I also think you're seeing 4D chess when the change of it actually being such is pretty slim.
On to some points you raise:
> Tariffs reduce global dollar supply
How so? The US can still print dollars. US banks can still create them out of thin air in the form of loans or derivatives. In fact, there might be a reduction in demand of dollars if any of:
- the EU, India, or China introduce a tariff on US services
- China, Japan, and South Korea close a trade agreement, which would likely denominated in Yen or Renminbi
Furthermore, supply would in fact be increased if the Fed caves in to Trump's demand to decrease interest rates - forcing their hand is one of his stated goals, isn't it?
> a reduction in supply will strengthen (the dollar)
It's probably too soon to tell, but we're seeing the opposite so far, where the USD has lost about 1% vs GBP, 2.5% vs EUR, 2.8% vs YEN, 0.5% vs RNM. It even managed to lose 0.5% vs RUB
The US has managed to do one thing in the last week: piss off just about everyone else. China is on the warpath, and it has already built stronger ties with Japan and S. Korea. Canada and the EU is imposing counter tariffs. Mexico and India are quiet but probably not just sitting back.
In my mind, chances are that this move will actually weaken the position of the USD as a reserve currency; it's a position built on military might and trust. The former is still there for the time being, but the latter is burnt for decades to come.
> the reserve currency issuer to [...] run a trade deficit
Once services are factored in, the USA is actually running a cash flow surplus, e.g. with the EU (not sure on a global scale, but I wouldn't e surprised). It also attracts 70% of the world's investments, way more than its actual economic weight. I wouldn't be surprised if foreign direct investment into the US went significantly down as a result of last week's self imposed foot shooting
> Tariffs provide an income stream for the US
From what I heard, the chilling effect on consumer spending and company investments is such that tariffs are historically a fiscal net negative. They may provide the numbers - on paper - for the Trump administration to slash taxes on the wealthy, but if true over the medium term US debt is going to baloon like never before. Having been born in a country with over 120% GDP in debt, I see the effects on a yearly basis, where administrations are at the mercy of the markets for anything they wish to do, and constantly teetering on the edge of default. This would be even more complicated for the USA: Italian public debt is owned by Italians who are among the most effective savers on the planet; US individuals are among the most indebted, so US sovereign debt is owed to foreigners
> If the US can do this correctly
doesn't seem to be the current path
> US is subordinate to the BRICS nations as a monetary union
They would have to agree among themselves first. I don't see that happening anytime soon. China and Russia have long-running territorial disputes, and the latter is on the edge of collapse due to the war in Ukraine. Same for China and India. And when it comes to Brazil, the USA seems to be hell bent on painting China as a more reliable business partner than themselves.
> Ever heard of the solidus, denarius, or drachma?
I have. These currencies however did not fall due to financial collapse, but due to good old military conquest (by the Romans and the Barbarians respectively)
> policymakers seem content with sacrificing the market and the near term health of the economy for the long term continued global dominance of the currency
This doesn't fit with Trump's character profile: transactional, short-termist, distrustful, narcissist. He sounds like he wants it all, and wants it now at whatever cost to others. Doesn't sound like he's getting it tho.
The US only prints domestic dollars either through fiscal (Treasury) or monetary (The Fed) mechanisms. In the case of the Fed, they simply grant license to the domestic banks to issue money in the form of loans, (a mortgage is newly printed money,) and so relies on domestic demand for its creation. The Treasury has a more direct ability to print as in the "stimmys" during covid. Both of these are domestic dynamics.
If you don't already understand it, have a look at how the Eurodollar works. (Eurodollar University on Youtube is a good primer.) In this essay, I'm mainly talking about the Eurodollar system, i.e. US dollar debt owed by non US entities to non US banks. This dynamic represents strong and persistent demand for US dollars outside of the US. There is also strong and inelastic demand for dollars to buy oil (petrodollar). These two systems combine to create the inelastic ex-US dollar demand I cited in the essay.
Tariffs are a tax. The main mechanism by which most nonUS entities get dollars is in trade with the US. If you want less of something, in this case trade, tax it. So the outflowing supply of USD to ROW is decreased against relatively inelastic demand -> dollar strength. Combine this with Triffin's observation that the reserve currency issuer who uses the reserve currency domestically must by definition run a trade deficit in order to supply dollars to ROW (while also desiring a trade balance or surplus to keep its currency strong and stable) and you can see how the nonlinear dynamics of this international money flow can create surprising outcomes like those I argue for in the note.
