Tag Archives: neochartalism

Strange Claims About KfW

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Earlier, I had two posts on this but now these have been merged into one. 

Chartalists again!

This blog post The fiscal role of the KfW – Part 1 by Bill Mitchell of Australia makes the most exorbitant claims about an institution called KfW and the government of Germany.

Bill Mitchell claims:

It is a major reason why the public debt ratio in Germany is 80 per cent rather than close to 100 per cent. It is a major reason why the federal deficit has been reduced without scorching the German economy. It is a story about smoke-and-mirrors accounting, German-style.

This is a bizarre claim. For Mitchell’s claim on the deficit to be valid, KfW should be a net borrower each year of a big size. For the claim on the public debt, KfW’s net indebtedness should be large. If Mitchell means anything other than this when saying “fiscal role”, what is it?

Unfortunately for Mitchell, KfW is a net lender to the private sector and the rest of the world sector in the flow sense and a net creditor in the stock sense.

First, Germany’s 2012 GDP was €2.666tn (source: OECD.StatExtracts) and 1% of that is about  €26.66bn and 20% of GDP is €533bn.

Here’s the 2012 financial report of KfW.

Let’s get an order of magnitude of the numbers. The net lending of KfW would identically be its undistributed profits minus capital expenditure. KfW doesn’t distribute profits (page 10 of the report) and so its undistributed profits is equal to its profits. Page 66 of the financial report says 2012 profits is €2.38bn and capital expenditure is negligible (page 72).

Hence KfW is a net lender and not a net borrower!

In other words, Prof. Mitchell seems to present a story in which the German government is using KfW as a tool to have a higher budget deficit than what it shows in its own books but it is in fact the opposite. This is because the combined entity KfW + Government of Germany has a lower deficit than the deficit of the government of Germany.

Moving to the balance sheet, its size is about €511bn – also quoted by Mitchell. But the size is not the main thing here. It is whether KfW is a net debtor or not. The balance sheet (page 68) says that equity is about €20.69bn. Of course, the item equity doesn’t by itself say anything about net indebtedness – an economic unit can possibly have a large net worth (in this case with no stock market shares issued, the same as equity) and yet be a net debtor if it holds a large proportion of its assets in non-financial form. The balance sheet however suggests that this is not the case – property, plant and equipment and intangible assets are small compared to other numbers.

Hence KfW is a net creditor and nothing like an institution with net indebtedness of about €533bn (100% minus 80% of GDP, see the quote at the start of this post.)

This was for 2012 but for other years just mirror the analysis – different numbers but of order of magnitude like these and nothing like what Prof. Mitchell interprets them to be. Supposedly, according to him, KfW

It spends, I mean lends millions each year at very low rates … pumps millions of Euros in the domestic economy and the export sector.

I suppose it subsidies lending and the fiscal part is how these subsidies are calculated and not the amount of lending which Mitchell seems to present by saying “pumps millions of Euros”. These lending flows are not like a government expenditure flow.

And spending is not lending!

In other words, the subsidy provided indirectly by the government via KfW. This can perhaps be estimated by the profits of a domestic bank of similar size or by some similar sort of comparison – and estimating what profits would have been otherwise. After this one would compare it to various numbers in the government budget. This however in my opinion will be nothing like what Mitchell makes it out to be.

Further Bill Mitchell makes another claim:

There are three reasons to look closely at the KfW:

1. It played a role in the Deutsche Telekom (so-called) privatisation, which helped the German government slip out of an embarassing excessive deficit procedure in 2004. Sleight-of-hand is the best description for what happened.

…

Except that there was no sleight-of-hand.

In national accounts such as in the 2008 SNA, items such as privatization appear in the financial account and perhaps sometimes in the “other changes in assets accounts”. This ECB Convergence Report June 2013, page 68, box 6 says:

a reduction in financial assets (as a result of privatisations for instance) tends to reduce the borrowing requirement as it generates cash, while leaving the deficit unchanged.

In other words, the privatization of Deutsche Telekom has no effect on the deficit. It reduces the public sector borrowing requirement and the public debt, but the private sector net worth doesn’t change at the time of the transaction. So it is not as if the private sector holds more of financial assets as a result of the privatization. It may see holding gains but that is a different matter.

At any rate, what would have been the alternative to bring the gross public debt down to meet the debt-deficit-criteria? Attempt to deflate German domestic demand and consequently demand and output in the rest of the Euro Area?

Also, even if one counts the effect of privatization in the deficit, it would have Germany’s deficit from 4.3% to 4.2%. As a commentator in Billy Blog writes:

Take for instance the purchase in November 2003, which according to you was done as a result of the pressure from the EU in reducing the deficit. The KfW purchased about 200 Million stocks, wow, sounds impressive… except the actual value of those stocks was only about 2.5 Billion €. The german deficit in 2003 was 89 Billion € or 4.2% of the GDP, so without the KwF buy it would have been… 4.3% (if you round up generously). The KfW buys and sells had no practical relevance for Germany either going below or above the deficit rule of the Growth and Stability Pact – the sums involved were simply not big enough for that.

Thus, the entire story about the supposed fiscal role of the KfW is incorrect.

More Strange Claims On KfW (10 Dec 2013)

Phil Pilkington writes in defense of Bill Mitchell in response to my previous post Strange Claims About KfW [Updated].

Pilkington’s errors are simple accounting errors and misunderstanding of flow-of-funds. Pilkington seems to assume the same logic of Mitchell. According to him:

The trick is that this borrowing doesn’t appear on the government balance sheet so, given a level of aggregate net expenditure equal to,

[Government Deficit + KfW Lending],

the Federal deficit is lower than it would otherwise be if the government had to foot the bill for all this expenditure.

First, the government would not have to “foot the bill for this expenditure” if it were to lend directly to the private sector on its books because the lending would not be “expenditure” but a loan by the government and it would be making a profit on it. The loan would not add to the budget balance even if the government were to directly lend. The expenditure would be for the firm using the proceeds of the loan and it is not public expenditure. Pilkington seems to confuse income/expenditure flows with financial flows. Or in the language of the 1993/2008 SNA confuses current accounts with the financial account.

In fact the profits if the government were to lend directly would reduce the federal deficit by a bit, not increase as claimed by Pilkington.

Further Pilkington seems to assume that another counter-factual in this case is less borrowing by the private sector and hence lesser private expenditure. No! this counter factual is the private sector borrowing from other banks – i.e, private banks. Why would German firms find difficulty in borrowing if they happened to show their creditworthiness to KfW?

