whole lot of other things, is the concept of globalization is deeply flawed. And we’ve been having a growing understanding that the reliance on the Internet has dangers, for example, because of the way in which it could be interrupted. And if the financial sector is reliant on the network working they’re going to be severely disrupted.

But I think more broadly now we understand from the pandemic that the disruption caused to the just-in-time supply chain system that is the most evolved way of globalization now. I was in Korea a while back, some years ago and I was guest of the president of Hyundai and I’d forgotten the exact number of hours but it’s only a few hours of raw materials in their assembly plant that they have available.

And in other words, what’s happening is that every hour these big trucks are coming in with raw materials as a just-in-time type production process. Now, any disruption to that, the factory shuts and it can’t possibly keep producing. And you just have to have a major road accident on a highway and your inputs get stranded on the highway and the factory closes.

And I think what the pandemic has demonstrated is that this reliance on ships going everywhere with goods and services, especially essential services like medical supplies and vaccine production and those types of things that were relevant to the pandemic. And I don’t talk about the pandemic in the past tense by the way, because it’s still raging and the death rates are rising again.

And so those things I think will force us and they are forcing nations to rethink the whole idea of dependency upon imports. And that sort of thinking must be going on in spades in Germany at the moment, given the crisis that Germany itself, but Europe in general now is facing because it basically became dependent on foreign imports of essential materials.

And I think what you’ll see is much more of a move and I hope we see that because in carbon terms it’s better for everything to go local again. And I think we’ll see much more localism occurring, much more of sustainable communities trying to have smaller scale production and food production, particularly in those types of things.

[01:00:57.970] – Grumbine

This brings us to the power dynamic with developing nations, the IMF, the World Bank, the World Trade Organization and the impact that these countries that don’t have necessarily the manufacturing capabilities or the robust diverse economy that have the full spectrum of sovereignty as Fadhel would say. There’s some concern and it tends to be laid out politically.

It may not be an economic concern, but it’s definitely a legitimate concern. That the predation of countries like the United States and others who basically attach a vacuum cleaner to the real resources of these less developed, more vulnerable countries as predatory in nature. And so when we talk about imports being a benefit and we’re importing their goods and services and turn them into neocolonial plantations of sorts.

This is not necessarily anything to do with imports being a benefit and exports being a cost, but it often gets conflated because this is a very real concern. Empire and US imperialism has done an awful lot of things and the US has used the SWIFT system to have a stranglehold on other countries and their ability to do things. I know Fadhel talks extensively about them working to develop food sovereignty, energy sovereignty.

There’s a real power dynamic concern that is often conflated for an economic one. And then there’s something that often comes back and says, “you MMTers  just don’t get it”. Really looking outside of this very narrow US thing and I’m talking to an Australian, so that’s the humor of what I just said, but that’s the frequent pushback is the conflating of US imperialism and the MMT framework in terms of this import export dynamic.

[01:03:02.110] – Mitchell

The first thing I’d say is that Modern Monetary Theory isn’t the theory of everything. It’s not going to tell me who’s going to win the football this afternoon and it’s not going to give me a rich historical and philosophical understanding of world history. And I think MMTers – some MMTers, we won’t name names – go too far in prosecuting what it means, what our work provides.

It’s not a theory of everything. And I’d urge listeners to become familiar with the work of Andre Gunder Frank, by the way. And that whole literature on underdevelopment and neocolonialism. And what that literature tells you is that the process of economic development as it’s been practiced in the last decades has really been about converting undeveloped countries into underdeveloped capitalist countries.

Not developed countries. Under developed capitalist countries. Where the core nations can vacuum out real resources under the guise that they’re developing that country. But what they’re really doing is creating capitalist institutions in those countries and then using those institutions to vacuum out the real resources, to send them back to the core countries, away from the periphery.

And that sort of conception of the role of the IMF and the World Bank – and the foreign capital in those countries being supported by those multinational institutions like the IMF and the World Bank – to set up structures within those poor countries. Financial institutions that allow financial flows to be sucked out – for profits to be sucked out – to fund the exploitation of real resources.

Which then can allow, through the financial system, that vacuum cleaning out. And at the same time, the IMF going in and disciplining the governments to cut funding and use of real resources. Human resources. Into basic health care and education and those type of things that we would consider to be essential as part of a development project. So they get cut so that the command of real resources is greater for the other purposes to vacuum out to the core countries. To understand all of that, you’ve got to go much beyond an understanding of MMT.

[01:05:56.530] – Grumbine

Right.

[01:05:57.790] – Mitchell

MMT can explain parts of the financial flows involved in that, but it can’t tell you that they’re about neocolonial motivation. You need political theory for that. You need understanding of ideologies. You need understanding of international power and hegemony and all of the rest of it. And well, that’s the fact.

