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"In very brief his simplified thesis: One country's public policy decision to subsidize export-led growth requires another country's public policy decision to a

by rsync 9y ago

"In very brief his simplified thesis: One country's public policy decision to subsidize export-led growth requires another country's public policy decision to also subsidize that growth through import consumption and debt. The accounts must balance." Isn't that only necessary in nominal currency ? That is, theoretically a country could introduce some factor that caused their currency, held by their trading partner, to increase in value to match their new export output ? The balance sheet would pencil out nominally, but there could still be an imbalance relative to some other value ... Isn't this difference between nominal and real values on the balance sheet what causes the tension between what dollar assets the Chinese hold vs. what they set their currency to vs. what our trade balance is ?

SilasX 9y ago
The claim was that debt must go up 1-to-1 with capital inflows and that you can't regard the inflows as good without also praising the necessarily-corresponding debt. It seems all these excellent answers actually agree that it's not true unless the money is deposited and re-lent. That's certainly likely in practice, but far from the implied "Oh silly layman, foreigners can't invest in your business without your country's debt going up, it's physically impossible."
- ryandamm 9y ago
  It's true in practice, because of the practical ways in which large-scale capital flows are manifested. The stronger point, that it's true in all cases, is made by Pettis somewhere deep in his blog... and it boils down to the idea that other edge cases diffuse the allocation of debt, investment, capital -- but the identity must still hold true at the level of abstraction of the nation / currency area. Those edge cases tend to look starker (and harder to explain) in toy models, though. I can't really do his argument justice, though. Sorry! I'm simply nowhere near sophisticated enough. But... the case where it's not re-lent, there is still exchange-rate pressure, but the 'missing' capital (say it's not stuck under a mattress, but is instead burned in a furnace) effectively deflates the remaining capital in the economy. The identities still balance. Again, the exact allocation of debt etc doesn't matter to the identity, and it's easy to construct a situation where the capital somehow disappears, or the underlying mechanism (or lack of mechanism) obscures the overall identity. This all works because currency is effectively meaningless, it's a derivative of actual 'value' in an economy, as measured by the total output of goods and services. I'm going to stop here before I butcher it any worse; but if you find this at all interesting, Pettis is a much better source than I.

by rsync 9y ago

SilasX 9y ago

The claim was that debt must go up 1-to-1 with capital inflows and that you can't regard the inflows as good without also praising the necessarily-corresponding debt. It seems all these excellent answers actually agree that it's not true unless the money is deposited and re-lent. That's certainly likely in practice, but far from the implied "Oh silly layman, foreigners can't invest in your business without your country's debt going up, it's physically impossible."

ryandamm 9y ago
It's true in practice, because of the practical ways in which large-scale capital flows are manifested. The stronger point, that it's true in all cases, is made by Pettis somewhere deep in his blog... and it boils down to the idea that other edge cases diffuse the allocation of debt, investment, capital -- but the identity must still hold true at the level of abstraction of the nation / currency area. Those edge cases tend to look starker (and harder to explain) in toy models, though. I can't really do his argument justice, though. Sorry! I'm simply nowhere near sophisticated enough. But... the case where it's not re-lent, there is still exchange-rate pressure, but the 'missing' capital (say it's not stuck under a mattress, but is instead burned in a furnace) effectively deflates the remaining capital in the economy. The identities still balance. Again, the exact allocation of debt etc doesn't matter to the identity, and it's easy to construct a situation where the capital somehow disappears, or the underlying mechanism (or lack of mechanism) obscures the overall identity. This all works because currency is effectively meaningless, it's a derivative of actual 'value' in an economy, as measured by the total output of goods and services. I'm going to stop here before I butcher it any worse; but if you find this at all interesting, Pettis is a much better source than I.