Also, as I highlighted in the previous post, a proxy for the subsidy would be the profit of the bank of a similar size minus the actual profit of KfW. It is nothing like Mitchell’s rabble-rouse.

Endogeneity Of Budget Deficits

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In this New Economic Perspectives post Randy Wray and Eric Tymoigne confuse accounting identities with behaviour.

In a context, the bloggers claim:

… Only a government deficit induced by fiscal policy leads to net saving.

where “net saving” is saving net of investment.

This posits a one-way causality of the sectoral balances accounting identity S − I = G − T from the right to the left.

This is inaccurate because of the endogeneity of the budget deficit which Wray himself is aware of but nonetheless confuses. This is because private expenditure may lead to a change in output and tax flows which may change the sign of the private sector balance (S minus I)

Suppose the private sector is in deficit and the government budget in surplus and the household sector drastically reduces its propensity to consume. This will lead to a fall in output and income and hence reduce tax flows to the government even if fiscal policy hasn’t changed (government expenditure and tax rate decisions haven’t changed) and the private sector’s balance can turn into a surplus from a deficit position.

That’s what endogeneity of the budget balance is all about. [Some government expenditure may change because of social transfers but the magnitude of this may be much lower than other things involved such as the private sector balance or changes.]

Second, it ignores the external sector.

Moreover the authors make another claim:

Monetary policy can change the composition of net saving by buying financial assets in the domestic sector in exchange for government currency, but it cannot change the size of net saving, i.e. the net accumulation of financial assets.

Cannot change the size of private sector saving net of investment?

Suppose the private sector is in surplus and interest rates are high. The central bank reduces interest rates drastically to induce the private sector’s expenditure to rise. If there is a large rise in investment for example, the private sector can go into a position of a deficit. It is true that the private sector may want to target a small surplus but this isn’t the case always and the private sector can remain in a deficit for long – not necessarily due to fiscal policy.

In the opposite case/scenario, starting from a case of a private sector deficit, suppose the central bank drastically raises interest rates to the point of causing the economy to go into a recession. The private sector balance may rise as people save more and output will fall, leading to lower tax outflows to the government and hence changing the private sector balance.

Some humility is needed by a few people who incorrectly seem to think they know how the world works with confused language such as “taxes aren’t revenue”!

Firestone Backfiring More

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So I happened to get a reply from Joe Firestone on my reply to his blog post.

I don’t have too much patience for going back and forth but a few points stand out.

I created a situation in which the current account balance of payments is at 4% of GDP, private sector balance is at 2% of GDP and the government budget balance at 2% surplus.

Joe Firestone thinks it is necessarily a contraction. Here is quoting him:

Ram, in the situation you’ve described, the Government is running a surplus of 2%, so it’s destroying net financial assets that would otherwise be flowing to the private sector if it had a smaller surplus, a balanced budget or a deficit. The budget surplus isn’t high enough, given the size of the trade surplus, for the Government to be causing a negative accumulation of NFAs in the private sector; but that doesn’t mean that the Government’s fiscal policy can be called “expansionary.” In fact, it’s contractionary relative to even a balanced budget, much less a deficit.

[boldening: mine]

First Firestone confuses “private sector”. According to him the private sector has a negative net accumulation of financial assets! (when given it has +2%!).

Second he fails to understand that the budget deficit is an endogenous variable – he has been conditioned to think that a surplus budget is necessarily contractionary. He cannot see that in the given situation fiscal policy can be expansionary. Firestone seems to compare it with a situation in which the budget would have been in deficit or surplus. Actually he should be comparing it with the previous periods. Moreover, even if compared to a situation where the budget could have been in balance or in deficit (future scenario) it doesn’t mean 2% surplus is more contractionary. All that matters is how the private sector responds to the expansion. A fast expansion can improve private sector expectations about the future and they may respond by higher production than the case if the government indicated a weaker expansion. [update: a fast rise in production due to a faster expansion – meaning a combination of higher expenditure and/or tax rate cuts may bring the budget into surplus because of higher total taxes resulting from higher national income, as compared to a less expansionary policy]. Plus there are other things such as deregulation, monetary policy etc. You cannot conclude 2% surplus is more contractionary than a balanced budget.

But more generally to the basic point, he concedes that net HPM creation is not NAFA even though this was an important point in his post.

So he says;

Ram:

Net HPM creation is not equal to private sector NAFA.

Again, I didn’t say or imply that it is. if you think I have, then please quote me.

Here is from his original post:

High-powered money includes cash money and reserves emanating from the Government, including the Federal Reserve. If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating. And so, it is not doing any net high powered money creation.

He uses the example of a balanced budget to show that balanced budget does not do “net high power money creation” – as if a deficit does net high powered money creation.

Fact is even if the government is in deficit, the HPM created due to expenditure minus taxes is offset by bond issuance. So even a deficit doesn’t directly do any net high power money creation.

Now, imagine a closed economy situation with 10% reserve requirement instead of 0%. Also assume the private expenditure is rising relative to private income and the private sector is in near zero balance. This leads to higher domestic demand and higher bank borrowing. Banks will need more reserves due to higher borrowing to satisfy higher reserve requirements. In such a situation the central bank would provide HPM to banks but the government budget is balanced as a mirror image of the private sector balance.

So we have a situation in with a balanced budget and net HPM creation!!!

But some souls are forever confused!

Once again, fiscal policy is highly important and the most important thing driving real demand generally speaking but no overkills please.

Update:

There is the question – what is net high power money creation.

First, since the government’s expenditure, taxation and bond issuance and actions of the central bank lead to creation/destruction of HPM, net can simply mean the flow of high powered money or ΔHPM in any period of accounting. Here deficit is not needed for ΔHPM to be positive.

Second, Joe Firestone perhaps is thinking of non-borrowed reserves. Again, even in this situation, a deficit is not needed for non-borrowed reserves to be positive. Let us say in one period, the government’s budget balance is zero and banks require more reserves. In this case, the central bank can create HPM by outright purchases of government bonds, so again balanced budget doesn’t imply zero increase in nonborrowed reserves in any one period.

There is always a third possibility but then what is it?

Firestone Backfiring – An Unfriendly Critique ;-)

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Firestone's Gun

Joe Firestone’s gun

Joe Firestone has a blog post critiquing Marc Lavoie’s critique of Neochartalism.