Many trillions of US debt is held by foreign entities. In the short run, ROW can get plenty of $$ without worrying about less trade. It seems as that is case as dollar in weakening and treasury interest rates are rising.
Great to see you back Ken! I'm just wondering when we move onto a Phase 2 or 3 with capital controls and how these might be implemented. This is a definite Bull in a China shop moment.
"This will do two things; it will reduce the seigniorage ..., and it will reduce dollar demand"
It will also do a third thing: It will reduce the supply of dollars. When nations abandon the dollar, the change will be (counter-intuitively) deflationary.
Most dollars originate at private banks, as loans. If the world stops holding dollars, it means companies and nations stop borrowing dollars from banks. When you pay off outstanding loans, the dollars will stop existing.
Abandonment of the dollar will cause its value to rise, not fall.
Super interesting analysis of the underlying dynamics that could be unfolding. My only observation would be that the international monetary system is so complex and intertwined and the rate of change brought on by this administration so fast that the actual medium and long term implications seem extremely difficult to predict. Just subscribed and look forward to what you write next in those very unusual times!
Thank you and welcome! Great point about the difficulty in predicting the effects of this step change in policy. The global financial system is like a vast network of pipes carrying water. This change is like the shock waves that create water hammers in steam heating. The magnitude of this change and its rapidity almost guarantee that pipes will burst somewhere.
100% agree with this article. Even though i voted for trump, im not 100% sure trump is thinking about how tariffs could reduce dollar demand globally. Stablecoins will help treasury indirectly reach folks (tether is a buyer of tbills) in the global south hungry for digital dollars, but some may forego dollars for bitcoin…maybe that is the plan; stablecoins coins secured with tbills is the gateway drug to bitcoin, which usa now has a strategic reserve of
My man! Back to writing. Well done, and I'm aligned with your perspective. The impact on my portfolio has been extremely painful, but I'm on board with the strategy. Wild times!
a bunch of sloppy thinking in this post, even if some points are accurate. firstly a nation can’t be forced to default in a sovereign currency they themselves issue as a floating currency (ie no pegs, no obligation to back with gold or whatever). the reason why the world had to move away from the gold standard is because it creates too much tension between nations. read Karl Polanyi in “the Great Transformation” about how the gold standard destroyed the historical balance of power between the great powers of Europe. the other part of it was that as economic growth exploded in the post WW2 period, gold extraction couldn’t keep pace with the need for expansion of the money supply. gold bugs always have misty eyes for gold but they don’t understand macroeconomics so fall into delusions about what gold back currencies can achieve. they also disempower the government of any sovereign currency issuing nation state of the power to purchase private resources, including labour, for the good of the nation, to build infrastructure to lift living standards and to run a welfare state and address inequality. issuing fiat currency allows for the state to tax and that allows for it to address the inherent and accelerating inequity that capitalist economies promote.
Thank you for saying that there is accuracy in some of my points.
The US has defaulted several times and the need to do so was an imposition placed upon us by the global macroeconomic situation (ie. other countries). In 1933, FDR defaulted by revaluing gold. In 1971, we defaulted by depegging from gold and revaluing gold. No country likes discipline and wants to decide its own monetary policy so gold as a basis for money is always resented. It is resented because you get your monetary policy from physics and the rate at which you can mine the stuff which curtails how fast you can grow the money supply.
Inflation is a slow motion default and is therefore the current preferred method of default; you get to stay nominally solvent while defaulting in real terms. But that isn't going to get the US out of its current predicament unless we 1) retain the reserve currency and 2) massively restructure the deficit so that inflation has a puncher's chance of catching up one day.
The thing I want to highlight in this piece is that there is a deep and growing tension in the global monetary system. The US can either continue business as usual and risk losing the reserve currency or it can face it head on and possibly reboot the dollar in a way the keeps it as the, or at least a, reserve currency. My belief that they are attempting the latter was only reinforced this week by the 90 day pause. They don't want to break the system they are trying to maintain and they almost had a Liz Truss moment. Someone find me a head of lettuce.
i’m well aware of the BRICs movement to an independent payment system. China already issues currency swaps with developing nations so they can be paid for goods exported to China in USD so they can start to get out from under the fascist control of the IMF and World Bank which knowingly saddle developing nations with crippling conditions and onerous debt repayment schedules. If China and India stop warring over everything they can, and there are signs this is happening, then the USA has already lost their hegemony for the 21st Century they spent so long setting up by doing so much to destroy democracy in other countries (not to mention back home with Citizen’s United etc etc).
