Comment: So, QE is not possible w/o Interest On Reserves (IOR) at the target rate or a target of zero--there's no QE ever without Krugman's "liquidity trap" to accompany it.

Mosler: Floating fx* (fx=exchange) is necessarily a permanent 'liquidity trap' policy.

Mosler: It's true for fixed fx (fx = Exchange) regimes that don't care about real terms of trade or the real standard of living.

Comment: PBOC Says No Longer in China’s Interest to Increase Reserves.

Mosler: Interesting as sustaining net exporting generally requires fx accumulation.

Mosler: Government 'money finance vs debt finance' is a fixed exchange rate distinction inconsequential to floating exchange rate regimes.

Mosler: Yes, I tried to tell him he was describing a fixed exchange rate condition but he wouldn't 'listen' at the time :(

Comment: Venezuela, Russia and Ukraine (98), Ecuador (99), Jamaica (2010 & 2013) all defaulted on local currency debt.

Mosler: All fixed fx if I recall correctly? Happens all the time.

Mosler: For Turkey: 0 rate policy, target a JG pool at 3% with fiscal policy, no fx sales, narrow banking, free healthcare, free education, etc.

Comment: Fighting the Last Macro War? (Slightly Wonkish).

Mosler: Just counter productively bogged down in inapplicable fixed exchange rate rhetoric.

Comment: The solution? Abolish the Fed and let the market set interest rates & abandon the notion that one metric of inflation has any meaning.

Mosler: Markets set rates with fixed fx policy. With our floating fx policy, the govt does.

Mosler: With a fixed exchange rate policy, the nominal interest rate is the 'real rate' (the own rate) for the object of conversion.

Mosler: Yes, fixed fx model/relative value story.

Comment: Rezende: Keynes rejected loanable funds theory.

Mosler: It applies to fixed fx, but not to floating fx.

Comment: I do think loanable funds is true and there is a natural rate of interest, although it is dynamic.

Mosler: True with fixed fx, but not with floating fx.

Comment: Is there ever a reason to raise interest rates?

Mosler: Not with floating fx policy.

Comment: Well scripted piece. Amen to concl on Congress but zero rates forever can't be right. Misallocation of cap already ev

Mosler: With floating fx, 0 is base case, it's hikes from there that alter allocation of capital away from 'neutral'.

Comment: Deficit monetizing, the last hope. Being sure of consequences maybe worth try/as a last social experiment.

Mosler: Monetizing is applicable to fixed exchange rate regimes, not applicable to today's floating fx regimes.

Comment: Don't know what you mean by monetizing. I mean Fed buying Treasury debt directly. What do you mean?

Mosler: Monetize=turn into money as arbitrarily defined for no further purpose with floating fx.

Comment: What Can Emerging Markets Do to Protect Against Hot Money? Not Much.

Mosler: How about no forex debt, full employment fiscal with a transition job, and a 0 rate and floating fx policy.

Comment: When currencies are rigidly fixed to gold as in pre-1914 Europe, they act like a single currency.

Mosler: Yes, between currency issuers. Fx policy is the 'first cut'.

Comment: FX policy not "first cut" pre-1914. Was inter-country reserve flow management.

Mosler: Yes, a fixed fx policy between currency issuers.

Comment: EP has no powers of taxation. Those belong to national parliaments.

Mosler: Understood, but 1st cut remains fx policy for macro context of institutional structures.

Comment: Indeed, and as you say the Euro floats freely wrt other currencies. It's a hybrid beast.

Mosler: For example fixing the euro to gold or another currency fundamentally changes the context.

Comment: But the external convertibility of the Euro wasn't what I was discussing.

Mosler: Gold standard is about external convertibility.

Comment: Euro is more like 18 rigidly pegged currencies than one single currency. Hence my analogy.

Mosler: 18 pegged currencies ARE functionally a single currency.

Comment: That is exactly my point. Multiple currencies rigidly pegged, as in pre-1914 Europe.

Mosler: 50 irrevocably pegged US state currencies would be same as the $ US today all else equal.

Comment: US has a federal fiscal authority with tax raising powers. Eurozone does not.

Mosler: Agreed but not to the original point of this exchange.

Comment: That is the only point of similarity. Absence of a single fiscal authority is fundamental diff.

Mosler: But not to the point at the beginning of this exchange.

Comment: The Euro works the same way - fixed fx policy between 18 sovereigns. No single fiscal authority backing Euro.

Mosler: Yes, differences within a floating fx context. A fixed fx context would be very different.

Comment: I don't think you really understand the points I am making.

Mosler: I’ve been trying to keep focus on our initial exchange about mixing metaphors. Still the case.

Comment: Interesting, but present situation in Russia is not like 1998. Unemployment is not (yet) the principal problem.

Mosler: Keep reading, as my point is you are using fixed fx analysis not applicable to their current floating fx policy.