Among other things, he seems to have issues with Marc Lavoie’s critique of the Neochartalist claim [which he quotes] that

. . . the creation of high powered money requires government deficits in the long run; . . .

Firestone states:

High-powered money includes cash money and reserves emanating from the Government, including the Federal Reserve. If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating.

The trouble with Neochartalism is that Neochartalists and “MMT” fans go to over-overkill levels to show the importance of fiscal policy. In general it is a mix of doublespeak and outright incorrect statements and it is highly unacademic and unscholarly.

Firestone is mixing various things. HPM or “high powered money” is different from the net financial assets created by deficit spending of the government.

To see this point, first imagine an open economy in which there is a current account balance of payments surplus of say around 4% of GDP for over 10 years or so (some proxy for “long run”) and the (domestic) private sector “NAFA” – net accumulation of financial assets is around 2% of GDP. The government budget will be in surplus – as a matter of accounting. This needn’t cause any trouble for the private sector.

Of course this doesn’t take away the role of fiscal policy and in no sense is the above statement meant to propose a policy for the government to be in surplus. In fact since the government’s budget balance is endogenous, it could well be the case in the above situation that the government’s fiscal policy is expansionary.

HPM is a different matter. The central bank can easily provide banks with reserves via open market operations or direct lending. Deficit spending is not really needed.

It may also be the case that while taxes flowing into the account of the government at the central bank is “destroying” more HPM than what expenditures is creating, net redemptions of government bonds (as the government is retiring debt) is creating HPM.

Now consider another case but a closed economy.  Assume that the private sector NAFA is negative for many quarters/years and the government’s budget is in surplus. This by itself is not a problem for HPM but may become unsustainable because the nonfinancial sector can start to have liquidity pressures – i.e., financial assets/income of the private nonfinancial sector may start to deteriorate even though net wealth/gdp is not falling (wealth includes nonfinancial assets such as firms’ fixed capital and households’ houses) and this may lead to more financial fragility.

Again, fiscal policy can be expansionary even with a surplus budget because the government budget balance is endogenous. Cannot be found from the above given data.

But Firestone blurs such matters giving the reader an impression that the private sector is losing assets and sees a reduction in output and income. And to the basic point, this has really little to do with HPM.

Firestone is highly confused and muddled when he says

Lavoie seems to think that net high powered money creation isn’t necessary for an economy, even if it is good to have.

Net HPM creation is not equal to private sector NAFA.

In fact typically the government’s cash flows do not affect the HPM when looked over larger time intervals. Expenditures add to HPM as the government moves its balances from its account at the central bank and taxes do the opposite. Bond issuances reduce HPM and redemptions increase it. Over short intervals, the flows are offset by central bank operations. Also for the wonkish, this needn’t always be the case: when there is a flow out of the government’s account at the central bank, it can simply lead to reduction of banks’ daylight overdrafts instead of increasing HPM. Firestone confuses cash flows with deficits.

Fake Trade-Offs

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Elasticities for one last time for now.

Recently Tom Palley wrote a fine critique of the Neochartalist approach to solve the world problems with oversimplistic solutions. Among other things, Palley challenges the simplistic Chartalist solutions due to dilemmas posed by the external sector.

Bill Mitchell of Australia wrote a reply in which he states the following:

It is easy to see that a Job Guarantee model requires a flexible exchange rate to be effective. We can identify two external effects. First, given the higher disposable incomes that the Job Guarantee workers would have compared to if they were unemployed imports would likely rise.

With a flexible exchange rate, the increase in imports would promote depreciation in the exchange rate. We should expect the current account to improve and net exports increase their contribution to local employment. The result depends on the estimates of the export and import price elasticities. The body of evidence available suggests that import elasticities are small (around –0.5).

This is a typical oversimplistic and incorrect approach.

First, Mitchell incorrectly claims that import elasticities are low for Australia citing a “body of evidence”. The number he quotes is price elasticity. He hides away from income elasticity. I suppose he thinks that the numbers estimated are “low” enough not worthy of mention. Unfortunately it is not.

Second, he claims that as a result of running an employer of the last resort by the government, the Australian exchange rate would fall and this would actually lead to an improvement of the current account.

This is a primitive neoclassical argument. While it is true that a depreciation of the Australian dollar would act to reduce imports due to price effects, it is no guarantee to reduce the trade imbalance. This is because if incomes rise faster, the trade imbalance may be rising (i.e., imports are rising) even if the Australian dollar is depreciating. Note that is different from the J-curve effect. Exports on the other hand depend on the competitiveness of Australian producers and demand conditions in the rest of the world and hence improvement of exports is dependent on how the rest of the world grows which cannot be assumed arbitrarily.

[Incidentally, producers in other nations may be even less competitive than Australian producers – thereby implying a stronger constraint on those nations because exports may not be rising as fast]

Funnily, the blog posts claims in one place that imports reduce and later that it increases. In that discussion, Mitchell seems to be addressing imported inflation – a somewhat less important detail here in this post.

Third and the most important point is since the exchange rate is not under official control, there is no guarantee that the exchange rate will depreciate. It may appreciate and stay at appreciated levels for an uncertain period till the net indebtedness of Australia rises to alarming levels.

I suppose Mitchell believes there cannot be a crisis because according to a 2008 paper coauthored by him, There is no financial crisis so deep that cannot be dealt with by public spending. Ironically during the global financial crisis which started in 2007-8, Australian banks went into a heavy US dollar funding problem which had to be resolved by the Reserve Bank of Australia using its credit lines at the Federal Reserve (via swap lines). This puts his huge claim that crises can simply be solved by public spending into pieces.

Now, if incomes rise in Australia, this has the adverse effect of deteriorating the balance of payments which Mitchell denies reguarly. Of course in real life, Australian authorities won’t like a deterioration. Here is where the fake trade-off of the employer of the last resort proposal comes in.

If incomes are to not rise because imports have to be kept under check, then the ELR is simply a redistribution to the ELR employee out of taxes. This is because more people receive the disposable income due to production and if output is constrained from the external sector, so are incomes – thereby implying lower disposable incomes for others already employed and not in the ELR.

Incidentally I mention in the passing that Australian banks are subject to vulnerabilities due to funding from foreigners – something Chartalists (who are also Minskyians) would deny. The huge amount of external funding needs of Australian banks – both in domestic and foreign currencies is a direct result of the current account imbalances accumulated over the past.

