Wednesday, May 9, 2012

China may understand MMT, & Turkey & Iran may too .

Our leaders' embargo on Iran may fail? Does that signal a return of the Silk Road?

Turkey Exports “Massive Quantities Of Gold” to (private buyers in) Iran and Arab Spring Nations.

The increase in trade with Iran comes as sanctions make it harder for trading partners such as Turkey, India and China to pay in dollars and euros.

Iran said in February it would accept payment in any local currency or gold.

Reuters report today that Iran is accepting payments in yuan for some of the crude oil it supplies to China, the Iranian ambassador to the United Arab Emirates said on Tuesday. "Yes, that is correct," Mohammed Reza Fayyaz told Reuters when asked to comment on an earlier report in The Financial Times.

The newspaper cited unidentified industry executives in Beijing as saying most of the oil that goes from Iran to China is handled by the Unipec trading arm of Sinopec China's second-largest oil company, and through another trading company called Zhuhai Zhenrong.

Fayyaz also confirmed that Iran was spending the currency on goods and services imported from China.

(h/t to @ImplodeOMeter)

23 comments:

Leverage said...

China has been using MMT the last years a lot. Off course they understand. They also understand the problem of inflation ("the only limit").

What I'm not so sure is if they understand the problem of spending good money on bad investments, corruption, etc. I think there are some concerns at central government high stances about this, not sure if they can fix or if there is interesting at fixing (corruption gets up to there off course).

This is where check & balances and democratic control are way superior. MMT without true democracy is half-backed system and dangerous (in USA there is some experience with this too, MMT to finance wars of the plutocracy, etc.).

Anonymous said...

If China was "using MMT" then they wouldn't be so obsessed with accumulating USD financial assets.

If anything they realise the government can spend all it wants, but don't draw the MMT conclusion that out-of-control trade deficits are fine (and present a fantastic 'free lunch' opportunity for vast government deficit spending, as MMT does).

Perhaps many US politicians think the same thing. The economic orthodoxy is that protectionism is really bad policy, so instead of going down this road they seek to reduce the CAD by cutting the deficit and bringing in supply side reforms.

Tom Hickey said...

Leverage, my reading is that corruption is an economic problem that is knotty because it is a political problem and also a social problem. Corruption is endemic in some cultures and it is very difficult to eradicate.

Even it cultures where it is not a traditional cultural problem it can become one. The US financial sector is one of them, as Bill Black and others have established. It is now firmly entrenched here in the US and it will be extremely difficult to root out as a result.

China, India, etc., have a much more traditional (institutional) problem with corruption than the US does, and look at what the consequences have been here.

Corruption in the US tends to be restricted to the top level, where it is much more dangerous, whereas in many other countries it is much more pervasive, hence, more or less accepted culturally.

Everyone knows that to get anything done, a bribe has to be paid. This makes doing business abroad for US firms dicey, because paying bribes abroad is illegal here.

Tom Hickey said...

Anonymous, China gets a great deal from ramping up exports to the US that are largely manufactured in China with foreign investment and foreign knowledge and technology. This is allowing China to acquire state of the art industrial capacity without have to reinvent the wheel. They can jump to the head of the pack easily this way. There is definitely method in this "madness."

Leverage said...

Anonymous,

My take on it is different and I think a lot westerns are missing the point: China is accumulating real capital and wealth.

Accumulating real capital and wealth is not consuming goods, these sort of "free lunchs" are short lived always (short lived in historical terms, meaning that can go on for a few decades, sometimes even centuries, but not forever) and the Chinese know (Opium Wars are a reminder of how these situations end up). Accumulating real capital is building industry, infrastructure and knowledge, getting education standard up, etc.

They couldn't buy it with renminbis because no one wanted renminbis a few yeas ago outside of China, so that's why amongst other things they needed USD balances. Building this relationship they have accumulated a lot capital, now that they don't need so much (they need it though, there are no safety nets in China, that's why savings are important there, also a major percentage of the population still is very poor) they are starting to use renminbis to buy stuff outside, necessary stuff they can't produce at home like oil as the OP says. they also are starting to move towards a deficit nation.

Nations like Germany and Japan are irrational about this, but not so much (I've an other theory for these too, may post later), but China not much. Chinese like spending a lot, but they needed (and still need) to build real capital first, and that's what they are doing.

Roger Erickson said...

Corruption tracks the ratio of trust in self vs community protection. Any nation where corruption is endemic is, by definition, lacking institutional trust & solidarity. It's therefore closer to the edge of dissolution.

This gets back to a orthogonal point that Warren Mosler often makes about money. For stability, it matters less what form of capital people accumulate in. What matters more is what form of capital they deem safest to "save" in.

Safest deposit box is ultimately a stable democracy.

Tom Hickey said...

Roger "Safest deposit box is ultimately a stable democracy."

And that means an actual democracy instead of camouflage for corruption.

paul meli said...

"…if China was "using MMT" then they wouldn't be so obsessed with accumulating USD financial assets…"

Yeah, they could just stop selling stuff - consume it themselves… Oh, wait…

Райчо Марков said...

Tom, I share your view regarding China.
Interested to hear your theory on Germany and Japan.

Leverage said...

Tom, exactly, it all is very rational if you take the point of view of the one calling the shoots and getting the profit.

Corporations, CEO's and shareholders, in a 'race to the bottom by falling rate of profits' system need to exploit any possibility of operating cuts. Also there is new markets to exploit etc. So it only makes sense in the short term to export capital because is not worth worrying about 20 years from now if you can't survive tomorrow.

