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Edition 01 :08 September, 2013.
(VERSION EN FRANÇAIS PAS DISPONIBLE)
Monetary reform
papers by L.F. Manning published at http://www.integrateddevelopment.org.
Chicago Plan Revisited Version II: An insufficient
response to financial system failure.
Comments on the IMF (Benes and Kumhof) paper “The
Chicago Plan Revisited”.
Debt bubbles cannot be popped : Business cycles are policy inventions.
DNA of the debt-based economy.
The end of capitalism : Systemic collapse.
General summary of all papers
published.(Revised
edition).
How to create stable financial systems in four complementary
steps. (Revised edition).
How to introduce an e-money financed virtual minimum wage
system in New Zealand. (Revised edition) .
How
to introduce a guaranteed minimum income in New Zealand. (Revised edition).
Increases in export income from price rises abroad are not
growth.
Interest-bearing debt system and its economic impacts.
(Revised edition).
Manifesto of 95 principles of the debt-based economy.
The Manning plan for permanent debt reduction in the national economy.
Measuring nothing on the road to nowhere.
Missing links between growth, saving, deposits and
GDP.
Savings Myth. (Revised edition).
There’s no such thing as affordable housing.
Unified text of the manifesto of the debt-based
economy.
Using a foreign transactions surcharge (FTS) to manage the
exchange rate.
What about a tax cut for the poor?
(The
following items have not been revised. They show the historic development of
the work. )
Financial system mechanics explained for the first time. “The Ripple
Starts Here.”
Short summary of the paper The Ripple Starts Here.
Financial system mechanics: Power-point presentation.
This
work is licensed under a Creative
Commons Attribution-Non-commercial-Share Alike 3.0 Licence
INCREASES IN EXPORT INCOME FROM
PRICE RISES ABROAD ARE NOT GROWTH
By
Email manning@kapiti.co.nz
Increases in overseas prices
do not themselves increase output. Instead, they tend to increase inflation. The
perceived increase in nominal GDP is not growth as is universally assumed in
orthodox economics though the additional deposits can, in theory, be used to
stimulate economic growth.
In
In the Fisher equation of
exchange MV = PQ = nominal GDP where:
M= money supply,
V = speed of circulation of
M,
P= price level
Q= output.
Assuming V is constant,
increases in commodity prices P increase the money supply M, not output Q.
There are two separate
elements to consider in connection with changes in export prices. The first
relates to domestic incomes. The second relates to the current account.
Domestic Incomes:
The primary effect of the
increase in deposits resulting from higher export prices is to increase
domestic purchasing power in the absence of the corresponding exported
production.
The exporter and the exporting
nation have more money, but the goods to spend it on are lost to the domestic
economy because they have been alienated abroad.
Whether any residual surplus
deposits (such as increased farmer dairy payments) create inflation depends on
what those receiving the deposits do with them.
If the deposits are used to
repay debt they are removed from the financial system and there is no
inflation. If they are used for domestic capital investment in the productive
sector they will increase future production capacity without inflation.
Ideally, where the exporting country has a current account deficit, that
productive investment should take place in the exporting country. To the extent
that productive investment is directed into foreign imports (such as machinery
and other capital equipment) the process tends to bring the current account (of
a country with a current account surplus) towards balance.
If, however, the surplus
deposits are used for domestic consumption they will cause an immediate
increase in domestic inflation in the exporting country.
The remaining and principal
use of the surplus deposits in aggregate in a country with a current account surplus,
is to re-invest them abroad, eliminating any inflation potential and building
future cash surpluses that lead to yet more foreign investment.
If exporting countries with
current account surpluses do not do this they will be subject to domestic
inflation. Many invest abroad.
Current account:
When export prices rise, there
is an increase in domestic deposits on the exporting country’s current account.
This is the current account equivalent of a capital transfer from abroad. This
is shown in the charts (cases 1-6) below.
The banking system holds the
foreign currency reserves received from the trade surplus and credits the
exporter’s account with a corresponding domestic currency deposit as discussed
above.
The secondary effect of the
increased export income is to reduce the current account deficit
if there is one, and increase the current account surplus if it is already in
surplus.
In the case of surplus
countries, all or part of those excess foreign currency balances are sold to
investors to buy foreign investments, creating compensatory offshore
investment. That reduces the surplus deposits in the exporting country and
increases foreign ownership of the debtor (importing) country’s economy.
The foreign investment, in
turn, offsets the domestic inflation potential arising from surplus domestic
deposits in the exporting country as discussed above.
Unless the exporter is paid in
a reserve currency (like the $US) the banks
(and, in particular the central bank) will not usually wish to hold
large foreign currency balances earned from the excess exports.
The re-investment of surpluses
typically determines the exchange rate.
The Charts.
The charts show what happens
when there are changes in export prices and the exchange rate. To keep them
simple they refer only to domestic incomes in the exporting country though they
could be extended to show the effect of subsequent foreign investment of the
surplus deposits. The vertical parallel lines in the chart represent the
foreign exchange interface.
In case 1 below the
hypothetical exchange rate is 0.50:1 ( 1 foreign currency unit = 2 exporting
country currency units) and the foreign sale price is the same as the domestic
price in domestic currency terms. The potential domestic inflation is the
amount of change in the total trade balance.
In case 2, when international
commodity prices (the ‘terms of trade” ) hypothetically double at a constant
exchange rate, the potential domestic inflation increases with the increase in
the trade balance.
In case 3, when the exchange rate hypothetically doubles while the
foreign currency sale price of exports remains constant as in case 1 the
potential domestic inflation halves compared with case 1.