Somehow a group of Keynesians think that simply deficit spending solves all our problems.

Wynne Godley And The Dynamics Of Deficits And Debts

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In a five-part series in his blog, Functional Finance and the Debt Ratio Scott Fullwiler claims that if the interest rate is held below the growth rate of output, sustainability of the public debt/gdp ratio is guaranteed in the sense that the ratio converges and does not keep increasing forever. This is erroneous and his conclusions are misleading.

Wolfgang Schäuble understands the connection between public finances and international competitiveness, although his solutions are all wrong. Heteredox economists should understand this connection as well!

Rather than write a detailed essay, I thought I should directly get to the point and pinpoint his errors. Of course, several Post Keynesians even before Fullwiler wrote his 2006 paper Interest Rates And Fiscal Sustainability (referred in his posts) have made this claim and this criticism applies to them as well.

While there are future scenarios, where growth improves the public debt/gdp ratio, it does not mean that all scenarios lead to a convergence. Fullwiler has examples in his posts where he shows how the convergence happens. But it doesn’t prove much.

Fullwiler’s error is a simple mathematical one. He sums the series for debt-sustainability equation and shows the the public debt/gdp ratio converges to

– pb/(g – r)

where pb is the primary balance/gdp ratio, g is the growth rate of output and r the interest rate. [notations are changed somewhat without any effect on conclusions]

This is a wrong result because it assumes that the primary balance is constant as a percentage of gdp. The series he sums need not converge if the primary balance in each period is different. One such scenario is when the deficit in each period is bigger than the deficit of the previous period. Fullwiler claims:

… in terms of convergence or unbounded growth of the debt ratio, as Jamie Galbraith put it, “it’s the interest rate, stupid!” since any level of primary deficit can converge if the interest rate is below the growth rate.

[italics and link in original]

This is repeated:

… More importantly, given an interest rate lower than GDP growth, any primary budget deficit will eventually converge …

Now this doesn’t make sense. The claim that “any” level of primary deficit can converge if the interest rate is below the growth rate is incorrect. For example, if we have primary balances pb0, pb1, pb2 and so on and each of them is growing sufficiently faster, the debt/gdp ratio is explosive even if interest rate is less than the growth rate of output. His result is valid if each of the balances pb0, pb1, pb2 … are equal to each other and not in general.

In other words, if g>r, the sequence dn given by the relation

dt – dt-1 = λdt-1 – pbt

where λ is equal to (r-g)/(1+g) need not converge for general values of pbn and only converges in special circumstances (if suppose the pbn are all equal or more realistic if there is a mechanism to bring the primary deficit into a surplus which may or may not be a discretionary attempt by the government.)

Example

Nothing of the above is purely academic. So in what situation can the public debt explode?

Let us assume an open economy. Let us assume that a country’s exports is X0 and not growing because of its inability to increase its market share or because of limited demand in world markets due to deflationary policies adopted by the rest of the world. Or both.

If one imagines a scenario in which there is growth in output and hence income, imports rise as well in a world of free trade.  This implies the current account deficit explodes. While growth may work to improve the debt/gdp ratio, the current account deficits work to worsen the debt ratio. The net effect is that “growth” instead of improving the debt/ratio worsens it.

This can be seen if one remembers that the sectoral balances identity connects the public sector deficit and the current balance of payments. We have

NAFA = PSBR + BP

where NAFA is the private sector net accumulation of financial assets, PSBR is the public sector borrowing requirement (the deficit) and BP is the current account balance of international payments.

Since the private sector typically wishes to have a positive NAFA (else there is another unsustainable process!), an exploding BP leads to an exploding PSBR if output grows much faster than exports. This implies the public debt/gdp grows forever and growth is not sustainable.

Now Fullwiler can potentially claim that the government can “simply credit bank accounts” and public debt/gdp and external debt/gdp rising forever is no cause for trouble but then why write a post claiming convergence of the ratios!

There is a diagram in the post which I modified below with a red line for a path for the sectoral balances. Is the claim that this line extrapolated leads to a stabilizing debt ratio?

[image updated]sf-p4-fig9-modified-corrected

Wynne Godley And Debt Dynamics

The above was pointed out by Wynne Godley in the 1970s. The following brings it out clearly. It is from an appendix to an article written by his co-author Bob Rowthorn in J. Michie and J. Grieve Smith (eds), Unemployment in Europe (London: Academic Press), 1994 pp. 199-206 and was originally a paper to the UK Treasury around ’92-’93

The main conclusions are as follows. Consider an economy in which neither inflation nor the balance of payments is a constraint on output, so that any permanent increase in demand leads to an equal and permanent rise in output. In such an economy, tax cuts or additional government expenditure are eventually self-financing. They lead to some increase in government debt, but not to an explosion, since this debt will ultimately stabilise. The factor stabilising the debt is the behaviour of output. Following a fiscal stimulus, output will rise and tax revenue will automatically increase. Moreover, the expansion will continue to the point where additional tax revenue is sufficient to halt government borrowing and stabilise the debt. In an inflation-constrained economy, the expansionary process will lead to an unsustainable inflation and the government will be compelled to half the expansion before tax revenue has increased sufficiently to stabilise the government debt. In a balance of payments constrained economy, the government debt will grow without limit because the output multiplier will be too small to generate the tax revenue required to stabilise government debt. The counterpart to expanding government debt will be an expanding national debt to foreigners.

Conclusion

Now this may sound as a pessimistic view for any individual nation or the world as a whole. The real problem is free trade – the most sacred tenet of the economics profession.

Not A Balance-Of-Payments Crisis?

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Here’s a new piece by Randall Wray on Economonitor claiming current accounts do not matter (once again!) and didn’t have much of a role on the Euro Area crisis. Part of his arguments are the same as those who participated in public debates 1991 (most, not all) and claimed the balance-of-payments doesn’t matter.

Perhaps he should revise his study of sectoral balances.

Before I consider his analysis, let me remind you why current account deficits matter. A current account deficit is the deficit between the income and expenditure of all resident units of an economy and because it is a deficit, it needs to be financed. Cumulative current account deficits lead to a rise in the net indebtedness of a nation (i.e., consolidated net debt of all resident sectors of an economy) and cannot keep rising forever relative to output. This is because a deficit in the current account is equal to the net borrowing of the nation which has to be financed and secondly, the debt built up needs to be refinanced again and again.

Here’s via Eurostat

It is clear from the chart that nations with high negative NIIP (and hence high net indebtedness) were/are the ones in trouble.