Chineses, well, they gain a lot with this as has been already said. plus they have a much more tight control of capital (in this their system may be more stable) and ability to print and target money to different economic sectors (something western central banks can't do), so actually can reduce the natural frictions of capitalism (accumulation and falling rates of profits).

banks love it: financial globalization means more arbitrage opportunities, more loaning at better rates etc. Globalization has saved banks since decades ago, it was a dead business model with falling profits and then boom, saved the day of a sector which was becoming useless (more with development of corporate capital markets).

And policians... well, they are politicians, serving their masters, their own interests or being morons, you pick.

Tom Hickey said...

Germany, Japan, and the UK government and banks have a much different relationship than in the US. The relationship is much closer in those countries than the US. China, too. The US is heading more that direction now than it has in the past figuring it has to compete globally with them.

JK said...

Tom,

How does what's been said here about China relate to the MMR criticism of MMT (and Mosler) that a current account deficit isn't necessarily a 'net benefit'?

While we get cheap goods, China is getting capital formation and increasing development.

Is the MMT position that.. while that may be true, the U.S. could likewise be getting capital formation as well if it understood and implemented MMT proposals?

Any thoughts on this?

Anonymous said...

"...the U.S. could likewise be getting capital formation as well if it understood and implemented MMT proposals?"

I think that this is beautiful, and true. We've got excess capacity provided to us through demand leakages. This is bad if the gov't and citizenry don't understand that we can fill this gap. Let's set up incentive systems (maybe something along the lines of Roche's Innovation initiative) and put that excess capacity to work to build some awesome stuff.

China can export plastic crap to us. We can use our excess capacity to do better things.

Anonymous said...

and the beautiful thing is, the more the government deficit spends, the larger the current account deficit grows! Free lunch all the way! What could possibly, ever go wrong?!

JK said...

Those of you that choose to post anonomously, do us all a favor and make up a user name to use. If you don't want your comments tracked back to you (sort of), use a new name each time. It's much easier to respond to your comments you if you do.

Tom Hickey said...

JK,

While China is getting US capital. technology and management experience, the US is getting low cost labor and access to the fastest growing and largest market in the world. This symbiotic relationship is called Chimerica. Both countries are pleased with it on balance, although the Chinese and US military complexes distrust each other and are preparing for inevitable war.

Roger Erickson said...

@JK "How does what's been said here about China relate to the MMR criticism of MMT (and Mosler) that a current account deficit isn't necessarily a 'net benefit'?"

It all depends on the profile of uses exports/imports are put to.

An exporter may well be building up national expertise - but not guaranteed.

Similarly, an importer MAY be passing off time spent on things it already knows how to do. The main benefit is policy freedom to dedicate output to even better things. Whether it actually does, or instead lets Control Frauds steal & sequester too much .... well, that's also a policy issue.

MMT exposes the options. Electorates & policy staff still have to formulate & execute policy.

It ain't over until the Fat Lady isn't a Systemically Dangerous Institution.

y said...

"Chinese and US military complexes distrust each other and are preparing for inevitable war."

So, no problem with letting the Chinese hold trillions of US financial assets then.

Tom Hickey said...

"So, no problem with letting the Chinese hold trillions of US financial assets then."

That's actually a protection against open hostility. The deeper the interdependence of Chimerica, the more powerful the interests profiting from it in both countries will be, and that will serve to counter the hard-liners in the political and military sphere of both countries.

Economic integration and interdependence is a very good thing for preserving the peace. That's why fraying the relationship is foolish.

Mario said...

I stumbled upon this article and I thought you guys might appreciate it as he gets the accounting identities. I am not sure if I agree with his conclusion regarding April’s surplus BUT I am just sooooo glad that the discussion is on the issues and framed in the proper ways.

http://jerrykhachoyan.com/is-the-treasurys-surplus-in-april-a-good-sign-for-the-economy/

Quote from the article:

if the Treasury (public sector) had surplus, someone had to have run a deficit. Presuming that the trade deficit (Foreign account) did not decrease significantly in April (We just got the data for March today and the trade deficit actually increased which likely means no jump in April), this must mean that the Private Sector as a whole, ran a net deficit. All that means is that the amount of Net Private Savings (Savings-Investment) went down.

Mario said...

Economic integration and interdependence is a very good thing for preserving the peace. That's why fraying the relationship is foolish.

that's exactly what Adam Smith said, and is a thought taken straight out of the enlightenment.

Mario said...

How does what's been said here about China relate to the MMR criticism of MMT (and Mosler) that a current account deficit isn't necessarily a 'net benefit'?

JK, the infrastructure those exports create for China America had 50 years ago. We can outsource those jobs now and have our neighbor do that for us. That is the net benefit for America.

However that is only HALF of the equation for America. The other half is that America needs to get busy creating the 21st century infrastructure for the world to follow. IMHO this means green technology, space technology, expert service skills (law, accounting, medicine, etc.), computer tech., and of course EDUCATION, etc., etc.

Let China build plastic toys for the world and benefit from doing that. We can and MUST take on the real challenge, the 21st century challenges, and keep pushing the envelope in progress for the entire world to follow. We have no excuses and all the resources to do that now....except for all the various false and non-sensical objections which we all know too well about here.

That's my take on the exports as a net benefit story, etc.

Tom Hickey said...

@ Mario

Right, at present the US is getting only half the benefit. The benefit in real terms is the exports of real stuff it receives, meaning it doesn't have to produce this stuff, which rather low on the economic ladder. But the US is not taking advantage of the freed up resources by redirecting them toward higher use and purpose, which it has the knowledge, capital, technology, education, etc. to accomplish. It's a squandered opportunity that is setting the country back instead. Foolish beyond belief.

It's as though America has decided it is tired of leading the way and asking someone else to take over the job.