Comment: No I am not. I was one of the people who advocated floating the ruble this time.

Mosler: Capital flight related rhetoric applies to fixed fx regimes.

Comment: Which I would say is the case in Russia.

Mosler: Historically it’s about 'lending' Ruble to insiders who buy FX and don’t need to repay loans as has been revealed.

Mosler: Capital flight related rhetoric applies to fixed fx regimes.

Comment: No...panic conversion of local ccy to foreign ccy by domestic users can happen when local ccy is depreciating fast.

Mosler: Except they need Rubles for taxes/expenses which limits the decline.

Comment: Or if political risk rises, govt may lose the power to tax. I would say that is a defining feature of hyperinflations.

Mosler: Agreed! But so far not the case in Russia.

Comment: Capital flight related rhetoric applies to fixed fx regimes.

Mosler: Capital flight related rhetoric applies to fixed fx regimes.

Comment: Is It Time for MMT To Become Mainstream to Save Us from the Second Global Financial Crisis of the Millennium?

Mosler: With floating fx, the natural 'risk free' nominal rate is 0.

Comment: Spain's current account balance continues to improve. March 946 million Euros vs -594 million Euros March 2014.

Mosler: Yes and without FX purchases, the collective euro zone trade surplus will drive up the euro until the surplus goes away.

Comment: Dudley on reinvestments today.

Mosler: You'd think the head of the NY Fed would have a better understanding of monetary operations :(

Comment: @wbmosler write about it!

Mosler: First, with floating fx, 0% = absence of gov intervention- higher rates require interference via interest on reserves or tsy sec sales.

Comment: IMF: Countries Should Take Action to Reduce External Imbalances.

Mosler: Floating fx expresses continuous balance between trade flows and non residents' net savings desires for that currency.

Comment: China Slashes U.S. Debt Stake by $180 Billion, Bonds Shrug.

Mosler: Shifting/rebalancing fx reserves from $ to euro?

Mosler: Investment is a function of sales, not rates. There is no such thing as consumption crowding out investment with floating fx policy.

Comment: Fed Raised Rates Without a Hitch, and It Only Took $105 Billion. But we're probably talking more like $1T a day soon.

Mosler: For the Fed, it's always about price, not quantity, with floating fx/non convertible currency.

Comment: Reconciling the Liquidity Trap with MMT.

Mosler: 'Liquidity trap' is applicable to a fixed fx policy, not a floating fx policy.

Comment: Not really *my* model. Simple version of Neo-Fisherian model just to illustrate my point about infinite horizons.

Mosler: Those tend to apply only to fixed fx regimes + CB as sole supplier of net reserves obviates money neutrality.

Comment: This is Patinkin's (1961?) model "Money, Interest and Prices"

Mosler: His wealth effect implies fixed fx policy where there is 'net money' in that economy.

Comment: Crowding out debate best had on operational and empirical grounds anyway.

Mosler: Nominal crowding out is applicable only to fixed fx regimes ;)

Comment: A dollar of services may create more domestic jobs than a dollar of manufacturing. Read @PIIE for the explanation.

Mosler: That would matter only with fixed fx loanable funds models, but not with today's floating fx policies. ;)

Comment: Has Federal debt ever burdened future generations?

Mosler: Not at the macro level, assuming floating fx.

Comment: Obvious bull flattener. Where do all of these people think positive interest rates come from?: If the Fed published a note stating it would no longer set policy rates, now 100% set by the market.

Mosler: No such thing with floating fx policy.

Comment: At the end, given govt expenditure it is not up to the govt determining the level of its deficit, but up to the private sector and the rest of the World (ROW). If they want more T-Bills & Bonds, the deficit will increase due to lower real investment & net exports:(G-T)=(S-I)-(X-M)

Mosler: Your narrative is applicable to fixed exchange rate policy.

Mosler: And scotland's 90% sterling debt under current institutional arrangements is a drag on its economy and will continue to be a drag with it's own currency, though it would both be a lesser drag and diminish over time.

Mosler: And Scotland would be able to keep the population fully employed and sustain a 0 policy rate all of which would promote low inflation, a stable currency, and real GDP growth that would cause the FX debt to GDP to diminish over time all with a higher standard of living.

Mosler: So in sum Turkey's FX depreciation is not coming from attempts to sustain full employment but from issues in the banking system combined with the 25% state policy rate.

Mosler: Turkey's fx debt is about 50% of GDP which is high. I'm saying it would be a larger problem if they didn't have their own currency because they wouldn't be able to sustain full employment. But they aren't doing that now even though they could.

Mosler: I just see they have $128 billion Of FX reserves! That means the gov has somehow directly or indirectly been selling Lira to buy FX and driving the currency down.

Mosler: Correction, I now see that those fx reserves more likely were borrowed.