The accounting identity which connects the NIIP to CAB is:

Δ NIIP = CAB + Revaluations

Most of the times, revaluations have less of a role in explaining the NIIP. Of course one can always come up with exceptions – such as for the United States with huge revaluations due to outward FDI and Ireland. It should however be noted that Ireland also had high current account deficits.

Here is data from the IMF on the current account balances:

From this you can see “Germany is not Greece”, “Netherlands is not Spain”, “Finland is not Cyprus” and so on and also the relation of CAB to NIIP.

Let me turn now to what Wray has to say:

Yesterday one presenter at this conference provided a lot of interesting data on cross border lending by European banks, most of which consisted of lending to fellow EMU members. He showed a strong correlation between cross border lending and cross border trade. Hence, posited a link between flows of finance and flows of goods and services. So far, so good. He also accepted a comment from the audience that correlation doesn’t prove causation, and that flows of finance are orders of magnitude larger than trade in goods and services—in other words, most of the financial churning has nothing to do with “real” production.

So atleast Wray accepts there is a correlation of some kind. For causation, see the arguments presented at the beginning of this post.

I won’t rehash that argument. Balances do balance, after all. For every current account deficit there’s a capital account surplus. It seems to me that the claim that the EMU suffers from “imbalances” is on even shakier ground. After all, they all use the same currency, so there’s no chance that an “imbalance” will lead to a run on the currency and to exchange rate depreciation (a usual fear following on from a current account deficit).

This argument was made by neoclassical economists around late 80s and early 90s when Europe was planning to form a monetary union. See this post Martin Wolf Pays A Generous Tribute To Anthony Thirlwall. Wray misses the point that a balance-of-payments crisis also leads to a deflationary spiral and that even though there is no exchange rate collapse, there is deflation in the Euro Area – exactly as predicted by those economists who thought the notion “current account deficits do not matter” was precisely wrong in the early 1990s.

Then Wray goes on to suggest that banks creating a boom and bust in Germany would have looked different:

Yes. But in what sense is that an “imbalance”? Look at it this way. What if instead of running up real estate prices in the sunny south—so that Brits and northern Europeans could enjoy vacation homes—the German banks had instead fueled a real estate bubble in Berlin? What if they had eliminated all underwriting standards and lent until the cows come home on the prospect that Berlin house prices would rise at an accelerating pace? Speculators from across the world would buy a piece of the bubble on the prospect that they’d reap the gains and sell-out at the peak. Construction activity would boom, workers could demand higher wages and would increase consumption, and Germany would have experienced higher price inflation than the rest of Euroland.

In the hypothetical case of Wray where German banks lend the non-financial sectors till the “cows come home”, domestic demand would have risen sharply (which he himself suggests) and this would have had the adverse effect on the balance of payments. Germany would have started running current account deficits because imports are dependent on domestic demand. Germany would have suffered similar fate but in the end it would have depended on how fast the domestic demand rose.

Wray should be careful in doing sectoral balances.

Bad bank behavior can boom or bust an economy—with or without current account deficits. And that’s pretty much what happened in Spain and Ireland (and also in Iceland).

Wray would have sounded right if he had given examples of nations having current account surpluses but from IMF’s table above it can be seen that both Spain and Ireland had huge current account deficits.

What about Iceland?

The data is from 2004-2011 and you can see that in 2008, Iceland had a current account deficit of 28.4%.

Wray then compares the Euro Area to the United States:

In Euroland, all use the same euro currency, and clearing is accomplished among the central banks and through the ECB (that is where Target 2 comes in). It works about as smoothly as the US system. But here’s the difference: the ECB “district banks” are national central banks. It is thus easier to keep mental tabs on the “imbalances” by member states in the EMU than in the USA.

Yes keeping mental tabs on imbalances (and not “imbalances”) can have its effect, but Wray crucially misses the point that in the United States, there is an automatic mechanism of compensating for trade imbalances via fiscal transfers. This acts via lower total taxes paid by regions facing slowdown caused by trade imbalances (not to be confused with lesser taxes paid due to reduced tax rates if any). A rise in public expenditure (not necessarily discretionary but resulting from government guarantees made beforehand) also helps.

Wray however quotes Mosler but he misses the point as well since it talks of directed government spending as opposed to a built in automatic mechanism which (the latter) prevents a crisis at this scale/type from happening.

Generally speaking, Wray seems to suggest that the crisis happened because the private sector credit-led boom went bust and this has nothing to do with current account imbalances. While it is true that the private sector credit-led boom ended in a bust and caused a crisis, what Wray misses is that the current account deficits contributed to exacerbating the crisis because nations in trouble built up huge indebtedness to the rest of the world and had troubles to refinance their debts. If all sectors of an economy have a consolidated net indebtedness position to the rest of the world, they will have issues borrowing and refinancing since – as a matter of accounting – foreigners have to attracted. Foreigners were unwilling because of doubts and also because there was/is a crisis in the world economy, they changed their portfolio preferences – making the whole issue of financing even more difficult.

A Digression On TARGET2

It can be argued that since the TARGET2 mechanism has a stabilizer of some sort – that since the Eurosystem TARGET2 claims arising due to capital flight from the “periphery” is an accommodative item in the balance-of-payments, current account deficits shouldn’t have been an issue.

The error in this argument is that while it is true that capital flight is automatically financed by the resultant Eurosystem TARGET2 claims and that this is helpful, it depends on the hidden assumption that banks have unlimited/uncollaterilized overdrafts at their home central banks. We have seen in various scenarios – such as with procedures such as the Emergency Liquidity Assistance (ELA) – that banks in the “periphery” can either run out of sufficient collateral needed to borrow from their home NCB or have chances to run out of collateral. They hence need to attract funds from abroad. The nation as a whole is dependent on foreigners. Current account deficits are not self-financing.

Mosler And His Moslerisms

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A few readers/commenters of my blog brought attention to a video of Warren Mosler where he claims that “there is no such thing as a capital flight” – presumably for a nation with a “sovereign currency” with the implication that a Euro Area nations can simply leave the Euro and adopt their original currency without a fear of capital flight post the event.

(Why have capital controls then, if that’s the case?)

Link @22:15

This claim can be easily dismissed by simple balance of payments analysis.

For this I use the IMF’s Balance of Payments Manual (BPM6). First lets look at the format of the BPM6’s numerical example.

