Monday, August 5, 2013

Reply to Juan Ramón Rallo, Part 4

The indefatigable Juan Ramón Rallo posts a further reply to me:
“Otra réplica a Lord Keynes: atesoramiento, capital y recursos ociosos (parte 4),” 4 August, 2013.
Some comments:
(1) Rallo now says that the Wicksellian natural rate is “a concept ... foreign to the Austrian tradition and it is unnecessary for the theory of the cycle” (“como digo, semejante concepto es ajeno a la tradición austriaca y es innecesario para la teoría del ciclo”).

Now we are back in circles, for this implies that I am right that all versions of ABCT that are based on the natural rate cannot be theoretically sound. And that is very large number, including the work of Mises, Hayek, Rothbard, and Garrison.

(2) Rallo seems to admit that money hoarding and lack of spending on newly produced goods and services does cause macroeconomic problems (“mi punto no es que un atesoramiento excesivo no pueda causar problemas macroeconómicos”).

I baffled by the comment that “savers may wish … production structures much safer (less risky) than today because risk aversion has increased” (“Los ahorradores pueden desear, por ejemplo, estructuras productivas mucho más seguros (menos arriesgadas) que las actuales por cuanto su aversión al riesgo se haya disparado”). Any saver increasing his holding of money or liquid financial assets today does not generally want the aggregate level of production or employment to fall. The loss of employment and output from increased aggregate saving is a largely unintended macroeconomic consequence of individual micro decisions. The vast majority of such people do not want to see mass unemployment that would make it likely that they, too, will their job and income.

(3) Regarding WWII in the US, there was a great deal of monetary saving, but massive use of real resources. The “real” saving that was done allowed diversion of resources to war production and the creation of a vast new number of capital projects related to the war production.

I fail to see how my comments about the rapid and successful conversion of war economy have been refuted. The immediate years after the war when this boom happened occurred at a time when prices and wages were the most inflexible they had ever been in US history. Numerous government interventions still existed. Yet some massive painful restructuring of the US capital structure analogous to the bust of ABCT with rising unemployment did not happen.

(4) Regarding the financial system and Minsky’s theories, Post Keynesianism says that the financial sector must be effectively regulated to prevent speculative and Ponzi financing of asset bubbles.

Regarding (4.4), I do not say that the developing world must be willing to finance all production equipment and investment around the world (!) (“¿Están dispuestos los países en desarrollo a financiar la reconversión de todos los aparatos productivos de todo el planeta?”).

What I said is this: any one country (for example, Canada) could meet capital shortages during booms by trading with its trading partners, whether in the developed world or developing world (for example, Canada can trade with the US, Europe, Australia, China or many other nations), not that a nation must meet all of its capital requirements from the developing world.

Furthermore, Rallo’s “real” analysis of international trade is faulty. All goods imported do not just trade for goods exported (whether imagined as a direct or even an indirect exchange). Imports are paid for with money, usually foreign exchange reserves. A country can obtain foreign exchange either by (1) selling goods through exports, (2) selling assets (real or financial) to foreigners or (3) foreign direct investment.

When a Spanish company buys Chinese capital goods and pays in US dollars, it has discharged its debt to the Chinese supplier. It does not necessarily “owe” real goods to China at all.

1 comment:

  1. "Imports are paid for with money, usually foreign exchange reserves. A country can obtain foreign exchange either by (1) selling goods through exports or (2) selling assets (real or financial) to foreigners.

    Don't see that as correct. You're one step too far down the line from the starting point

    If an exporter wants to sell to you they will have to accept what you have on offer. If they won't do that then there is no deal. The exporter won't like that.

    So export led nations make sure that there is sufficient liquidity out there of their own currency so that transactions will actually complete.

    So as an importer you start off with your domestic currency, and somewhere along the transaction chain an entity exchanges that for the foreign currency so that the supplier gets what they need to pay their staff, etc.

    That ability to exchange has to be there for the transaction to complete.

    So there are two legs. The first is to agree to ship the goods/services from supplier to customer, and the second is to take the money that the customer has and by a series of transformations turn it into the money that the supplier needs. Both those legs have to be in place at the time the transaction is agreed - or it won't be agreed and the transaction won't happen at all.

    Within a currency area of course the second part of that transaction is generally simplified. If the customer has money it is generally the same sort that the supplier wants.

    So I see this 'foreign exchange reserves' idea as a mistake in analysis. Export nations will boost those 'foreign exchange reserves' via liquidity actions because they want to sell their real goods/services to you.

    It's the same mistake as 'government's borrow money' idea. The initiating party and the party that has to be persuaded is likely opposite to that which is generally believed.

    Just as the private sector wishes to save safely and the government borrower allows them to do that, the export-led exporter wishes to export and needs a willing importer. Liquidity actions allows those importers to purchase.