Mosler: Depends on how you define constrained but I do agree Turkey's FX debt reduces their real terms of trade potential vs. that of the UK. But both can quickly get to full employment and a 0 rate policy.

Mosler: And Turkey's domestic consumption potential is slightly lower due to FX debt service.

Mosler: I do look at it unfavorably. Just saying it's no worse if you have your own currency. And with Turkey it doesn't read like the problem is the state increasing demand.

Mosler: Looks more like the high policy rate is causing lenders to sell their interest payments for fx and drive down the lira. The inflation looks at lot more like cost push than demand pull?.

Comment: If reserves made a difference to future loans perhaps but the empirical evidence shows fractional reserve banking is a myth. It’s an accounting irregularity nothing more.

Mosler: It's applicable with fixed exchange rate regimes.

Comment: Wouldn’t it risk seeing capital flight as investors prefer to invest in other countries with a higher interest rate?

Mosler: Higher rates of employment and consumer demand tend to attract investment. And 'capital flight' as defined is only applicable to fixed exchange rate regimes.

Mosler: The Austrian school was shown to be applicable to fixed exchange rate regimes and not to floating exchange rate regimes.

Comment: Is there such a thing as capital flight under a floating exchange rate policy?

Mosler: It's inapplicable as defined with fixed fx.

Comment: "Without constraints on capital mobility, investors will continue to exercise a veto" over the ability of democratic governments to implement policies in the interests of their people.

Mosler: I don't see it that way. With floating exchange rate policy, I don't see investors having any such veto.

Comment: Personally, biggest ones for me would be the idea that fully abolishing CB independence won't have seriously negative effects (when we have great reasons to worry about that), or that perma ZIRP won't have negative effects.

Mosler: Understood. First, I argue that the base case for a floating fx currency is ZIRP, and operationally it takes continuous state intervention to support rates at higher levels- treasury securities, interest on reserves, etc.

Comment: Willingness to hold government liabilities, interaction between bond market and other financial markets, effects of changes in exchange rate, determinants of inflation, among others.

Mosler: Effects of exchange rate changes are largely functions of the institutional structures of the various states? But per se, they are more about distributional issues within each state?

Comment: Following today's delivery I might be in a position to comment some time in the near future.

Mosler: That is, with a floating exchange rate, bank lending is not (operationally) reserve constrained, but instead constrained by regulation.

Comment: In a way, this part of JR critique to the IS slope - and I’m not so sure Warren’s point is similar to hers. JR is criticising the theory of investment and of capital as represented in the IS curve... the inverse relationship between I and r due to the MEC isn’t so clear for JR.

Mosler: Reads to me like that analysis at best would be applicable to fixed fx regimes.

Comment: What does this mean from Scott Sumner.

Comment: But there are substantive problems too. They seem to not understand that when nominal rates are positive, high-powered money is several orders of magnitude more inflationary than T-securities. (High-powered money is zero interest base money in a positive interest rate environment). They don't seem to understand the Fisher effect, and instead assume that flooding the economy with base money drives interest rates to zero

Mosler: At best, it means he's applying fixed exchange rate constructs to floating exchange rate regimes.

Comment: MMT critics (like @paulkrugman) who are forced to reckon w/ it but say "it's nothing new/quite wrong", are attempting an MMT-NC Synthesis. The 1st one failed & bastardized Keynes's ideas, which were radical methodological departure from the mainstream.

Mosler: I already did it for them decades ago by informing them that ISLM is applicable to fixed but not floating fx.

Comment: Keynes theory does not rest on the ZLB. Liquidity traps can happen at higher interest rates. This is a modern mainstream economics projection back onto Keynes.

Mosler: With floating fx policy, liquidity is not operationally constrained, so it's a continuous case of the so called liquidity trap.

Comment: I'm going to take that as a yes considering what you do to obtain the tax credit is done at the margins and how far you go to obtain it contributes to productivity. Please correct me if I have erred in my logic (or use of phrase 'at the margins').

Mosler: Exchange rates and value isn't specified or implied.

Comment: I’m trying to write up a short primer on the Austrian Business Cycle Theory and recessions. I find myself writing “This is nonsense! Where are the formal models?”I’m so embarrassed.

Mosler: It's applicable to fixed exchange rates.

Comment: Negative interest rates -- a Kaleckian perspective.

Mosler: Kal was and remains applicable in fixed fx regimes, but not today's floating fx regimes.

Comment: How does Gavyn Davies at FT conclude from the Mann & Buiter piece that "The essential conclusion is that MMT’s central tenet applies only when the economy is stuck in a deep recession, with interest rates at the effective lower bound of zero". Because QTM. MV=PQ. Except when i=0.

Mosler: Buiter doesn't seem to fathom that fixed fx is continuously liquidity constrained vs floating fx which never is.

