4.3  Foreign-account deficit as a hegemonic privilege  

/89/ In a sector-balance approach one would expect a basic assumption to be that bottom lines be balanced, or surplus/deficit not too high and not structurally ingrained. This, at least, was Keynes' original stance on international trade and foreign-account balances. It was the design principle of the plan he introduced for a new world trading order with a common unit of account, the Bancor.[1] Keynes wanted to do away with a system of one or two competing lead currencies which, as in Knapp's state theory of money, are in fact the currencies of the hegemonic powers of the time. In his time, Keynes wanted international trade to be cleared in a basket unit composed of the prices of 30 major traded commodities. In addition, Keynes conceived of a mechanism to rule out foreign trade surpluses/deficits growing too big.

MMT's attitude is different. MMTers remain implicit about any such rule, and as a matter of fact approve of deficits. MMT's opinion on foreign-account deficits is similar to its opinion on high and chronic government debt, which is labelled 'functional' regardless of the possible dysfunctions it may entail. /90/ According to MMT a nation can enjoy a foreign-account deficit since, as Wray states, 'exports are a cost, imports are a benefit'.[2]

Mosler: '...the modern world has forgotten that exports are the cost of imports. ... Any country running a trade surplus is taking risk inherent in accumulating fiat foreign currency. Real goods and services are leaving the country running a surplus, in return for an uncertain ability to import in the future. The importing country is getting real goods and services, and agreeing only to later export at whatever price it pleases to other countries holding its currency.'[3]

MMT is not very outspoken on the last element in this quotation, i.e. the national currencies involved. The quote actually says that a nation may enjoy its indebtedness to foreign countries as long as it commands a national currency for which there is sufficient demand and acceptance abroad so that debt instruments involved can be denominated in that nation's own currency. Some call it 'monetary imperialism'. In any case it is the privilege of supreme nation-states with a global reserve currency, whose government, companies and individuals can go into debt at home and to foreigners to a much greater extent than is the case for other nations without being punished by the markets for running chronic budget and current-account deficits. Those privileged countries can enjoy going shopping across the world in return for accepting a slow long-term decline in the value of their currency. This does not matter in the short run as long as invoices are denominated in that currency.

Basically, the mechanism can work with all global reserve currencies, in particular the US dollar (62% of world currency reserves), the euro (25%), the British pound (3.8%) and the Japanese yen (3.6%).[4] The US dollar and the pound have run foreign-account deficits for a long time. The yen and euro have had surpluses so far; the euro, though, is divided, roughly speaking, into northern surpluses and Mediterranean deficits.

Meanwhile, the currencies of emerging economies are becoming estab­lished, for the moment as trading currencies, later surely as reserve curren­cies. /91/ Emerging eco­no­mies' share of daily foreign-exchange turnover has by now become equal to the rich world's share.[5] Chinese yuan-denominated trade settlements have increased rapidly of late. Among the new industrial countries, China and Russia record surpluses, India and Brazil deficits.

The alleged advantage of deficit countries is a double-edged sword. It will hurt to the degree that foreigners no longer want or need to have a respective currency. Chronic deficit countries become ever more dependent on creditor countries' goodwill. Since the mid-1990s, the emerging economies have held the bigger and growing share of overall currency reserves in the world. On balance, the old industrial world (especially the US) is now in debt to the new industrial world (especially China).

Debtor countries may feel safe since they can expect creditor countries to not want to see devaluing of their foreign-currency reserves and other foreign assets. If necessary, they may also exert a little arm-twisting. Over time, though, any such 'balance of monetary threat' is deceptive. Deficit currencies devalue in the long run, which has been particularly true for the pound and the dollar for the past half-century―notwithstanding temporary counter-cycles due to special political and economic events elsewhere. Deficit currencies are not 'hard' currencies but relatively 'soft' ones, as is frankly indicated in Mos­ler's programmatic title 'Soft Currency Economics' of 1995. Some political and military effort on the part of the US is required to ensure that international trade, in particular oil trade, continues to be denominated in dollars.

MMT is not entirely indifferent to such problematic aspects. Here and there, MMT explicitly concedes that certain problems may occur.[6] Deliberately running a foreign-account deficit is seen as 'fundamentally a beggar thy neighbor strategy'.[7] Between the lines, though, it reads like 'why not?' MMT here again reproduces the carelessness of Lerner-style deficit policies as if high and chronic sector imbalances, i.e. government or private indebtedness, domestic or foreign, were not to be taken seriously. None of the problems mentioned is ever given due attention.

/92/ Monetary theory cannot ignore new questions on the global monetary architecture raised by the new distribution of powers in the world system now underway. New industrial nations have already begun to reconsider ideas on a global clearing union. The Special Drawing Rights of the IMF, and an updated share of capital and votes in the IMF organisation, are seen as a possible starting point. If, contrary to such more co-operative perspectives, neo-imperial 'beggar thy neighbour' strategies were to prevail, this will certainly be no good for free trade and is bound to lead to chronic tensions because of chronic sector imbalances.


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[1] Keynes 1940–44.

[2] Wray 2012 126, 133, pp217.

[3] Mosler 1995 12.

[4] IMF, Currency Composition of Official Foreign Exchange Reserves (COFER), http://www.imf.org/ exter­nal/np/sta/cofer/eng/cofer.pdf.

[5] The Economist Special, 24 Sep 2011, 18.

[6] Wray 2012 112, 188.

[7] Wray 2012 218.