I have now re-read Chapter 8 of Reclaiming the State and this is what I think they say on International Trade, I plan to simplify it further. I have tried not to insert the anti-arguments, but I am not sure that I agree that “Sudden Stops” can only happen to poor countries. Also if the MMT people are right, then while the fiscal surplus/deficit is not a constraint on macro-economic policy, I am still to be convinced that the balance of trade isn’t! Also MMTers argue that the World Bank/International Monetary Fund/WTO will need to be refactored with new goals based on facilitating trade & development and ensuring that Trade can be financed. If collective/political action is required to ensure that international trade works, why not the EU as the first port of call. Anyway, here’s my notes. …

Anyway, here’s what I think they say.

Welfare Issues

  1. Wealth and well being are best measured by consumption.
  2. Imports are axiomatically accompanied by FX inflows and imports are part of consumption
  3. Imports are consumption items or capital goods, the latter create growth
  4. Exports suppress effective demand and the FX outflows compete with investment.

This is contrary to classic Keynesianism; here it is argued that imports are good, and exports bad whereas the alternative view that exports are an external augmentation of demand which creates growth, jobs and income.

Globally, imports = exports, therefore, there must be both surplus and deficit countries/currencies.


  1. A balance of trade deficit should cause a depreciation in the exchange rate. This does not always happen because of non-trade currency flows, the behaviour of which can be irrational.
  2. Currency depreciation should make exports more competitive, but they are demand led i.e demand is inelastic and thus a drop in export prices in the importing country does not necessarily lead to more demand.
  3. Currency depreciation should increase inflation but doesn’t seem to, but it does increase the domestic value of FX debts.

The classic “balance of trade” stabilisers don’t work which since they are inflationary would be bad, but it means that depreciation does not increase exports which is also bad.

Trade Finance

  1. The ratio of foreign owned public debt in foreign currency is important, this can be held in sterling or foreign currency.
  2. In the UK Sterling held public debt, including that held by overseas customers can be funded/serviced by QE but currency depreciation increases the domestic value of foreign currency debt.
  3. Growth in foreign currency debt can be sustained if the economy grows enough to cover the increase in servicing costs. It is thus a goal to have the interest rate below the rate of growth.
  4. Unsustainable private sector FX debt can be solved by corporate defaults.
  5. Investment capital is geographically immobile, hot money can leave as it chooses or can be regulated.
  6. There can be circumstances where no-one wants the importer’s sovereign currency at which point imports can’t happen. This will usually be as a result of non-investment capital flows, and this can be ameliorated by through public policy, specifically capital controls.
  7. These “sudden stops” have usually occurred in the developing world and MMT sees these as a real word constraint not a BoT constraint as the policy instruments, especially increasing exports or restricting imports may not be available to very poor countries. They are also more likely in a fixed exchange rate regime.
  8. The WTO/IMF/World Bank should be re-engineered to service development aid in a progressive manner and to provide global macro-economic liquidity.

Currency sovereigns need only worry about the level of public debt held in FX and irrational/speculative currency movements. i.e. this is the only monetary limit on international trade. In the UK, this FX debt is trivial and there are regulatory responses to “hot money” flows.

Denial of trade finance, an issue between sovereigns is rare and should be ameliorated by a new world trade regime.


According to my researches, and sourced from the Bank of England, the UK Govt. Foreign Debt holdings is about $22 bn. Source BoE pqqlaau.

ONS reports total foreign debt at £6.6 trillion.

The UK GDP is £2,320 bn, the public sector debt in foreign currency is under 1% of the GDP.

The UK Balance of Trade has been running a deficit for decades and the UK imports 48% of its food.

How much of the UK Gilt market is foreign owned? This site at the Debt Management Office would seem to apply. Is it really 28%? What is the unit of measurement? The UK public debt is according to Wikipedia, as of Q1 (the first quarter of) 2018, UK debt amounted to £1.78 trillion, or 86.58% of total GDP, at which time the annual cost of servicing (paying the interest) the public debt amounted to around £48 billion (which is roughly 4% of GDP or 8% of UK government tax income)

There is a financial services instrument called an FX Swap. This consists of reciprocal loans of stocks of currency. i.e. there is a promise to return the monies. In an FX trade, there is no promise to return the monies. I was exploring this as part of trying to understand how trade financing works.

Dave Economics , ,

5 Replies

  1. Just been to a presentation by James Meadway, who further explained his, “Not all Currencies are equal” slogan but also reinforced to me the seeming innocence of Trade Finance 4. Private Sector FX debt is to be solved by corporate defaults; this would include the UK banking groups whose exposure to dollar & renminbi is a liability that can’t be solved by printing money and whose defaults would be disastrous.

    It raises the question as to how one unwinds the current FX debt vulnerability.

  2. What do you plan on paying the foreign parties with? They have to receive currency that is useful in their own country, i.e. a hard currency. Imagine if you were a Chinese exporter, would you take payment in non convertible currency?

    In order for MMT to work the United States would have to become an autarky. We would have to mine all of the raw materials, we would have to convert them into manufactured goods in our own factories and we would somehow have to continue exporting intellectual property and high technology.

    If you have no hard currency and you still want imports you have to pay in gold, oil, natural gas, diamonds ect…

    1. My article is meant to be an explanation of the theory, and not a positive polemic.

      The ‘not all currencies are equal’ insight means that the US in particular can import in exchange for dollars i.e. its own currency and thus your predictions about the need for barter trading are excessively pessimistic.

      Otherwise MMT argues that exporters lend importers the currency to pay the import costs; this of course is intermediated by a market. We should recognise that the import transactions are often intra-company transfers.

      The MMT insight that every country will be in surplus or deficit needs to be taken account of in determining policy. i.e. that neither condition is good or bad.

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