The example is below:

(click to enlarge)

Roughly Mosler’s argument is that if a foreigner sells assets denominated in the domestic currency, some other foreigner would need to buy it.

He gives a Bretton-Woods anti-analogy where – presumably – an official foreign creditor can demand gold for conversion and repatriate it home by ship. And that since official convertibility to gold is suspended, there is no capital flight according to this mini-story.

To see there is capital flight, one needs to look at the foreign exchange market microstructure. By the way, the Neochartalists erroneously tend to treat banks as brokers (as opposed to dealers) in the foreign exchange markets. Let us say a foreigner – perhaps a financial institution – with “portfolio investment” in the country in question liquidates assets in the domestic currency and exchanges it at a domestic bank (domestic with respect to the country we are discussing). This “order flow” leaves the bank with a short position in foreign currency which it will try to eliminate. This will lead to a cascading effect because the foreign dealer it may want to offload its position will react itself and hence a series of transactions in the fx markets – leading to a depreciation of the currency.

It may happen that the currency depreciation may bring in an order flow in the opposite direction – thereby leading to a quasi-equilibrium. However if the general expectations is such that the currency may depreciate further then it is hard. If such expectations are formed, there may be even more capital ouflow!

It is precisely here that the central bank may intervene and sell foreign reserves – thereby helping the dealers (both domestic and foreign to offload their undesired positions). So recently there was news of intervention by the Reserve Bank of India in the fx markets. (minor technicality: the reduction of domestic banks’ settlement balances due to the settlement of central bank fx sales will lead to a “fine tuning reverse operation” by the central bank)

So how does the whole thing look in the balance of payments? The answer is very simple: assuming foreigners sold 100 units of assets – minus 100 due to liquidation of domestic assets and minus 100 due to sale of reserve assets.

So that’s capital flight.

And … like that … it’s gone!

Born In The U.S.A. – MMT And Monetary Sovereignty

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In my previous post on government defaults and its connection to open economies, I had a comment from Sergio Cesaratto (who is full professor of Economics at the University of Siena (Italy)) which I liked. Since I don’t publish comments, I asked him if I could promote it to a post and he sent me an updated version which looks more like a post.

Sergio Cesaratto*

sergio.cesaratto@unisi.it
http://www.econ-pol.unisi.it/cesaratto/
http://politicaeconomiablog.blogspot.com/

The absence of a truly European central bank to guarantee the liquidity of the European sovereign debts aggravated (although it not originated) the crisis by letting the sovereign spreads to spiralling upward. As  consequence of the ECB deficient conduct, according to De Grauwe (2011: 8-10) the periphery’s public debts (PD) moved from a low risk to a high risk equilibrium, in his view from a liquidity to a solvability crisis.  This is not totally correct since the original troubles with the European periphery seem solvability, not of just of liquidity, and indeed it emerged when liquidity was abundant and the sovereign spreads low. According to Wray and his MMT fellows this abundance just delayed the redde rationem of the deficient Eurozone (EZ) monetary constitution, so that they attribute an almost exclusive relevance to the renunciation to national sovereign central bank (SCB) as the explanation of the European financial crisis.

In short Wray argues that as long as a country retains a sovereign currency, that is it retain the privilege to make payments by issuing its own currency and does not promise to redeem the debt at any fixed exchange rate or worse in a foreign currency, then it cannot default and the nationality of the debt holders is irrelevant:

The important variable for them [Reinhart and Rogoff 2009] is who holds the government’s debt—internal or external creditors—and the relative power of these constituencies is supposed to be an important factor in government’s decision to default (…). This would also correlate to whether the nation was a net importer or exporter. We believe that it is more useful to categorize government debt according to the currency in which it is denominated and according to the exchange rate regime adopted. … we believe that the “sovereign debt” issued by a country that adopts its own floating rate, nonconvertible (no promise to convert to metal or foreign currency at a pegged rate) currency does not face default risk. Again, we call this a sovereign currency, issued by a sovereign government. …A sovereign government services its debt—whether held by foreigners or domestically—in exactly one way: by crediting bank accounts. … [it is indeed]  irrelevant for matters of solvency and interest rates whether there are takers for government bonds and whether the bonds are owned by domestic citizens or foreigners. (Nersisyan and Wray 2010: 12-14).

While it is certainly right that if a fixed exchange rate leads to a current account (CA) deficit, a country is exposed to “sudden stops” in capital flows and the higher interest rate necessary to avoid the capital flights and to keep the parity will worsen the external and domestic imbalances Wray seems to hold a different view: for him the CA imbalances are irrelevant:

a country can run a current account deficit so long as the rest of the world wants to accumulate its IOUs. The country’s capital account surplus “balances” its current account deficit…. We can even view the current account deficit as resulting from a rest of world desire to accumulate net savings in the form of claims on the country.

That is, any country with a fully sovereign currency and no promise of convertibility at a given exchange rate can confide on an unlimited foreign credit. But for most of the countries countries, the no-promise of convertibility at a given exchange rate is precisely the case in which they will not get (cheap) foreign credit. Indeed, it is by promising at-pair convertibility that periphery countries can finance in a cheap way their CA deficits.  This will, of course, often create future problems, but certainly a floating exchange rate would discourage cheap foreign lending. One may also say that a competitive (real) exchange rate policy is what periphery countries need, a position largely shared by development economists nowadays, not least because it is not conducive to a fictitious foreign-borrowing-led growth.

Wray (2001)  elsewhere admits that the irrelevance proposition that any State

can run budget deficits that help to fuel current account deficits without worry about government or national insolvency

applies indeed only to the US: precisely because the rest of the world wants Dollars. But surely that cannot be true of any other nation. Today, the US Dollar is the international reserve currency—making the US special. … the two main reasons why the US can run persistent current account deficits are: a) virtually all its foreign-held debt is in Dollars; and b) external demand for Dollar-denominated assets is high—for a variety of reasons.

The main reason seems that the U.S. issues the main reserve currency and you issue a liability (so to speak, it’s fiat money) internationally fully accepted even without a commitment to convert it in something else.  So, what Wray say, with a sovereign currency PD and CA debts are not a problem only apply to the U.S.