Comment: Willem Buiter: Modern Monetary Theory (MMT): What's right is not new, what's new is not right, and what's left is too simplistic.

Mosler: Glad he read my book. Now he needs a briefing on fixed vs floating fx assumptions in his models... ;)

Comment: This guy is a professor of economics and doesn't know what the definition of financial repression is....

Mosler: Financial repression only applies to fixed fx regimes.

Comment: It looks like you missed a key point: the very definition of monetary sovereignty. Well, now the whole thing needs a rewrite, maybe this time with some homework beforehand, like reading and citing the MMT academic literature. You know the thing that academics usually do.

Mosler: Right, confusing fixed with floating exchange rate regimes.

Comment: Mario Draghi’s policy bazooka may be his most precious legacy: The special lending programme has flown under the radar but could be a game-changer.

Mosler: Unlimited bank liquidity is the base case for analysis with floating exchange rates.

Comment: Re-watching: MMT vs. Austrian School Debate with @wbmosler and @BobMurphyEcon

Mosler: Yes, Austrian analysis is applicable to fixed exchange rate regimes like HK and Bulgaria, etc.

Comment: Lagarde Says MMT Is No ‘Panacea’ But May Help Fight Deflation.

Mosler: Next time you see ECB Chair Lagarde, let her know that with floating exchange rates currencies aren't operationally liquidity constrained, and therefore, by design, permanently in a 'liquidity trap'

Comment: "I want to introduce the concept of 'fiscal independence'. An economy is fiscally independent when there is a significant net cash flow per period to the economy from its ownership of offshore or foreign assets."- Hyman Minsky (not saying I agree, but very interesting).

Mosler: Mainly applicable to a nation with a fixed exchange rate policy... ;)

Comment: You had total control for two years. You don't need China or anyone else to spur activity at Caterpillar, John Deere, auto makers, etc. You should have done massive infrastructure and tax cuts that materially benefited the bottom 80%.

Mosler: Don't be surprised if the President doesn't again go counter to advice and begin purchasing foreign currencies to weaken the US dollar, claiming that building FX reserves adds to American greatness and puts us on equal footing with the nations holding US dollar reserves... :(

Comment: What if the export is a natural resource like oil. Would your comment apply to Norway?

Mosler: It's about optimizing real terms of trade- getting the most back in exchange for your exports. Tariffs do the opposite.

Comment: These low, low rates are telling us several things: (a) private investment demand is really weak despite tax cuts (b) recession risks are pretty high (c) infrastructure! I mean, with borrowing virtually free, why not fix all those falling-down bridges?

Mosler: With fixed exchange rates, one could say that interest rates are sending such a signal. With floating exchange rates, that notion is inapplicable.

Comment: Scott Freeman on monetary surprises and nominal government debt.

Mosler: The currency is a public monopoly. With floating exchange rate policy, the Fed is 'price setter' for interest rates, not 'price taker.' Inflation expectations per se don't alter interest rates. Only with fixed exchange rate policy, interest rates are 'market determined.’

Comment: "So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue"- Paul Krugman

Mosler: True with a fixed exchange rate regime... ;)

Mosler: Permanent domestic 0 rate policy, plugs leaks/corruption in the payment/banking system that's allowing insiders/exporters/etc. and probably state owned enterprises to obtain and sell local currency for fx?.

Comment: MMT in a table. Examples of "none": US, Canada, etc. Examples of "financial": Euro zone countries. Examples of "real": WWII US and Europe. Examples of "financial/real": ???

Mosler: MS= floating exchange rate policy for purposes of this example.

Mosler: To create sellers of goods and services desiring that currency in exchange, as per the gov's desire to provision itself via the spending of its otherwise worthless currency....

Comment: Question: What do people mean by "capital flight" in this context? They can't mean the departure of paper money (which is replaceable at zero cost). Do they mean the departure of human capital (w/ no scope of importing their brilliant services produced from abroad)?

Mosler: It's generally about selling dollars and buying FX, often via selling US financial and real assets and selling the dollar proceeds to buy FX denominated assets. The first order consequences are a falling dollar and deflationary price pressures, as indifference levels shift.

Comment: BuBa? Can you enlighten some of us on this acronym? PS on the very money system I do believe Perry Mehrling's discussion of the inherent hierarchy of money, hybridity of private and public money, and the importance of liquidity (not solvency), would add important nuances!

Mosler: Yes, for fixed exchange rate regimes as we discussed.

Comment: Same 100% crowding out (of Investment) if you assume G is a perfect substitute for private I. But you get crowding *in* (and even bigger multipliers) if instead you assume G is a *complement* for private C or I. It all depends. It's tricky. Macros sweep this under the rug.

Mosler: Said another way, for a govt. with a floating fx policy that necessarily spends first, thus providing the funds that can be used to pay taxes and (voluntarily) buy govt. securities, said crowding out is inapplicable... ;).