The US put the writing on the wall seizing foreign assets of Russian kleptocrats. it told other would be oligarchs to look for another currency and nation to store your wealth in. that’s already underway in BRICs . countries. it will happen for sure and USA will start to see less trade in greenbacks and US Govt Bonds. i don’t think that’s actually a bad thing necessarily. US hegemonic power has been pretty bad for many countries in the world during the 20th century, however Americans want to view that.
“nflation is a slow motion default and is therefore the current preferred method of default; you get to stay nominally solvent while defaulting in real terms. ”
this incorrect. a slow motion default would still end up in a default. a nation issuing their own currency may choose to default but in the absence of debt denominated n a foreign currency they will never, ever, be forced default. (possibly political forces could encourage a president to do so).
so i think the concept of “inflation as slow motion default” is an unhelpful metaphor for a concept that needs no métaphore. people understand what inflation is, it’s the currency losing buying power over time. you can also have the economic problem of the currency maintains value or increasing value over time in which case those with savings are disinclined to invest in new business ventures, this can also hurt an economy.
of course inflation is problematic. either the absence inflation (negative or zero inflation) creating a more dismal outlook for commerce or inflation that becomes too high and triggers an inflationary feedback in the economic system are things for the central government to avoid. but inflation can’t just be avoided using (weakly conceived neoclassical) monetary policy or with just some vague ideas about the fiscal position (surplus or deficit). what matters when deficit spending (which is the norm for reasons already explained) is **where** the central government spends money into the economy.
if a nation définit spends to invest in a fully renewable energy power system and electrifies much of their industry and buildings currently dependent on fossil fuels then it has a deflationary impact on the broader economy. why? because renewable energy is broadly speaking significantly cheaper than fossil fuels today so energy consumers, that is households, commercial ventures and industry all end up paying less for their energy. (even coal mines and plants in India out PV panels on the roofs to collect cheaper energy than they can self produce using coal!).
same goes for a universal public health system. if the USA had a modern and universal healthcare system then US employers wouldn’t have to add jacked up private health insurance payments to their employee’s wages, that would make their salaries lower and make their company more competitive against importers of foreign equivalent goods and services, and more competitive in export markets. something import tariffs wont do! yet nobody in the USA is talking about universal healthcare to make US exporters more competitive!
same goes for other universal services of the ki;d taken for granted in Europe and even Cuba. good public transport, public health, national public parks and gardens, education (shockingly expensive in USA and Australia while Norway pays not only for university education, but Norwegian students are paid to study abroad for one or more years), public energy companies to break the oligarchy of the fossil fuel cabals destroying a habitable planet. etc etc.
of course a nation can be forced to default under a global gold standard which effectively pegs currencies to each other. this is a stupid system which prevents countries from allowing a natural devaluation of its currency in times of economic hardship relative to its trading partners.