With fixed exchange rates, it is not so much the promise to redeem the debt at a fixed exchange rate or in a foreign currency that creates problems. It would not be a problem in CA surplus countries, for instance. The problem is that fixed exchange rates lead periphery countries to a CA deficit, to the fear of devaluation, unsustainable interest rates, “sudden capital stops” etc. Recall that the European unbalances initially grew with a ECB pursuing very low interest rates that with financial liberalization and the end of a devaluation risk led to the bubbles in the periphery and eventually to the unbalances. This is not to say that the role of a SCB is not relevant: quite the opposite.  Lately, the ECB should and could have operated to avoid the increase in the sovereign spread, but it could not have avoided the preceding sequence of events.

It may be added that with the right institutional setting, the EZ could be a perfect U.S.-MMT style country. With the full backing of the ECB the infra-European financial imbalances would be perfectly sustainable for a region with external balanced accounts that, what’s more, issues an international currency. The institutional change required for the EZ to resemble the U.S. includes the transfer of the conspicuous part of existing PDs along with many government budget functions to a federal government (to avoid moral hazard),[1] while national States would work as the American local States. Monetary policy should cooperate with fiscal policy to pursue full employment and, subordinated to this, price stability. Federal transfers from dynamic to troubled areas should dramatically increase while minimum standard welfare rights should be universally recognised to all European citizens. Labour mobility and infra-EZ direct investment should be incentivised. Actually, fiscal pacts were already includes in the Maastricht (1992) and Amsterdam (1997) treaties, in which the European periphery exchanged budget discipline with German inflation ‘credibility’ and low interest rates. As the subsequent experience has shown, the troubles have not derived from fiscal indiscipline. Part of the problems certainly derived from a deregulated finance. At the European and national level, financial resources should therefore be re-regulated to sustain public, social and environmental investment rather than construction or consumption bubbles. Public or semi-public investment banks should be used at both levels to this purpose. Be as it may, at the time of writing this project appear still too challenging for real Europe, a club of independent states. Short of this full institutional unification, a pro-active monetary and budget policies at the European level, particularly in the surplus countries, would of course also go into the direction of a solution.

References

De Grauwe Paul  (2011) Managing a fragile Eurozone, Vox

Nersisyan Y., Wray R.L. (2010), Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff, Working Paper No. 603, Levy Institute June 2010

Wray L.R.  (2011), Currency Solvency and the Special Case of the US Dollar

(this post is a section of a longer essay on the European crisis; I originally sent a summary to Concerted action as a comment to his latest post. I thank Ramanan for promoting it to a post and, without implications, Eladio Febrero for comments).

* Sergio Cesaratto is full professor of Economics at the University of Siena (Italy).

[1] As Nersisyan and Wray 2010: 16 argue:

With a sovereign currency, the need to balance the budget over some time period determined by the movements of celestial objects or over the course of a business cycle is a myth, an old-fashioned religion. When a country operates on a fiat monetary regime, debt and deficit limits and even bond issues for that matter are self-imposed, i.e., there are no financial constraints inherent in the fiat system that exist under a gold standard or fixed exchange rate regime. But that superstition is seen as necessary because if everyone realizes that government is not actually constrained by the necessity of balanced budgets, then it might spend ‘out of control,’ taking too large a percent of the nation’s resources.

The Monetary Economics Of Sovereign Government Rating

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If a government (outside monetary unions) can make a draft at the central bank, why do rating agencies rate governments’ creditworthiness?

In this post, I will attempt to describe the dynamics of defaults and restructurings by going through some monetary economics of open economies.

Carmen Reinhart and Kenneth Rogoff wrote a book in 2009 titled This Time Is Different: Eight Centuries Of Financial Folly or simply This Time Is Different arguing that governments do indeed default – both in debt denominated in the domestic and foreign currencies. They blame the public debt and the government for the public debt – hence giving the innuendo that governments across the planet should attempt to cut public debt by tight fiscal policies. This is an illegitimate conclusion – on which I will say more below.

At another extreme are the Chartalists who argue that the government cannot “run out of money” and hence fiscal policy has no monetary constraints. Sometimes they qualify this statement by saying that the currency they are discussing are “sovereign currencies”. Now, there are various definitions of what a sovereign currency is but it is frequently pointed out by them that nations who have seen restructuring of government debt did not have a “sovereign currency” – because the currency is either pegged or fixed or it is the case that the government had a lot of debt in foreign currency which presumably allows defaults/restructuring of government debt in the domestic currency as well. The motivation behind this is Milton Friedman’s idea that nations should freely float their currencies in international markets and that markets will clear and that the State intervention in the currency markets can only make things worse. Hence Reinhart/Rogoff don’t prove them wrong – according to them – since the situations are supposedly different.

We will see that while there is some truth to it, the notion of a “sovereign currency” is highly misleading. Such intuitions are coincident with the incorrect notion that indebtedness to foreigners (in domestic currency) is just a technical liability and there’s nothing more to that!

Here’s S&P’s article on the methodology it uses to assign ratings on governments: Standard & Poor’s – Sovereign Government Rating And Methodology. One can see the importance it gives to the external sector. However, S&P does not provide a mechanism on how a government will finally end up defaulting. The purpose of this post is to look into this.

Before this let us make a connection between the public debt and the net indebtedness of a nation. Most people in the planet confuse the two. The former is the debt of the government whereas the latter is the (net) indebtedness of the nation as a whole. This is the net international investment position (adjusting for traditional settlement assets such as gold) with the sign reversed. This can be obtained by consolidating all the sectors of an economy and the consolidation involves (for example) netting of the assets of the domestic private sector held abroad and also its gross indebtedness to the rest of the world.

So one can think of two extremes:

  1. Japan – with a high public debt of about 195% of gdp (includes just the central government debt),  while being a net creditor of the world. It’s NIIP is about 50% of gdp (data source: MoF, Japan)
  2. Australia – with a low public debt of 18% of gdp and NIIP of minus 59% of gdp.

So in the case of Japan, while the government is a huge debtor, the nation as a whole is a creditor, whereas in the case of Australia, it is the opposite. So the rating agencies get it wrong or opposite!

Let us first assume a closed economy. The greatest starting point in analyzing economies is the sectoral balances approach. For a closed economy it is:

NAFA = DEF

where NAFA is the Net Accumulation of Financial Assets of the private sector and DEF is the government’s budget deficit. If the private sector wants to accumulate a lot of financial assets, and the government wants to run the economy near full employment, the public debt will be higher, the higher the propensity to save, for example. (This is not as straightforward as presented here but can be shown in a simple stock-flow consistent model). So unlike what neoclassical economists think, the level of public debt is somewhat irrelevant. Neither does the government has too much trouble in financing its debt because the public debt is the mirror image of the private sector net financial asset position.