In case 4, when both the terms
of trade and the exchange rate hypothetically double, the change in the terms
of trade offsets the change in the exchange rate leading to the same outcome as
in case 1.
In case 5, when the exchange
rate hypothetically halves compared with case 1, the potential domestic
inflation doubles.
In case 6, when the exchange
rate hypothetically halves compared with case 1 and the terms of trade at the
same time double, the potential domestic inflation quadruples because the
effects have to be added together.
The actual economic outcome
depends on what the deposit holders do. The orthodox response, largely borne
out by empirical evidence, is that the financial surpluses are invested
offshore, such as, for example, in foreign bonds, equities and direct foreign
investment.
CASE 1 : The foreign sale price is the same as the domestic price in
domestic currency terms.
[ The double line in the centre
is the foreign exchange interface.]
DOMESTIC (EXPORTER) FOREIGN (IMPORTER)
(2 domestic
currency units = 1 foreign currency unit)
Exchange rate 0.50 1.00
__________________________________________________________________
Local production
price exporting
country’s currency
units 5.00
Product Exported
Price paid by importer
in his foreign currency 2.50
__________________________________________________________
Bank Reserves - 5.00 +
2.50
Deposit in
Exporting country 5.00
Repay production
Credit: deposits
In exporting country -5.00
NET Change in
Domestic deposits 5.00
Inflation 5.00
domestic currency
units
CASE 2 : Compared with case 1 there is a 100% increase in the foreign
sale price. (International commodity prices hypothetically double at a constant
exchange rate.)
[ The double line in the centre is the foreign exchange interface.]
DOMESTIC (EXPORTER) FOREIGN (IMPORTER)
(2 domestic currency
units = 1 foreign currency unit)
Exchange rate 0.50 1.00
__________________________________________________________________
Local Production
Price in exporting
Country’s currency,
as in case 1 5.00
Product Exported
Price paid by
Importer in his
foreign currency
(doubled with respect
to case 1) 5.00
Bank Reserves -10.00 + 5.00
Deposit in
Exporting country 10.00
Repay production
credit: deposits in
exporting country -5.00
NET Change in
Domestic deposits 10.00
Inflation 10.00
domestic currency
units
CASE 3 : Compared with case 1 : the exchange rate hypothetically doubles
while the foreign currency sale price of exports remains constant.
[ The double line in the centre is the foreign exchange interface.]
DOMESTIC (EXPORTER) FOREIGN (IMPORTER)
(1 domestic currency unit =
1 foreign currency unit)
Exporting country’s
Exchange rate
doubles in comparison
with case 1. 1.00 1.00
__________________________________________________________________
Local Production
Price in exporting
Country’s currency,
as in case 1 5.00
Product Exported
Price paid by
Importer in his
foreign currency
(doubled with respect
to case 1) 2.50
Bank Reserves - 2.50 + 2.50
Deposit in exporting
country 2.50
Repay production
Credit: deposits
In exporting country -5.00
NET Change in
Domestic deposits 2.50
Inflation 2.50
domestic currency
units
Case 4. Compared with case 1, showing a 100% increase in the sale price
with the exchange rate doubled.
[ The double line in the centre is the foreign exchange interface.]
DOMESTIC (EXPORTER) FOREIGN (IMPORTER)
(1 domestic currency
unit = 1 foreign currency unit)
Exporting country’s
Exchange rate
doubles in comparison
with case 1. 1.00 1.00
__________________________________________________________________
Local Production
Price in exporting
Country’s currency,
as in case 1 5.00
Product Exported
Price paid by
Importer in his
foreign currency
(doubled with respect
to case 1)
5.00
Bank Reserves - 5.00 + 5.00
Deposit in
Exporting country 5.00
Repay production
credit: deposits
in exporting country -5.00
NET Change in
Domestic deposits 5.00
Inflation 5.00
domestic currency
units
CASE 5 : Compared with case 1, the exchange rate is halved.
[ The double line in the centre is the foreign exchange interface.]
DOMESTIC (EXPORTER) FOREIGN (IMPORTER)
(4 domestic
currency units = 1 foreign currency unit)
Exporting country’s
Exchange rate
halves in comparison
with case 1.
0.25 1.00
__________________________________________________________________
Local Production
Price in exporting
country’s currency,
as in case 1 5.00
Product Exported
Price paid by
I\importer in his
foreign currency
(halved with respect
to case 1) 2.50
Bank Reserves - 10.00 +
2.50
Deposit in exporting
country 10.00
Repay production
credit: deposits in -5.00
exporting country.
NET Change in
Domestic deposits 10.00
Inflation 10.00
domestic currency
units
CASE 6 : Compared with case 1, the exchange rate is halved and the
foreign sale price doubles.
[ The double line in the centre is the foreign exchange interface.]
DOMESTIC (EXPORTER) FOREIGN (IMPORTER)
(4 domestic
currency units = 1 foreign currency unit)
Exporting country’s
Exchange rate
halves in comparison
with case 1.
0.25 1.00
__________________________________________________________________
Local Production
Price in exporting
country’s currency,
as in case 1 5.00
Product Exported
Price paid by
Importer in his
foreign currency
(doubled with respect
to case 1) 5.00
Bank Reserves -20.00
+ 5.00
Deposit in
exporting country 20.00
Repay production
Debt : deposits
in exporting
country -5.00
NET Change in
Domestic deposits 20.00
Inflation 20.00
domestic currency
units
"Money is not the key that
opens the gates of the market but the bolt that bars them."
Gesell, Silvio, The Natural
Economic Order, revised English edition, Peter Owen,
This work is
licensed under a Creative
Commons Attribution-Non-commercial-Share Alike 3.0 Licence.