Comment: Can I settle my tax liability to US govt (such as it now is) with Bit coin?.

Mosler: US tax liabilities are denominated in $US and the US government doesn't provide a fixed exchange rate for gold, bit coin, or any other asset.

Comment: You're implying (I think) that government funds never leave commercial banks and therefore no amount of deficit or surplus spending would change level of liquidity in the banking sector (would only move it around). This seems contrary to the pretext for cash and debt management.

Mosler: Banking isn't liquidity constrained with floating fx etc.

Comment: Do you think there is a natural rate of interest in each economy? I'm from a school of thought that says if you are below that rate for too long, then you have inflation. I would rather have South African Reserve Bank start with lowering interest rates, and see how it goes from there.

Mosler: The way I see it (with floating fx policy), they've all got the interest rate thing backwards.

Comment: 1947 USA money pyramid.

Mosler: Gold standard stuff. Note how many more 'convertible dollars' were outstanding vs the amount of actual gold. The US was carrying on its own version of fractional reserve banking... ;)

Comment: That explains everything. @sdgrumbine, your thoughts?

Mosler: Austrian economics is applicable to fixed fx policy, not floating.

Comment: Warren, could you clear up what option 1, 2a and 2b are in that paper? They don’t seem clearly marked to me. The three choices are: 1. Hold rubles in a clearing account at the Central Bank. Exchange ruble clearing balances for something else at the CB. 2 a. Buy a Russian GKO (tsy sec), which is an interest bearing account at the CB. 2b.. Exchange rubles for $ at the official rate at the CB

Mosler: For fixed fx: 1. Reserves 2a. Tsy Securities 2b. Convert to gold (or whatever the currency is fixed to). No 2b. for floating fx. So the question is, 2b. or not 2b. ;)

Comment: For them, money wasn't neutral but, a factor of production. They believed plenty of money is the only way to reduce usury both in "price & rate", which may pave the way for more investment instead of speculation.

Mosler: Haven't read it but seems the context is fixed exchange rate policies?

Comment: You are stuck with financial crowding out which doesn't happen! The loanable funds model exists and works only in the neoliberal/neoclassical economics world! It has nothing to do with reality!

Mosler: It's applicable to fixed fx policy.

Comment: I’m pretty sure the answer to that depends on the exchange rate regime which, I think, is the point @wbmosler was making in our Webinar last week on MMT.

Mosler: Yes with fixed fx policy, holders of 'new' $ (deficit) spent have the option to convert to gold, or another currency, etc. and treasury securities compete via rates with that option. With floating fx, treasury securities compete only with fed funds and both are fed accts.

Comment: Perfectly conventional macro gets you junk like ISLM, loanable funds theory, "crowding out" nonsense that you've pushed forever.

Mosler: Which is applicable at best to fixed exchange rate regimes, but inapplicable to floating exchange rate regimes.

Comment: If it isn't a fact, where did the citizens of Euroland get the very first Euros to fund the ECB and EU Commission? Presumably the MS govs just asked all citizens to start paying their taxes in Euros instead of Lira/Francs so they could provision themselves with the EUR?

Mosler: The new ECB 'bought the money supply' by exchanging euro for marks, lira, francs, etc. at the agreed exchange rates. That is, spending in euro came first.

Comment: Sunday’s reading, really incredible from @StephanieKelton. The paradox is that I’ve just recently finished studying a course on Austrian Economics.

Mosler: Austrian is at best applicable to fixed fx policy.

Comment: If you're looking for a quick weekend read, we just published a piece on the U.S. debt situation. Given all the work you do on MMT, we'd be super interested to hear your thoughts.

Mosler: Applicable maybe to fixed fx regimes but not the US.

Comment: The absence of theoretical foundations, means something. That's fine. I'll stick with theoretical foundations on money that are coherent.

Mosler: Abstract says it's for fixed fx policy?

Mosler: Reserves don't control credit with floating fx, and IOR determines the cost of funds for banks.

Comment: Key point. Any EM policy maker will be very critical of #MMT, because they know that the ultimate constraint on a country and it's ability to ease fiscal & monetary policies is the currency. Across EM, currencies have been in free-fall, sharply curtailing the ability to do QE etc

Mosler: In any case, with floating fx policy, QE per se is just a placebo. It only increases M under narrow definitions that don't include tsy secs. Fixed fx is an entirely different matter.

Comment: That assumption is in my models. Not sure what you think falls in place though. It's just standard monetary theory.

Mosler: Monops set 2 prices 1. own rate= policy interest rate set by Fed as single supplier of net reserves 2. terms of exchange for other goods and services= price level is necessarily a function of prices paid by gov. spends=source of price level.