Now let us take the case of an open economy. The sectoral balances identity now is

NAFA = DEF + CAB

A deficit in the current account implies an increase in the net indebtedness to foreigners. Unless the markets miraculously clear with the exchange rate adjusting to bring the CAB in balance, a deficit in the current account implies the nation as a whole has to attract foreigners to finance this deficit i.e., via a lower NAFA or higher DEF. In the long run, the private sector is accumulating financial assets (or has small positive NAFA) and the whole of the current account balance is reflected in the public sector balance.

So the debate fixed vs floating doesn’t help too much. A relaxation of fiscal policy may spill over into higher imports with the public debt and the net indebtedness to foreigners keeps rising forever to gdp. Hence nations typically have to curb growth to bring the current account into balance.

An excellent reference for this is New Cambridge Macroeconomics And Global Monetarism – Some Issues In The Conduct Of U.K. Economic Policy, 1978, by Martin Fetherston and Wynne Godley.

This is theory. So let’s look at an open economy mechanism of an event of default by the government as a story.

In the following, I will use the phrase “pure float” instead of the dubious terminology “sovereign currency”.

Here’s the simplest model:

In the above, a nation with its currency on a pure float and with zero official sector liabilities in foreign currencies has a somewhat weak external position in 2012. Now, according to some of the Neochartalist arguments this nation can’t default on its government debt. However this is a wrong conclusion as the scenario above hightlights. In the scenario constructed, the balance of payments position weakens over the years (and I have mentioned that roughly in 2020 it weakens). In 2022, foreigners are no longer willing to finance the debt. This may be due to a capital flight or due to the inability of the banking system to maintain a low net open position in foreign currency. The depreciation of the domestic currency isn’t sufficient to clear the fx markets and the official sector (either the central bank or the government’s treasury) necessarily has to intervene in the foreign exchange markets by issuing debt denominated in foreign currency. The government is then acting as the borrower of the last resort and the objective is to use the proceeds to partially have more foreign exchange reserves and/or to sell the foreign currency proceeds from the debt issuance to clear the fx markets. The government is then left with a net liability position in the foreign currency. Soon the external situation worsens to the point requiring official foreign help – such as from the IMF – which promises to help and requires a restructuring of the debt both in domestic and foreign currencies.

Free marketers have a blind belief in the markets and the theories are built on the assumption that markets always clear. The recent crisis has highlighted that this isn’t the case. Even for the case of Australia – whose currency can be considered closed to being pure float – has had issues in the external sector and the Reserve Bank of Australia had to borrow in US dollars from the Federal Reserve (via swap lines) to help Australian banks meet their foreign currency funding needs during the crisis.

Of course the above is not typical but to prevent the external vulnerability to go out of control, governments keep domestic demand low and a lot of times, they over-do this.

The point of the exercise is to prove that it is not meaningless to think of nations becoming bankrupt in whichever situation one can think of and it doesn’t help to laugh at the rating agencies and make fun of them – possibly with the exception for the case of Japan. Statements such as “government with a sovereign currency cannot become bankrupt” are simply misleading. In the above, the Chartalists would argue that the currency was not sovereign and they were not wrong about the default but the currency was sovereign in their own definition in 2012!

Here are some comments on some nations.

Japan: As mentioned above, Japan is a net creditor of the rest of the world and partially as a consequence of that, most of the Japanese government’s debt is held internally. The rating agencies are aware of this but in spite of this continue to make comments on the creditworthiness of the Japanese government. It is possible that residents may transfer funds abroad for unknown reasons (which the raters for some reason suspect) but it may require just a minor interest rate hike to prevent this from happening. Japan has a relatively strong external situation and hence has no issues in financing its government debt.

Canada: Nick Rowe of WCI mentioned to me on his blog that worrying about the balance of payments constraint is like “beating a dead horse” – citing the example of Canada which has floated its currency and it seems has no trouble with its external sector. But this ignores other things in the formulation of the problem. Canada is an advanced nation and an external situation which is not weak. However, a growth of the nation much faster than the rest of the world will lead to a worsening of the external situation. To some extent the nation’s external situation has been the result of its relatively better competitiveness of exporters compared to its propensity to import and a demand situation which either as a conscious attempt of demand management of the government or by pure fluke has helped its external situation remain non-vulnerable.

United States: The US dollar is the reserve currency of the world and slowly over time, the United States has turned from being a creditor of the rest of the world to becoming the world’s largest debtor nation. (Again not due to its public debt but because of its net indebtedness to foreigners). The US external sector is a great imbalance and any attempt to get out of the recession by fiscal policy alone will worsen its external situation leading to a crash at some point. S&P is right! So to come out of the depressed state, the nation has to complement fiscal expansion with improvement of the external situation such as by (and not restricted to) asking trading partners to not revalue their currencies. Still for some reasons bloggers at the “New Economic Perspectives” think that

… Bernanke also knows that the US has infinite ability to finance these fiscal components, that there is no solvency issue and that the policy rate and both ends of the yield curve are under the direct control of the Fed.

Back to This Time Is Different. While Reinhart and Rogoff’s analysis of government debt may be useful, their conclusions can be destructive for the world as a whole. The domestic private sector of a nation needs continuous injection from outside so that it can run surpluses in general and tightening of fiscal policies will lead to a depression. Global imbalances is crucial in understanding the nature of this crisis (and not public debt alone) and even coordinated attempts to reflate economies may provide only a temporary relief. Since failure in international trade restricts the growth of nations and their attempts to reach full employment, what the world needs is an entirely different way to run the economies under managed trade with fiscal expansion. Ideas of “free trade” such as that outlined here by Alan Blinder simply help some classes of society at the expense of others because it relies on the “market mechanism” which has failed over and over again.

This brings me to “sovereignty”. As argued, the concept “sovereign currency” is almost vacuous (except highlighting the problems of the Euro Area) but sovereignty as argued by Wynne Godley in his great 1992 article Maastricht And All That and by Anthony Thirlwall in the same year on FT (my post on it here Martin Wolf Pays A Generous Tribute To Anthony Thirlwall) definitely have great importance. Some of Thirwall’s concepts of economic sovereignty in the article were: the ability to protect and encourage strategic industries, the possibility of designing systems of managed trade to even out payments imbalances, the ability to protect against certain countries with persistent surpluses, differential taxes which discriminate in favour of the tradeable goods sector.