A Serious Limit on MMT I mentioned in a recent post that the twelve federal reserve banks are insolvent and an MMT friend, like the board of governors of the Fed, said that was not really a problem. Domestically, that is correct; internationally, the matter is much less clear. Here is why. I dont argue the US government is insolvent per se. I said 12 banks federal reserve banks were. Those banks currently operate under conventional budgetary and accounting restraints like other banks. To be sure, the huge quantity of bad assets of those banks could be sold off for what they could bring and the balance sheet decrements for those banks, relative to the face value of those assets, could be compensated for by the Fed with newly created increases to their deposit accounts but that money infusion would be tremendous. The private stockholders of those banks would surely love that and be delighted. Mania from heaven. As we know, however, the only real limitation domestically to such activities is inflation. However, depreciation of the dollar relative to other currencies in world markets and the willingness of other nations to buy and hold our debt is a real concern that impacts us. MMT does not well or much address that or the spillover effects from domestic markets to international markets. World and US markets are now financially integrated. And for US dollars and bonds, very real deprecation pressures are there in world markets because the rest of the world doesnt not recognize an MMT view as between nations. That is why China is stockpiling gold like crazy and seriously lying about it. Purchases in the last 15 months or so are estimated to be almost 5000 tons, although they admit to just over 1000 tons. Why stockpile and then why lie? Clearly China has an agenda. China has also been getting rid of our currency and its holdings of our debt. It has been buying our bonds with its currency earnings and then dumping those bonds quickly. Chinas stock of our debt is a fifth of what it was in 2008. However, we are using undisclosed third party agents to support the markets for our debt, shoving even more dollars into world markets and accelerating Chinas, Russias and other nations concerns about the US and the dollar, especially as the world reserve currency. All that prevents China and other nations from refusing to accept dollars for their sales of exports in the US is 1) they need our markets for sales and 2) our bond markets remain stable so they can convert the dollars they earn into our longer term debt and then dump it without sustaining a lost. But that is only because we are secretly supporting world US bond prices. The price of this effort is a flood of dollars into world markets. It is no wonder China is stockpiling gold. The dollar is not the sovereign currency of the all the world and it is badly slipping as the worlds reserve currency.
Posted on: Sun, 02 Nov 2014 22:42:59 +0000
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