Comment: Increasingly, emerging markets issue in local currency, but fiscal space is still constrained. The reason: global capital markets depreciate their currencies. There's nothing that makes the US immune to this, which gets assumed away in the "monetary sovereignty" umbrella of MMT.

Mosler: Examples of a 0 rate policy causing an inflation problem? Thanks!

Mosler: Any examples, with floating fx, of high policy rates and low inflation? Maybe high rates promote/prolong inflation? Forward pricing channels? Interest income channels? ;)

Comment: Agree that in principle it can be price setter. But this was not your claim, which was that government *is* price setter. I asked how. You answered whenever govt buys something. Evidently, this is not the case.

Mosler: As monop gov sets 2 prices. Let's start with the 'own rate' for the $- the policy interest rate. The Fed sets it (by vote) as monop supplier of reserves currently via int on reserves. With floating fx, the idea of markets setting the policy rate is inapplicable. Ok so far?.

Mosler: I recall a senior Bank of Mexico officer telling me they let the market set rates as they set the overnight rate based on their t bill auction rates, which I said was logically dynamically unstable/impossible. The operations people confirmed my suspicions. They set the rate.

Mosler: Integral to the monopolist is the setting of two prices. 1) How his 'item' trades vs itself, called the own rate-in this case the interest rate and 2) How his item trades vs other 'items'- in this case called the price level. We good to here?

Mosler: Also empirical, but it means, for openers, that inflation expectations aren't the cause of inflation, and that it's gov spending policy+institutional structure that turns relative value stories into inflation stories (not that it isn't necessarily 'good policy' to do just that).

Mosler: Assuming a market economy, it follows the gov need only set one price and let market forces work such that prices reflect relative value. That's what fixed fx policy is about. With today's floating fx policy, the de facto 'price anchor' is unemployment (rather than gold), etc.

Comment: How does currency depreciation not affect ability to import?? Does that apply to all countries, or is this only applicable to reserve currencies?

Mosler: Real exports exchange for real imports, directly or indirectly, at 'world prices' even if you don't have a currency at all.

Comment: MMTed Q&A - Episode 7 - featuring Dr Pavlina Tcherneva discussing the Job Guarantee with me.

Mosler: My comments: 1. Unemployment defines minimum 'fiscal space'. 2. Job Guarantee does not reduce the ability to import. 3. Currency depreciation does not reduce the ability to import or reduce real wealth, however it does alter internal distribution.

Comment: E.g it now takes more Scotch to buy a Ferrari. Just thinking about countries where they are dependent on mainly one export e.g. oil, as the relative price of oil to other items change, this is reflected in the change in currency value. Idk, just a thought?

Mosler: What you are pointing to is called real terms of trade which is a separate issue from exchange rates.

Comment: IS/LM is an incomplete model. It says nothing about price formation. It needs to be closed. The Phillips Curve is the wrong way to close it. The Belief Function is better.

Mosler: Islm is applicable to fixed fx, but you have to stretch and redefine terms, etc. to try to make any sense of it with floating fx.

Mosler: Fixed fx gives you that price formation story.

Comment: But that doesn't change the fact that without addressing international competitiveness, a country will be constrained to follow a lower growth rate vs if it imported less/exporting more.

Mosler: The real limit to domestic output is the number of available domestic workers and their productivity. With floating fx, aggregate demand constraints are about fiscal balance/public policy which can be continuously adjusted to sustain full employment, etc.

Comment: If a countries CAD is ever expanding, a few problematic things can start to happen. One is that the country becomes very indebted. I'm not talking about government debt. I'm talking about private sector debt.

Mosler: Private sector debt can be resolved by bankruptcy at no real cost to the economy.

Comment: Of course there are real costs to bankruptcy and private sector financial crises.

Mosler: If any, only short term transition costs as the real assets shift hands.

Comment: Not only short term, assets will lose value, credit gets restricted, and demand losses can lead to permanent scarring. And if there's less confidence in domestic businesses and finance, capital inflows won't be as forthcoming, reducing ability to import

Mosler: Assuming no desire to hoard fx, worst case is 'balanced' trade, best case non residents want to hoard your financial assets and you can run a deficit.

Comment: But a nation can't have ever increasing current account deficits without at some point getting into balance of payments difficulties. Floating FX doesn't change that.

Mosler: Please define 'balance of payments difficulties' with floating fx thanks!

Comment: I'm not arguing for trade surpluses. Nor am I saying that imports should be discouraged to the point where no one imports. That's a fallacy of composition. I'm saying that imports are often a cost & exports are often a benefit because of effects on demand, employment and capacity.

Comment: Right and it ends up in modern trade models, including Krugman's. (Although, I would say there's half a dozen bad assumptions in Comparative Advantage. This is definitely a bad one).

Mosler: It's in a fixed fx context.

