Korrekting Keynes

What’s wrong with mmT?

Nothing per se.

The problem is that governments are not seemingly capable of transcending the prevailing macroeconomics paradigms. Why is this important? Important to transcend, that is?

It is because regardless of the monetary system, there is no excuse for leaving people idle and unemployed when they might otherwise be contributing to building a more peaceful and harmonious society.

If you are beholden to some Ideology or another, however good you think it may be, you will be unable to transcend that paradigm, and thus might (innocently?) or otherwise become a force for evil, a force causing mass unemployment \ldots a complete waste of human lives.

This was meant to be a script for a video Short.

On a nice combative-but-friendly forum the topic of J.M. Keynes and the Bancor system arose. Why did Keynes not figure out floating exchange rates were far better? It was supposed to be a counterfactual thought experiment, but people took it literally as a dissing of JMK. That was funny, but still annoying! (Distracted from the point.) But it did squeeze out a few PDF’s from one SteveK — for those who have not read the JMK original ideas. I am digressing from my script now. There are many “excuses” we could give this strawman JMK.

Fixed exchange rates were the paradigm of the time. (Were they? Was no one aware of even the concept of floating exchange rates? I highly doubt it, but granted the mindset was different.)

It was the era post-WW-II and when the United Nations ideal was still plausible. Hence it made complete sense to create a more tightly coupled international currency system.

…. heck, even a World Currency. Why not? After all, the point of Keynes’ side of things was to benefit the poorer nations.

The thing is, after an horrific european & northern pacific “world” war people had a massive appetite for peace and international brotherhood and sisterhood. So it might have been desirable to use a Bancor system in order to assist the poorer nations, specifically to increase their import capacity without suffering domestic inflation pressures — which although sustainable in perpetuity must be acknowledged as a (false) psychological political liability.

The key here is:

It might have been desirable to assist poorer nations via Bancor — had the international political will been favourable.

Two huge qualifiers there, which were completely counterfactual. The international will among the power elite did not exist, and therefore it was undesirable to adopt an IMF (neoliberal, amoral, technocratic) managed fixed exchange rate system.

JMK might not have been a douchebag Imperialist or Neocolonialist, but the other power elites were. So a Bancor was perhaps a nice Ideal, but was a non-starter. (Easy to say in hindsight, but back in the day someone like myself would’ve just been swallowing what Keynes had to say, hoping for the best.)

There is a paper by Wray and Sardoni (2007) which is a good discussion of why the Bancor plan was flawed, and why for the interim period in history — up to the present day — a floating exchange rate environment is superior.

History is what it was, although floating exchange rates were known, they were not understood. So JMK was stuck in a sticky paradigm. There is little evidence that either the Bancor plan or Bretton Woods regarded floating exchange rates as superior, and the fixed exchange rate paradigm dominated both policy and academic thinking until at least the 1970s. Bitter irony for many of us, Milton Friedman was one of the first more influential economists to argue in favour of floating exchange rates, along with Harry Johnson (1969).

Friedman and Johnson were not entirely wrong, though I only pay attention to Johnson. He argued that, “The fundamental argument for flexible exchange rates is that they would allow countries autonomy with respect to their use of monetary, fiscal, and other policy instruments, consistent with the maintenance of whatever degree of freedom in international transactions they chose to allow their citizens…”

… except then followed some blather about “maintaining equilibrium”. That’s always geek-econospeak for some sort of crippling of the working class. They never really mention that equilibrium is not a goal in and of itself, since stability can exist in cycles. The only meaningful macroeconomic state we desire is full employment in non-ꕗꖹꝆꝆꕷꖾꕯꖡ jobs. All else is a footnote. Those footnotes are of course paramount: are people peaceful, happy, creative, …

Why? It is because all else equal, you can be more creative and at liberty if you do no have to work so many hours for everyone to have the means of living a decent life. And the more people working a little bit, the less any one person needs to work a lot.

No Exchange Rate System is Preferable

There is a huge caveat to the MMT preference for floating exchange rates.

A float permits the government to run full employment policy without inflation risk, but this is good only if the government know it!

The point being, if the government do not know it, then chances are (very high) they also do not know they are the cause of all unemployment. They also will not know they have no need to issue bonds (basic income but only for people who already have money and in proportion to how much money they already have) — hence are liable to issue bonds and thus drive needless and regressive inflation policy. They are liable to hope the private sector will employ everyone, using a NAIRU lens. Which is a false lens in all cases. But especially false on a floating exchange rate.

A float permits the government to run full employment regardless of import price sensitivity, since then the domestic fiscal adjustment can always be made. This is because that government is never promising to deliver a foreign currency. They can run permanent zero interest rate policy.

This is important, since ZIRP on a fixed exchange rate regime can be inflationary if exports are weak. But it all reverses polarity on a float, when now ZIRP becomes deflationary biased, or at least inflation neutral.

Few mainstream economists acknowledge this reality. Hence all the brainworms. They do not understand the implications of a floating exchange rate. All the policy we’ve seen since most nations moved to a float is ample testimony the mainstream economists have no clue. They are all ignorant, or at least those advising governments.

When neither a Bancor style (to help the poorest) managed regime, nor a floating exchange rate regime is desirable, because the governments will balls things up regardless, then the conclusion is that no exchange rate policy is preferable. The working class lose either way. Leaving working class MMT activists screaming mild toddy-hot words seeking some compassion into the freezing blizzard of academic ice-𖡮𖦪𖥣𖥐𖢉ꕷ.

Yes, with a wise compassionate government, a floating exchange rate is an enormous advantage, it allows said government to run full employment policy without instability. Yet also, with a wise compassionate government a fixed exchange rate is also fine, provided the purpose is understood: inflation must be permitted to run hot to benefit the poorest. The fiscal adjustment is to raise the minimum wage and tolerate import price inflation is however easier on a float, and politically damaging on a fixed exchange rate when the government must deliver a foreign currency. It is a question of which is political manageable, hot inflation, or variable exchange rate. History teaches us people prefer less inflation, mostly for false psychological reasons, but that’s the time we live within.

But we do not have such governments.

Yes, with a wise compassionate international order, an international single currency is an enormous advantage, it allows said international order to run asymmetric trade without instability to benefit the poorest nations. Win-win. Because we all lose when a country is torn apart by poverty and conflict, or unable to green their energy system.

But we do not have such an international order.

It’s worth noting the same applies to The EU. The idea of a single currency region is fine — provided the Union was peaceful, democratic (no unelected ECB fiscal authority) and brotherly/sisterly. But the EU did not have such a peaceful family Union. It was a vain hope of some, delusion optimistic hope of others (like my strawman JMK, I am not saying they were bad people). Not be any stretch of the imagination did they have the requisite precondition of harmony. Hence the EMU was never fit for purpose.

In our period of history, the EU should have first established peace among member nations, with open borders, frictionless trade, and all the rest. Only over a long span of time then, with trust built-up, could they hope to form a currency union without causing (probably through ignorance) mass unemployment and wars on distant borders. (“We will fight to the last Ukrainian.”)

Though he was a decrepit eugenicist. Out of such minds not all good things will flow.

Even as their real purchasing power is increasing, they think the higher prices are somehow horrific. Go figure?! (I cannot figure it out.) You need to understand the price is just a number for score-keeping, not a claim on gold, if you don’t then you will appear unfathomably 𖨚𖢧ꚶ𖡮𖥣𖦧𖥣 to me, though I do understand the source of your 𖨚𖢧ꚶ𖡮𖥣𖦧𖥣ity, so maybe not completely unfathomable.