The purpose of exports is to get imports

In this telephonic interview, Warren Mosler explains in detail how exports and imports impacts currency and real economy

Sep, 27, 2015


Warren, could you elaborate on your point that purpose of exports is to get imports?


The dynamics in Europe with the Euro were that Europe was set up based on the traditional mainstream export model and what an exporter does, what somebody who desires to export does is, they keep fiscal policy tight and the Maastricht Treaty was set up to keep fiscal policy tight, three percent deficit limits, sixty percent debt to GDP with some enforcement provisions for violators; at the same time this is much what Germany did when Germany had its own currency, the Mark and was exporting.

However what this policy does is, it keeps domestic demand down, as it makes the currency harder to get. So, it makes the currency strong and so what Germany did, what Japan did, what China does is, they then go out and buy foreign exchange to keep their currencies weak enough, to keep their real wages and the real cost which is mainly wages low enough, so that they can net export, now this is to the detriment of the population as a whole, but it's to the benefit of certain specific exporters, so the basic model is to keep fiscal policy tight and then sell your currency, buy the currency of your target market to keep your currency & your real wages low enough, so that you can then net export and at the same time you accumulate reserves of the targeted export region, so Germany for example had something like 50 billion US $s, back then that was a lot of money in 1998 when the currencies were irrevocably locked as part of the strategy, Japan probably close to two trillion in foreign exchange reserves and so is China.

So, the Europe what they did was, they copied that model with the tight fiscal policy but they can't go out and buy dollars, so you see they can't buy dollars or yen or anything else because that would be a ideological violation, it would give the appearance that the dollar is backing the euro, if ECB was building dollar reserves or building yen reserves, then you'd say, oh look, what's behind the Euro, that they wanted their currency to be the reserve currency like the dollar, the dollar wasn't build any, we don't build any foreign exchange reserves and so they just did the tight fiscal policy and didn’t buy the foreign exchange, so what happens, the currency just goes up to the point, where your exports never materialize and as your competitiveness increases and your wages get more competitive, your exports start to go up, the currency just gets stronger and so that's what's been going on now, since the beginning or the euro is eighty five to the dollar at one point, now it's 130 after being as high as 160.

So in general this policy is thwarted, as you know this has kept Europe from becoming the net exporter that it desires; let me add one more thing and that is if you're gonna be a net exporter, then you've got to own the foreign exchange of the other country, okay and nobody has your currency, so if you want your currency to be a reserve currency, you have to be a net importer because the United States for example we import and we pay for it in dollars and then the rest of the world has those dollars and you had Germany and all the European countries are building dollar reserves exporting to the US and Japan and China and so by running a trade deficit everyone else gets dollars because they sell us tires and cars and we give them dollars, dollar deposits at the Fed and so the dollar becomes the world's reserve currency because they're using it for reserves to drive export, okay Japan now why doesn't the yen reserve currency, big powerful country, second largest economy in the world, because they're a net exporter, so nobody has any yen, everybody is short in yen; when you're an exporter, the world is short in your currency, so here's Europe want it to be a net exporter which means everyone is going to be net borrowed in euros and at the same time they want the euros to be the reserve currency where everybody has euros, well, you're talking out of both sides of your mouth that can't happen, it is a violating the accounting identity.

You have to separate the real goods and services which would be cars and houses and handbags and personal service you know trainer services from the nominal, which are just data in spreadsheets which is the currency, the currency is not a real, it's just nominal, okay it's just a number, you don't actually eat it or drive it or do anything, it's just a number, so your real wealth is best described as your pile of stuff, so your pile of stuff consists of everything you can produce yourself domestically at full employment plus your pile gets bigger than the rest of the world who sends you real goods and services - your pile gets smaller when you have to send the rest of the world goods and services, so your real wealth is your domestic production plus your imports minus your exports.

Your exports are the real cost of production, now that doesn't mean they're bad, because but you have to remember the whole purpose of exports is to get imports, so if you can effectively use your exports to get more imports that's called improving your real terms of trade, your real terms of trade is what it's classically been talked about which is how much can you get for what you send out, you're gonna be sending out exports, you want to get as much possible, you want the best real terms of trade for your nation, so if you can send out one Prada handbag and in return get one Mercedes, that's pretty good exchange, your real terms of trade are good and so Italy's always had and with its luxury export, exceptionally high real terms of trade and done very well and however if you were just gonna send out your exports and not import anything what's the point, you can play golf instead of building something to send to somebody and not use it, okay.

So I don't know if that exactly answers your question and your foreign exchange that you build when you export, the only way you get any real benefit from that is if you buy something with it; just piling up numbers and bank accounts does you no good until you spend it.