Comment: Ah, nothing like anti-Friedman FT readers to cheer up your morning:«"The monetary authority can make the market rate less than the natural rate only by inflation. It can make the market rate higher than the natural rate only by deflation," Friedman said. Quoting a shameless propagandists who made a job of regurgitating old and broken claims is a bit weak, but even if so there has been a lot of inflation, but central bankers and politicians have narrowly defined "inflation" as "wage inflation, and then adopted policies to prevent easy credit from creeping into the real economy, and to push down wage inflation. G Osborne for example very lucidly illustrated the technique:"A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active."And the "monetarily active" side has only benefited the capital markets as "the rules" have allowed expanding leverage on in those through the special status of banks and on acceptable collateral).

Mosler: Applicable to fixed fx.

Comment: That is, they inflated away the purchasing power vs CPI of anyone actually holding Treasuries or bank savings deposits, as yields were forcibly kept below the prevailing inflation rate. People/institutions with substantial USD savings were hurt; those with hard assets preserved.

Mosler: Either way with floating fx, the public debt is just $ (tax credits) in securities accts at the Fed-it already is 'the money'-so it's never about gov 'paying it back' as it is with fixed fx. Gov/real domestic wealth doesn't gain or lose from changes in the price level.

Comment: Watching the global not just the U.S. trade data is often useful. European import data for example. Euro area May/June imports from China were about EUR 5b a month above pre-COVID 19 levels.

Mosler: Worth checking to see if China is building Euro FX reserves which would indicate targeting the Euro zone for exports and sustaining it via euro strength?

Comment: For some reason, I’ve grown up Monetarist, Austrian. I have started reading your work and trying to grasp MMT, and honestly, it makes a lot of sense for today’s day and age. So nice work. P.S your theory pisses a lot of people off, and I love it.

Mosler: Good to hear that and not to forget that we're all Austrians when in the context of fixed exchange rates... ;)

Comment: In order to create counterparty-style debt, banks typically need to have “reserves” they hold on their books, and can only lend a multiple of reserves. This is how we control debt levels. (yes, I know there are no reserve requirements right now - sit down I’ll get to you).

Mosler: With today's floating exchange rate policy, lending is not reserve constrained. The deposit is created as payment for your signed note, and if a reserve requirement incurred, in the first instance it's functionally an overdraft in the bank's account at the Fed.

Comment: The original intent of reserve requirements is to preserve bank solvency. See Sahil’s thread below for an incredibly well-detailed explanation of how reserves function.

Mosler: With fixed exchange rates, reserves of convertible currency protect bank solvency in the case of depositors' withdrawals/demand for convertible currency. This is inapplicable to today's floating exchange rate policies.

Comment: Well, over a longer time horizon QE is not bad. Banks don’t need to win tomorrow, they need to win over a decade. Expanded reserves help them do this. Remember: the Fed totally controls this one money ingredient. Reserves are literally the “philosopher’s stone” of money

Mosler: You're again mistaken about reserves in a floating exchange rate context. They are not an 'ingredient of money'

Comment: Well, here is why I disagree, but I think at least any economist considering themselves some sort of Keynesian should know the Keynesian part of it anyway.

Mosler: 1st, Keynes context was fixed fx/mine is today's floating fx. 2nd I point to how the interest income channel alters demand and as debt/gdp increases likely overwhelm differences in propensities to spend between borrowers and savers. 3rd is forward pricing of goods and services.

Comment: When G > T and bonds are sold, we are told that the government's "borrowing" drives up the "national debt." Then, of course, we're told that the "debt" has to be "paid back," and panic sets in. I have a huge problem with all of this. Let me explain.

Mosler: Yes! True with fixed fx regimes, but not applicable with today's floating fx regimes.

Comment: I think supply/demand curves are nonsense and I normally ignore them, but why does increasing the deficit reduce supply in this graph? Isn’t demand the side that is changing with a shock to the budget balance?

Comment: This just seems like Calvinball

Mosler: At best applies to fixed fx regimes.

Comment: Unfortunately my Econ profs circa ‘76 never mentioned this caveat. It was crowding out, loanable funds, and velocity, etc.. and this from a former chair of the President’s council of economic advisors.

Mosler: All fixed fx stuff….

Comment: Same 100% crowding out (of Investment) if you assume G is a perfect substitute for private I. But you get crowding *in* (and even bigger multipliers) if instead you assume G is a *complement* for private C or I. It all depends. It's tricky. Macros sweep this under the rug.

Mosler: Said another way, for a govt. with a floating fx policy that necessarily spends first, thus providing the funds that can be used to pay taxes and (voluntarily) buy govt. securities, said crowding out is inapplicable... ;)

Comment: First of all, thank you very much for your reply. Without an increase in the interest rate and with a lot of Argentinean pesos circulating, what measures would you think should be taken to lower inflation?