[01:06:19.870] – Grumbine

I love that too. So, while MMT economists that have developed it have their own theories of politics, belief systems and sensibilities, MMT can be used by the most fascist man out there, and it can also be used by the most labor-friendly, people-friendly, planet-first socialist out there.

[01:06:44.740] – Mitchell

Of course.

[01:06:45.790] – Grumbine

And, so, I think this is a very important point, that this is why it’s so important for everyone to understand the basics of Modern Monetary Theory so that it can inform their politics. My country, which is insane, a lot of people would like to have a constitutional convention. They’d like to turn the constitution on its head and rewrite the rules.

If your understanding of economics is under the old neoliberal regime, then you’re going to just reproduce a neoliberal regime, not knowing any better. You’re going to feel like you’ve done a great thing, but all you’ve done is superimpose the thing that was holding you back to begin with.

[01:07:26.160] – Mitchell

Probably.

[01:07:27.550] – Grumbine

To me, it’s an interesting intersection that MMT allows us to understand what we can and can’t do and our theory of politics and the commons will inform what we do with that knowledge.

[01:07:41.850] – Mitchell

Exactly. The way I express it is that MMT is a system of understanding the capacities and consequences of using those capacities of the currency-issuing government within an institutional structure, the financial institutional structure, the banking and central banking. Now, it doesn’t allow you to understand how that institutional structure was designed or created. It’s not about policy.

So it will tell you what the consequences of using the currency issuing capacity are, but it doesn’t tell you what the dimensions of using that capacity are. The policy. To do that, you need to impose a set of values or an ideology. So you made the point that a crazy man, or I would add woman, on the right wing would have the same understanding of MMT in those institutions and the capacities and consequences as I would have, but come up with totally different policy prescriptions and a role for government.

Whereas I would have the role of government being to provide first-class public-sector infrastructure, healthcare, education, energy, water, banking, public banking, all the rest of the things that a typical person from the left of the debate would have. And I could understand how from Modern Monetary Theory what the consequences of the government doing that would be.

Yet the person from the right would have private schools, private hospitals, deregulation, all the rest of it, but they would also understand what the consequences of that would be and they’d be the same understanding that I would have. They just want that. And they would understand for example, that in my world unemployment would be very low and in their world unemployment would be much higher.

But they have different values from me on the value of low unemployment and high unemployment. But the point I’d make, the importance of that is that then flushes out in a transparent way political motivation. And what I mean by that is that if everybody understood MMT, a politician from the right would no longer be able to come and say well we’ve got to just bear with this high unemployment because we can’t afford to have more jobs, the government can’t afford to create employment, it doesn’t have enough money.

Now, that’s the way these things are spun at the moment, a cloak of mystique and a big smokescreen. We can’t afford it. So last week the government in Australia said that we’ve got trillion dollars of debt, we can’t afford basic healthcare. Effectively that’s what they said. What they actually said was they can’t afford to continue funding the emergency payment to people who are forced by Covid to go into seven days isolation.

So up until now we’ve been paying $750 a week to a person who can’t work and has no other form of payment like holiday pay or sick pay left at all. We’ve been paying them $750 a week. Federal government. The government last week said, we can’t afford that because we’ve got a trillion dollars of debt. Now, if everybody understood MMT, they would immediately know that that was a fallacious statement.

And so even though a right winger and a left winger would have completely different policies, the rationale and the motivations would be all out in the open. In other words, we would all understand that the Australian federal government last week basically didn’t give a hoot – I was going to say something starting with F – didn’t give a hoot about casual workers without sick pay, being impoverished, without income for a week because they were doing a socially responsible thing, isolating because they caught Covid. We would all know that. And we would judge the government and their political ambitions on that more transparent understanding.

[01:12:14.990] – Grumbine

As the world has shifted dramatically and we seek a Balkanization of Russia, China, Iran, countries from Africa and South America – and then the European NATO, US, Australia alliance – it appears that there’s a real restructuring of the world while we’re in the midst of an existential climate crisis.

Given your book “Reclaiming the State,” one of my favorite books, by the way, if you were to revisit that book circa 2022, what you might have added to that, given what’s going on now, it appears that moving back to local production, sustainable societies, et cetera, this is going to be very important. How might you have looked at that book differently, given where we are today?

[01:13:15.260] – Mitchell

Well, I’m working on a sequel now. It’ll be a sole author, so it’s not strictly a Mitchell-Fazi sequel, it’s a Mitchell sequel. But what I’m writing about at the moment – and what will come out next is – I’ve got this notion, and I wrote about it in my blog last week, of poly crisis. That we’ve been used to segmenting our thoughts into these individual crises. Like the Asian crisis. Like the Mexican debt crisis.

