7DIF#5: “Exports are a ‘real’ cost”

Q) Is invading China the best way for the United States to fix its debt problem?

A) “The US does not have a debt problem. On the other hand, China has a big ‘tangible goods’ problem, so let us hope they do not decide to invade us to get their stuff back.” —Craig Foster, Teacher & retired CSFB trader

A monetary sovereign can keep handing over pieces of paper off a printing press all day long, but they can’t keep handing over (‘real’) tangible goods all day long. That’s what Warren Mosler (in 7DIF#5) means when he says “Exports are a ‘real’ cost” (when making the argument that trade deficits are not a problem either)…

However, Pure MMTers should be aware that ‘exports are a real cost’ oversimplifies the many other moving pieces involved in trade differentials. When saying that, you may get some push-back. Just like Steve Keen correctly did in that recent (05/06/18) Real Progressives broadcast:

Mosler: “Having a trade deficit doesn’t constrain investment.”

Keen: “(When Australia runs a trade deficit, it means) a lot of our (Australian) assets have gone overseas…it is going to foreigners.”

Mosler: “Assets are not going overseas by running trade deficits. If you sold your Australian Opera house, are they going to dig it up and take it away?”

Keen: “I’m talking about the financial transactions paying for imports that lead to the foreign sector then buying our assets. They have claims on our assets. You are saying that is good and that exports are the real costs, that by being a net exporter (running a trade surplus), that sending real goods for receiving credit balances at the central banks is bad.”

Mosler: “There is a only nominal payment for trade deficits.”

Keen: “There is nothing ‘nominal’ about foreigners owning our assets.”

Keen had a good point. Since there are both costs AND benefits, both bad AND good, for both importer AND exporter, in both trade deficit AND surplus, we should consider a qualifier to go along with ‘Exports are a real cost’ like ‘Trade deficits are the position of strength’.

For example, you (a nation running trade deficits) are the guy paying someone else to make stuff for you. In addition you (running trade deficits) are working in the Research & Design suite innovating the products instead of on the factory floor.

That said, imports are a ‘cost’, too. Free trade can become unfair trade. Or more specifically, can morph into unfair trade practices that pressures the transfer of sensitive intellectual property to overseas governments, undermines your proprietary technology by depriving you of the ability to license it at full value and weakens your global competitiveness. Not to mention that trade deficits dangerously depletes your manufacturing base wiping out millions and millions of middle class jobs.

Until you get to the point (US manufacturing less than 12% of GDP) when you say ‘enough is enough’ (hence the present ‘trade war’ by Trump and a separate filing of a WTO violation case against China by US Trade Representative Lighthizer).

Thanks for reading,



THE HUBBUB ABOUT GITHUB is that the Microsoft Corporation is buying a champion of open-sourced platforms (an ethos of the free-sharing code movement) called GitHub, which is used by over 28 million programmers. The more programs on a company’s platform, the more software apps are created, attracting more customers and even more developers—a flywheel of growth and profit. Microsoft will acquire GitHub for $7.5 BILLION IN MICROSOFT STOCK.

What is Modern Monetary Theory?

Another good way to think about it, is that Microsoft had two choices how to pay that $7.5B. Microsoft, a user of dollars, could either go into debt and pay with borrowed dollars (similar to the state & local gov’t); or, Microsoft, also a sovereign issuer, could create fiat, a.k.a. ‘shares’ and pay with Microsoft stock (similar to the federal gov’t).

Those newly-created Microsoft shares will be liabilities, yes (they will be assets of the new shareholders); those Microsoft shares will be obligations, of course (Microsoft will give those new shareholders dividends and voting rights); but will those newly-created Microsoft shares ‘spent’ for GitHub be a ‘debt’ (?), no.

Don’t take my word for it. Ask any accountant and they will confirm to you that all debts are liabilities but not all liabilities are debts.

If you ask any of Microsoft’s accountants, or any publicly-traded corporation’s accountant, how many dollars that the company has borrowed (how much debt in dollars that the company is in), or how many dollars that the company has budgeted (for spending) this year, he or she can give you a figure to the penny.

However, ask that same accountant how much of their own stock that the company has ‘borrowed’ (how much in ‘debt’ of their own stock that the company is in), or how many shares that the company has ‘budgeted’ to issue (to create for spending) and they can’t answer those questions because there’s no such thing.

That paradigm difference between those two ‘currencies’ used by either the Microsoft ‘state & local government’ division or the Microsoft ‘federal government’ division…is MMT.

NOTE: The distinction between the ‘user of currency’ and the ‘issuer of currency’ is that when deficit spending, a user is adding to an outstanding amount of debt; while an issuer, when deficit spending, is instead adding to an outstanding amount of float.

Where it gets tricky for the ‘hyperinflation-sensitive’ mainstream to grasp is that when issuers of currency add to their outstanding float, it doesn’t necessarily ‘dilute’ the float of currency with the same precision that it would dilute a float of stock.

For example, if there are ten shares of Microsoft stock outstanding (each share equals 10% ownership of Microsoft), and Microsoft issues 10 more shares, then the previous outstanding float was diluted exactly 50% (each share now only equals 5% of IBM). Currency is a different story. There are many other moving pieces involved that determines whether the previous outstanding float of currency has diluted (has lost purchasing power, or more precisely, the holders of the currency have suffered inflation).

Why are federal gov’t deficits (additions of currency) sometimes inflationary and other times not? One answer is “it depends on productivity,” as per Jim Boukis, a co-creator of Pure MMT for the 100%. Another is that those deficit spending dollars are going into the ‘non-functional’ economy (blowing savings asset bubbles) which may have little effect on overall consumer price inflation in the real, ‘functional’ economy. “For example, in 2008 and 2009 deficits were 10% of GDP, and then every year the deficits decreased to 9%, 8, 7, 6, 5, etc, but the dollar didn’t weaken, there was no inflation,” Jim Boukis adds.

Other examples, if the prevailing economy is soft, if demographic changes are weakening the economy, if geopolitical events are creating deflationary winds against the economy, then the inflationary bias of those additions of federal gov’t deficit-spending dollars may not be causing any inflation at all because it is vaporizing on impact.

Thanks for reading,