Mosler: Start by cutting the local currency policy rate to 0. Then examine the source of the price increases, including loans to SOE's and 'insiders' that 'count' as deficit spending and result in the selling of those funds for fx.

Comment: What's gotten lost since COVID-19 first hit is how constrained EM fiscal policy space really is. Countries below the diagonal have seen local currency bond yields rise despite the huge gravitational pull down from US yields falling so much. Turkey (TR) & Brazil (BR) stand out…

Mosler: With floating fx, the CB sets the policy rate.

Comment: ...there *is* a more interesting question about what a “real resource constraint is” & a question about the distribution of these, but MMT tends to relegate this to a second-order consideration (which I think is why it relegates redistributive taxation as a concern, too.)

Mosler: The constraint is goods and services offered for sale in exchange for that currency.

Comment:

Mosler: With floating fx policy, it's always a 'liquidity trap' as rate cuts are a deflationary bias.

Comment: This is also demonstrated in the current hyperinflation of Venezuela, where Minimum wage is being doubled by Maduro every few months, trying to keep up with prices. But this min wage doubling is fuelling the hyperinflation.

Mosler: Last I checked that inflation wasn't about excess consumer demand?

Comment: Here's an original idea, let the mkt set rates and the FED is only the lender of last resort...oh wait, that was the original intention.

Mosler: That would be with fixed fx policy. With floating fx, Fed is necessarily rate setter.

Comment: Really? The depreciation of the mark generated inflation because the government decided to buy gold at that depreciated exchange rate?

Mosler: Mainly foreign exchange and goods and services, but yes, in that if they hadn't agreed to the higher prices, there would have been no gov spending which would have brought (mark) prices down. Not that it would be 'good policy' to do that, etc.

Comment: Turkey's central bank deserves a huge amount of credit and respect for today. Lira appreciation is a de facto loosening in financial conditions and good for Turkey. We'll be discussing this at 9 am (ET) with @M_PaulMcNamara on an @IIF call in a few hours.

Mosler: Fundamentally, with floating fx, rate hikes weaken the currency. I'd cut the policy rate to 0.

Comment: The trick to make any trade regime sustainable, Keynes argued, is to make countries running current account surpluses - the major international creditors - participate in the adjustment back to trade balance. This lesson still remains to be learned, esp. in Germany and the €zone.

Mosler: That applies to fixed fx.

Comment: O/N funding is a daily decision by lender, 10yr funding is not.

Mosler: Which is of no consequence for a gov with a floating fx policy.

Comment: Best of Mankiw No. 7: "When the government reduces national saving by running a budget deficit, the interest rises and investment falls. Because investment is important for long-run economic growth, government deficits reduce the economy's growth rate" (Principles, 7th ed. 562).

Mosler: Can be true for fixed exchange rate regimes.

Comment: Best of Mankiw No. 8: What is the primary job of banks? “A primary job of banks is to take in deposits from people who want to save and use these deposits to make loans to people who want to borrow".

Mosler: True for fixed exchange rates/convertible currency.

Comment: Yes, private banks do create money under licence to the government when they make loans. However the deposits they create are lower in the hierarchy of money than the CB reserves that are required in final settlement of payments between banks’ accounts at the CB.

Mosler: The hierarchy thing applied to gold standard risks with gold at the top, then convertible gold certificates below that, and then bank deposits with only fractional reserves for support, etc. For floating fx, it's about credit risk with gov and gov insured deposits on top, etc.

Comment: How bad is the US debt and deficit situation? Abstract: Debt and deficits are huge and the Fed is hiding funding costs. Is the US already unable to finance itself?

Mosler: Not applicable for floating fx policy where the gov and its designated agents necessarily spend first and only then are the funds available to pay taxes and buy gov securities.

Comment: We obviously have enormous GDP losses now that cannot be fixed by deficits & tremendous need for taxes & transfers to support GDP in future. But after squandering it for years, we may have little fiscal capacity. So we have to be very efficient w/ tax &transfer programs.

Mosler: With floating fx, 'fiscal capacity' is inapplicable. Gov spending is via the crediting of member bank reserve accounts, a process not constrained by revenues.

Comment: The ‘Savings Glut’ Is Really a Dearth of Investment.

Mosler: The low rates come from anticipated future Fed rate settings. And with floating fx, causation runs from loans to deposits, so the idea of a savings glut is inapplicable.

Comment: The Post Keynesian view of fractional reserve banking (Yes, we have fractional reserve banking [zero percent since 3/2020]. And no, banks are not reserve constrained).

Mosler: Fractional is about convertible currency reserves to meet withdrawals. Not applicable with non convertible currency.

Comment: Zero *real* rate is probably acceptable. Permanent zero nominal rate definitely has a lot negative consequences. How about letting rates determined by borrowers and lenders, i.e. free market? Is this idea so extreme nowadays?

Mosler: That would be applicable to fixed fx regimes.