It’s fascinating how the mainstream, and quite a few traditional Post Keynesians, struggle with foreign. The problem is the mental model they have been trained to analyse. By focussing on a country, with fixed borders and a consolidated ‘Rest of World’, they appear to miss the subtleties in play that become apparent when you look at the issue from a different point of view.
The classic one is believing that foreign is quite different from domestic. It really isn’t that different at all.
Once you take the MMT view of the situation, you see that there is little difference between somebody holding, say, Sterling Savings in Birmingham, Alabama from somebody holding Sterling Savings in Birmingham, England.
Both are a drain from circulation in the Sterling currency area and free up capacity in the real economy within that area, because saving denies somebody an income further down the spending chain. Both may provide capacity to buy something in the future and, outside of cash or a basic deposit account, both are likely to provide some sort of income in Sterling.
Both can be taxed. Sterling accounts are all transitively linked to the Bank of England via chains of other Sterling accounts. That’s what makes them Sterling. (Yes that applies to Eurocurrency deposits as well — ultimately they have to clear via the Sterling banking system to be worth anything and that allows authorities to collect back taxes on a remittance basis).
Foreign entities are holding your currency as savings. Similarly, financial products denominated in your currency are held as savings. Savings are, in effect, an export product of your currency area.
Once you look at it this way, then savings are very similar to a barrel of oil in stock, or an aircraft engine. If your country relies upon oil exports and people stop wanting oil then you may have a problem. If you rely on aircraft engine exports and there are no orders for new aircraft, you may have a problem. If you rely upon people taking your savings (because they had an export-led policy — which implies a savings-import policy) and that changes (the export-led policy moves to a domestic-led policy, as we’re starting to see in China) then you may have a problem.
To mitigate, you would make sure your exports are sufficiently diversified and decoupled — including the level and global distribution of exported savings. In other words you take a portfolio approach as a matter of policy. Make sure you have your eggs in as many baskets as possible and don’t keep the baskets all in one continent.
Sovereign wealth funds rely upon your export of savings to exist. The Norwegian Wealth Fund allows Norway to supply oil (and the odd salmon) in exchange for savings products. The Wealth Fund has no policy other than to accumulate savings products over time — which gives it a huge amount on the asset side of its national balance sheet. Norges Bank can then discount this asset into Krone for its domestic money supply purposes.
And that is the first brake on the ‘what happens if they spend it all’ fear. Foreign financial assets are the balancing asset for the country’s own money supply. It makes the numbers at the national level look good. They won’t be getting rid of it in a hurry until that view changes. And that view is unlikely to change if the country is running an export-led policy since the two are part of the same ideology.
But let’s say the central bank purges its neo-liberal types and hires some people who realise central banks can’t go bust in their own denomination. They ignore the sovereign wealth fund, say it is a silly waste of time, and stop worrying about the inevitable mark up to ‘Other Assets’.
And let’s say the Norwegians elect the Hedonistic party that promises to swap their huge hoard of savings for actual stuff and blow it all on imports. What is all that spending going to do to your economy?
It is going to cause an export boom. (Which everybody is desperate for in the present, but apparently is a terrible thing in the future. Answers on a postcard…)
Will that stop or reduce domestic spending in your currency area?
Probably not, because if your investment expansion caused by the boom is insufficient to handle the load, you can always rely on that circuit breaker — more imports.
It goes something like this:
- The Norwegians order stuff from your currency area backed with their hoard of savings.
- Your economy ships stuff to the Norwegians in return for their savings in your currency.
- Exporters have an income and pay people.
- Those people then start to buy stuff, but everybody is working for exporters and there is nobody to make anything (allegedly).
- Other nations on the planet — running export led policies — spot the wealth in your nation and turn up in droves to sell their wares.
- You buy imports and they keep the profits as savings (possibly in their own sovereign wealth fund).
The net effect is that the Norwegians reduce their savings in your currency and other export-led economies run up savings in your currency. So you spread the Norwegian demand around the planet to the extent that you can’t satisfy it yourself.
But let’s say that, for some reason, nobody wants your savings — even though there is a boom on and everybody is making loads of money. So you can’t rely on imports, or foreign direct investment, because the rest of the world has developed ‘mainstream economics’ disease and desperately wants to preserve a dying model they fervently believe in even though it makes no rational sense whatsoever to expect multiple independent nations to behave in unison this way.
Surely now your domestic consumers are going to suffer under the relentless demands of hard partying Norwegians!
But what political party is going to favour foreigners over residents who actually vote for them? Only those no hopers who have zero chance of ever getting elected.
A party in government — having encouraged the private sector to automate, innovate and invest as much as it can — would put in place export restrictions. One such approach would be a volume restriction. You would issue Norwegian export licences to a set value in Sterling and auction them off to the highest bidder. That makes servicing export orders more expensive than servicing domestic orders and firms will start to take that into account when they decide to accept an order. There are many other approaches, including: restricting withdrawals from Sterling accounts owned by foreign entities, large fees for exports, and randomly delaying exports in customs so firms don’t know when they’ll get paid (this one may already be in place).
You’ll note that you could swap out Hedonistic Norwegian Foreigners and replace them with Wealthy Domestic Cotswolders and the results would be pretty much the same (slightly less Viking, slightly more Saxon perhaps). Rich people with lots of money might decide to spend everything as well. So should we ban pensions — just in case?
What about the currency effects, you might ask. Well if an economy is in boom time, exporting like crazy and making profit hand over fist, is the currency going to be strong or weak at that point? Exactly.
Now that the ‘bond market vigilantes myth’ has been slain, the ‘foreign debt holders’ myth has sprung up in its place. It’s just another excuse to maintain the globalist, creditor first viewpoint and to try and stop politicians being elected that put the public good of the domestic population first.