Home > Uncategorized > Links. Dissecting damp, drizzly nonsense about financial markets

Links. Dissecting damp, drizzly nonsense about financial markets

This weeks ´The Economist´ welcomes the election of a center right president in Argentina, mainly because this enhances the chances that Argentina will become part of the international capital market, again. Which, supposes The Economists, will not necessarily work wonders (it carefully does not state that) but which seems to be a kind of moral imperative for civilized nations. The Economist is wrong about this last idea.

  1. Josh Mason dissects a comparable article from the Financial times (below, an excerpt)
  2. Richard Werner dissects comparable nonsense from scientific articles and many, many famous economists, stating (in a somewhat Schumpeterian way) that when a country has control over its fiat money banking system, which is necessarily the case with fiat money national banking systems, countries do not need foreign investment to finance domestic investments. Banks can do it by creating credit (short-term day-to-day financing of international trade flows is another matter, M.K.).
  3. A whole bunch of economists show in a ´consensus narrative´ piece on Voxeu that the kind of capital flows (and sudden stops!) enabled by the not yet a national state Euro Area contributed mightily to the financial and especially the Euro crisis


  4. Slightly older:the IMF argues that non performing loans in Italy should not be refinanced and served at all costs (for instance by evicting 25% of all house owners, as might happen in Greece – M.K.!)
  5. A common theme of all these articles is ´stock/flow consistent´ thinking: (refinancing) legacy debts may lead to large liquidity problems which can be exacerbated by failing institutions. But that´s only one of the possible problems. Interestingly, this line of thinking was shared by all participants of last weeks ECB shadow council meeting (of which I´m a member), from left to right. And remember: the definitions of left and right differ quite a bit between countries, it really is a hodge podge of people. This consensus might well be due to the fact that despite their differences all of the participants are well versed in ordinary business economics, which more or less exists of analysing flows and stocks, i.e. profit and loss statements and balance sheets. This contrary to ´economics´ as taught at universities which as far as I know still treats such vital tools of economic analysis with contempt.

The promised excerpt:

The top of the front page in today’s Financial Times shows Steve Forbes’ scowling face with the caption, “We want our money!” Really, that should be there every day — it could be their new logo.

Further down the page, the big story is the election of the opposition candidate Mauricio Macri as president of Argentina. I’ll wait to see what Marc Weisbrot has to say before guessing what this means substantively for the direction of the Argentine state. What I want to call attention to now is the consistent theme of the coverage.

The front page headline in the FT is “Markets cheer Argentina’s new order”; the opening words of the article are “Investors hailed the election of Mauricio Macri….” After mentioning his call for the leaders of Argentina’s central bank to step down — the apparent unobjectionableness of which is evidence on the real content of central bank “independence” — the first substantive claims of the article are that “markets reacted positively” and that “Macri has promised to eliminate strict exchange controls” — evidently the most important policy issue from the perspective of the FT reporter.

Over the fold, we learn again that “Investors yesterday cheered the election of Mauricio Macri”; that “dollar bonds issued by Argentina … extended their winning streak”; and that “markets have hoped for an end to ‘Kirchnerismo’.” The only people quoted in the article other than Macri himself are three European investment bankers. One says that “Macri understands what the country needs to do to regain the confidence of international investors and get the country back on its feet” — presumably in that order. Another instructs the new government that “Argentina must normalise relations with the capital markets and start attracting the all- important foreign investors”.

The accompanying think piece explains that among the “most pressing issues” for Macri are that “the country is shut out of international markets by its long court case with holdout creditors” and that “the economy suffers from a web of distortions, including energy subsidies that can shrink a household’s monthly energy bill to the price of a cup of coffee.” (The horror!) It emphasizes again that Macri’s only firm policy commitment at this point is to remove capital controls, and suggests that “Argentina will need to have recourse to multilateral financial support.” The conclusion: “The biggest area where Macri needs to effect change is the investment climate. Investors have cheered his rise … but Mr Macri’s job is to convert Argentina into a destination for real money investment rather than hedge fund speculation … a decisive change for a country that … is unique in having lost its ‘rich nation status’.”

So that’s the job of the president of Argentina, making the country a destination for real money. Good to have that clear!

Now, you might say, if you don’t want to read every story through the frame of “Is it good for the bondholders,” then why are you reading the FT? Fair enough — but the FT is a good newspaper. (The Forbes story is fascinating.) Anyway, it’s worth being reminded every so often that in the higher consciousness of the bourgeoisie, nations and all other social arrangements exist only in order to generate payments to owners of financial assets.


The question I’m interested in, though, is the converse one — are the bondholders good for Argentina?


  1. Blissex
    November 30, 2015 at 8:37 pm

    «when a country has control over its fiat money banking system, which is necessarily the case with fiat money national banking systems, countries do not need foreign investment to finance domestic investments. Banks can do it by creating credit (short-term day-to-day financing of international trade flows is another matter, M.K.)»

    Yes, that’s one of those “damp, drizzly nonsense” notions because only when domestic investment does not require imports it can be financed by redistribution via explicit taxation, or implicit taxation like seignorage (“creating credit”).

    Lucky indeed is the nation that can increase net domestic investment without any significant increase in net imports and that can redistribute using “seignorage” without creating any inflation as there are unused domestic resources. Too bad they are so few.

  2. December 2, 2015 at 5:44 am

    MK, thanks for the link to Richard Werner. I’ve been looking for a citable source for the simple point that foreign investment is not necessary to fund domestic activity.

    Indeed the Werner paper is the clearest and most decisive I’ve seen on the more basic question of whether commercial banks create credit out of nothing. Excellent, thanks.

    Blissex, there’s more to domestic activity than imports. And if domestic activity is below capacity (true for most economies these days, especially in Europe) then inflation is not a danger. And the “implicit taxation” you seem to disapprove of is standard procedure already. Read Werner’s article.

  3. December 2, 2015 at 5:39 pm

    MK, thanks for the Werner link from me too. What astounded me was his point that the ‘credit creation’ theory of banking is not new but dates back at least to 1856. I looked in his references for JustaLucky’s [real] Nobel laureate Frederick Soddy, to no avail; but banker MacLeod (1856) features prominently in Soddy’s “Wealth, Virtual Wealth and Debt: The Solution of the Economic Paradox” (1926, 1983) – as does art tutor John Ruskin’s “Unto This Last” (1862): their defining money as debt in almost exactly the same way.

    Would that EKH as at ‘Tower of Babel’ would stop haranguing professional economists despised as Heterodox by the self-styled Orthodox, and start reading honest amateur economists like Cobbett, MacLeod, Ruskin, Soddy, Stamp, Chesterton and Schumacher who got so near the mark their adversaries won’t even mention them.

    • December 2, 2015 at 11:45 pm

      Yes I also meant to mention the credit creation theory being 150 years old. Amazing.

      I’m also currently reading Claude Dillinger’s Unnatural Science (see right column). He recounts many other examples of economists arbitrarily changing ideas like fashion accessories.

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