Sunday, September 4, 2016

A Quick Point about Bill Mitchell’s Views on Speculative Capital Movements

Bill Mitchell sketches his views on international speculative capital movements here:
“… I do not think that the imposition of country-by-country capital controls is the best way to eliminate the destructive macroeconomic impacts of rapid inflows or withdrawals of financial capital.

If we consider that the only productive role of the financial markets is to advance the social welfare of the citizens – that is, advancing public purpose – then it is likely that a whole range of financial transactions, which drive cross-border capital flows, should be made illegal.

Capital inflows that manifest as FDI in productive infrastructure are relatively unproblematic. They create employment and physical augmentation of productive capacity which becomes geographically immobile.

However, financial flows that are speculative (especially short-term flows) and not connected with the real economy are unproductive and should be declared illegal. You may consider this is an extreme direct control. However the policy should be introduced on a multi-lateral basis spanning all nations rather than being imposed on a country-by-country basis. The large first-world nations should take the lead. I don’t see that leadership being forthcoming.”
Bill Mitchell, “Are Capital Controls the Answer?,” Billy Blog, April 28, 2010.
It seems to me that this would impose a serious problem for the Third World as follows:
(1) with a large volume of speculative capital movements banned, this will reduce capital account surpluses, and probably cause balance of payments crises in the Third World as trade deficits cannot be financed, and

(2) this will mean MMT-style fiscal policies will not be able to be pursued in the Third World, and there will also be a serious crisis of development in the Third World, and some new mechanisms will have to be designed to provide foreign exchange for economic Third World development.
That would require a total reform of the international payments system, including the World Bank and IMF, which would have to provide such foreign exchange for countries that need it.


  1. And thats why i cant understand bill mitchell's hostility toward international clearing union and bancor.

  2. why do they need to run trade deficits? You write: "this will reduce capital account surpluses, and probably cause balance of payments crises in the Third World as trade deficits cannot be financed"

    In case they have food supply problem etc, I can see that trade deficits need to be run. You might consider It naive MMT view like many people do but why can't they "live within their means"?

    Foreign capital inflows are good for enhancing country's productivity for example but I personally would not use them for the purpose of trade deficits.

    What gets me about this is that once MMTers say trade deficits are beneficial for the country then the critisc say: ahaa, your policies will ruin the country. And then they start saying that third world countries would be ruined if they couldn't run trade deficits.

    1. kristjan

      thats why all the countries in the world should accept this

  3. "kristjan

    thats why all the countries in the world should accept this"

    Why should they run fixed exchange rates? IMO they shouldn't. Should every nation in the world start speaking Esperanto?

    1. because if you are using this system you can always insure that the current account deficit/surplus in all countries and in all times is zero.

      because in this case you can force surplus countries their surpluses and eliminate balance of payment constraint for good.

      thats why all the countries in the world should accept this because it will help third world countries to develop without having chronic stagflation and it will help developed countries to tame the financial sector.

      which is win win situation.

      so basically international clearing union is a system which is superior to floating exhcange system.

  4. "If a nation had too high a bancor surplus the ICU would take a percentage of that surplus and put it into the Clearing Union's Reserve Fund; this would encourage nations with surpluses to buy other nations' exports. Nations that imported more than they exported would have their currency depreciated against the bancor; encouraging other nations to buy their products, and making imports more expensive."

    I don't understand it too well. First it says fixed exchange rate, then the currency can depreciate, that by definition is not fix forex. On that wikipedia page there are some assumptions that may or may not hold true. Like for example the reserve funds and encouraging other nations to buy their products. There is probably more to that than is on that wikipedia page but generally I don't believe in any rules based currency systems that are not politically managed. The idea on the wikipedia page sounds to me like a currency system, not a clearing system.

    1. Basically the international clearing union have 3 tools in order to insure that the current account at all times of all countries will be close to zero.

      1.interest as penality on bancor surpluses.

      2.devaluation of the currency in case its not developing country to insure that the imports will not be higher than exports (at least insure that rich countries will not have free lunch).

      3.non coditional loans to any country which need it

      More about that you can see at this video of steve keen.

  5. "and not connected with the real economy "

    If a multi-national bank has to acquire currency balances in response to some merchant lowering prices in the local currency terms of financed product in the one nation I would not say that is disconnected from the "real economy"... which is probably the reason for the majority of such transactions...

  6. "and probably cause balance of payments crises in the Third World as trade deficits cannot be financed,"

    They are financed automatically, or they simply don't exist in the first place in any system that floats its currency.

    If a business tries to sell into the third world and won't take the local scrip, then the third world country doesn't get the item or service and the business doesn't get a sale or any production.

    The third world country is then best looking around the world *for another supplier*.

    In a world short of demand, opening up markets and offering exclusive deals to suppliers *that have central banking systems that will discount the local currency* is the best developing nation policy.

    Which is why China is doing a roaring trade in Africa.

    A developed nation will always try to get you to borrow in the foreign currency. The standard line should be to politely refuse and tell them to come back when they have a useful financial proposal in the local currency.

    1. i answered you already in the post about realist left i rephrased my question again.

      the problem with what you are saying is that you have binary thinking if they sold you at price a but now they are not sattisfied with the price they will just stop sell it or/and your people will not buy it if it will be offered at higher price well the only place where its working is in neoclassical textbooks its called perfect competition which is a myth.

      in practice what will happen is that companies will ask higher prices in your currency for the deal and your people will buy it and it will cause devaluation of your currency but since your exports are relatively inelastic while imports are relatively elastic (and not homogenous easily replaced products usually supplied by big supply chains with serious market power). and this in turn will create a situation of rapid depreciation of your currency in case you are trying to inject demand into the economy in order to create full employment.

    2. And I replied down there too. Neil & the first anon there are correct. You & the second are not. There is no such thing as a balance of payment constraint the way usually meant.

      We are talking about trade between countries, not charity. Nobody is saying that common sense = FF = MMT will magically make countries that can't feed themselves suddenly able to.

      But the supposed depreciation & possible inflation due to trade is not indefinite and uncontrollable, but limited. Nobody is saying that bancors, international clearing unions etc might not be nice things to have in some cases, Wray & other MMTers have said such things.

      But because the depreciation, inflation are limited, even in the worst case, and as Neil points out, current conditions make the worst case not overly likely, what is very, very wrong is the suggestion these nice things are necessary.

      MMT / FF works just fine even for developing countries & international trade. The one thing to never, ever do is to not have full employment, not give a paying job to anybody who wants one. Working more makes people -- and countries - richer. Basically always for people, and even more so for countries. Those who think otherwise should stop and reflect on how strange what they are saying is.

  7. "If a multi-national bank has to acquire currency balances"

    It doesn't have to acquire currency balances. It just creates the balance in the other jurisdiction and does an internal contra.

    Multi-national banks have authorisation in two locations, which means they can shift the asset, delete the paying currency deposit and discount the asset in the receiving currency.

    Banks create money remember. Multi-national banks can create *and delete* money in several denominations with nothing other than an internal contra charge. That's why they exist.