Like the global financial crisis. Like the pandemic. Like the oil crisis. Like the wheat crisis. And all of these things. But what really we’re beginning to understand now – and this is how I’m evolving “Reclaiming the State” concepts – is that we’ve really got a poly crisis. That there’s all these crises coming together. There’s food crisis, there’s energy crisis, there’s carbon crisis, there’s a quality of work crisis, there’s an inequality crisis, there’s a poverty crisis.

And the only feasible way to understand them is that they’re all interlinked and they represent the accumulation of the neoliberal era, that it’s really the consequences of all the dynamics of neoliberalism that are finally coming together. Bushfires now in London and floods in Australia, they’re all parts of the same story. And they have to be seen as integrated, as a failure of the whole way of doing things.

And not just… We don’t just need a policy of moving people from a flood prone area to a non flood prone area because that’s not the solution. That’s like a temporary solution. The crisis is the system as a whole. It’s a poly crisis. And that human civilizations collapse. Historically we’ve seen civilizations collapse and we’re reaching, in my view, a point where we’re facing collapse.

The environment, the social crisis, all of these things that are leading to incommensurate future for humanity. And unless we do something dramatic and not just announce that, oh, we’re going to have carbon zero by 2050, that’s just a ridiculous sop to the neoliberal system. We’ve got to say we are going to stop using coal within ten years, or whatever the climate scientists tell us.

And so I think we’re at a bend point in history where we’ve either got to make a dramatic shift in our whole production, consumption, distribution systems or this civilization, this era of humanity, is going to collapse. And the only way that we’re going to make those fundamental shifts is in the short run by a massive shift in the way the government operates.

We can’t continue to have all of this private market driven activity. We’re going to have to go back to a highly regulated world whether we like it or not. People are so stupid that they don’t even wear masks at the moment and we’ve got a pandemic that’s starting to accelerate again. So our tolerance for regulation is so pitiful at the moment, yet what’s needed is massive regulation and massive government intervention.

And I can just see all the freedom-ites, these ridiculous people that think it’s a violation of freedom to be told to wear facemasks during a pandemic, well, what they’re going to have to be told to do to save the planet and to save society, there’s multiples of restrictions on that. So that’s where I’m heading. And we’re really seeing this poly crisis is really the coming together of the consequences and incommensurability of neoliberalism. It’s reached the end of the road and it’s going to be diabolical if we don’t do something about it.

[01:17:45.650] – Grumbine

Well, that’s a great way to end in a depressing sense, but it’s good to be sober and I appreciate… Everything you said, I concur with.

[01:17:54.340] – Mitchell

Well, that’s the danger anyway. I really think we’re really approaching the end of the road and we’re really at a point of forking the road where unless we really take quite substantial action now, we’re going to face major calamity. And obviously the way in which humanity has addressed calamity in the past is through war and destruction. And that’s not inconceivable now.

Maybe 20 years ago I didn’t think we were in that position yet, but I’m now starting to believe that NATO will get it into their heads that it can’t allow Germany to go under because of the gas. And so what’s the solution? Well, not to substitute away from gas, but to basically take the gas for themselves. And if you think about what’s going on with Putin at the moment, he’s going to destroy Ukraine.

That’s his motivation. He wants to destroy the Ukraine. And sanctions are not going to stop him – all of that stuff – because we’re too compromised. We need his gas because of stupid decisions we’ve made in the past, because of neoliberal decisions. And the only way to stop Putin now is for NATO to invade him. And how’s that going to play out? Whether we do or not, I’m not sure, but how would that play out?

But increasingly, those military destructive solutions are going to become more tenable in the average citizen because of real resource shortages, famines, floods, fires, and all the rest of the things that threaten our current way of life. We’re going to see destructive ways of dealing with those because we’re too stupid to make fundamental changes. That’s sort of where my head is at the moment.

[01:19:52.430] – Grumbine

It’s terrifying.

[01:19:53.770] – Mitchell

Yeah, it is.

[01:19:56.150] – Grumbine

Bill, I cannot thank you enough for taking all this time you’ve taken with me, and I’m really grateful. I’m really proud to know that you’re going to Japan to do what you’re doing. It’s very prestigious, and I’m very happy for you. You work very hard, and it’s just a tremendous honor. It seems like Louisa is going to be joining you and has her own thing she’s going to be doing, so it sounds like it’s going to be a great time.

[01:20:20.230] – Mitchell

Yeah, she’s got projects to do over there. So for us, it’s a chance to really embed in Japanese culture and to learn it and to get language skills, and that opens doors that most, if you don’t speak the local language, aren’t opened. And it will give me a real chance to understand some of the deeper things that I know about, but don’t understand fully yet.

[01:20:45.710] – Grumbine

Well, bravo. Sir, thank you so much for joining me. This is Steve Grumbine with my wonderful guest, Bill Mitchell. Macro N Cheese. We’re out of here.

[01:21:02.190] – 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.