what i said was if a nation issues their own currency and are not in debt to some other nation in a debt denominated in a foreign currency then they will always be able to issue the currency to met interest payments (or pay down capital) on their debt. always. this is a fact. they may choose not to for whatever reason but they can never be in the situation of being forced to default because they cannot get their hands on enough of their currency, they issue it so they will credit up the Federal Savings Act account at their Central Bank and pay the creditors their interest payment. this takes effect by the CB transferring reserves from the reserve account of the Central Government to the Reserve account(s) of the private bank(s) who holds the debt (usually in the form of Government Bonds or Bills) issued by the Central Government
when you use terms like “fiscal discipline ” you are conjuring up the myth that the Central Government of a sovereign nation is to be considered just like a household with respect to savings and spending, credit and debt. nothing could be further from the truth. what is true and easily verified by anybody who has the ten minutes it takes to read about the accounting identity that is known as nations Sectorial Balances, revealed to economists by a brilliant heterodox academic economist Wynne Godley. (https://en.wikipedia.org/wiki/Sectoral_balances)
Godley first explored macro with dozens of sector represented in his equations, but it became evident to himself and others who studied under him that you Cn also simply the nations sectors into two or three sectors. Public and Private. to that you can add the foreign trade sector. Just considering the entire economy as made up of two sectors, the Public sector of the central government and central bank (CGCB for short) and Private sectors (everything else including lower levels of government) what is revealed is the simple fact that a deficit in the Public sector must be a surplus for the private sector, and vise versa, a surplus in thé public sector must be a deficit for the private sector. so public deficits reduce private savings and public deficits increase private savings. Stephanie Keaton explains this in the first chapters of her NYT Best Seller, “The Deficit Myth” really well (https://stephaniekelton.com/book/)). Add in the foreign trade sector (which Is mostly capital flows not trade in goods and services) and you have net three way flows of currency that must all balance out to zero. Again if the CGCB are in a deficit position then there is a net flow of currency to the FT and private sectors combined, it might be that private sector and the FT sector are both in surplus, or it might be that one of these two sectors is also, like the CGCB sector, in deficit, and the remaining sector is in surplus. But it has to always net out to zero.
every times when the US government has taken a fiscal position of surplus it has triggered a recession, usually within a couple of years. sometimes a global recession due to the size and reach of the US economy in the global economy (which has been globalised in some ways since colonialism not just since the 1980s!). that’s because global trade always nets out to zero (obviously, there’s always a buyer for each seller in every transaction) so the private sector must liquidate savings if the government of the largest economy in the world (which USA has been since post WW2) takes a surplus position. people need to understand that Central Governments issuing their own currency need to be in a deficit position for the economy to grow, and this is what most people want most of the time (if not all the time!). as Stephanie Keaton puts it, “their red ink is our black ink”.
* or six directions if you count gross flows and count both directions as seperate flows.
This is a completely accurate picture i’ve given you, if admittedly very simplified, it’s still holds true. just read Bill Mitchel’s blog or Warren. Moseler’s “The 7 Deadly Innocent Frauds of Economic Policy” (http://moslereconomics.com/mandatory-readings/innocent-frauds/ ) for confirmation. these two are considered the fed founders of the framework now known as Modern Monetary (Money) Theory, which is not a policy prescription but a way to understand the flow of money in nations of the post-gold standard, modern world with floating currencies.
dreaming of better days under a gold standard are delusional. read Polanyi to understand how powerful and ultimately very destructive forces were unleashed by the institution of a gold standard. also their just isn’t enough gold production to keep up with economic growth and it would constantly require consensus amongst all nations about its revaluation to allow the relative devaluation of currencies.
if the so called PIGS countries had their own sovereign currencies rather than the Euro, then arguable they would never have got into their debt crisis situations they did post-GFC. and even if they had have, they could have devalued their currencies by supporting their citizens with individual means tested payments which would seen more money for consumers and local employment rebound, and also encouraged exports and tourism. instead hundreds of thousands of 20 to 50 year old citizens from these countries emigrated to other countries outside of he EU in search of employment and still haven’t returned.
Bill Mitchell wrote a book warning Europe not to create a region wide currency for these very reasons, they weren’t a risk, they were a certainty.
I also think you're seeing 4D chess when the change of it actually being such is pretty slim.
On to some points you raise:
> Tariffs reduce global dollar supply
How so? The US can still print dollars. US banks can still create them out of thin air in the form of loans or derivatives. In fact, there might be a reduction in demand of dollars if any of:
- the EU, India, or China introduce a tariff on US services
- China, Japan, and South Korea close a trade agreement, which would likely denominated in Yen or Renminbi
Furthermore, supply would in fact be increased if the Fed caves in to Trump's demand to decrease interest rates - forcing their hand is one of his stated goals, isn't it?
> a reduction in supply will strengthen (the dollar)
It's probably too soon to tell, but we're seeing the opposite so far, where the USD has lost about 1% vs GBP, 2.5% vs EUR, 2.8% vs YEN, 0.5% vs RNM. It even managed to lose 0.5% vs RUB
The US has managed to do one thing in the last week: piss off just about everyone else. China is on the warpath, and it has already built stronger ties with Japan and S. Korea. Canada and the EU is imposing counter tariffs. Mexico and India are quiet but probably not just sitting back.
In my mind, chances are that this move will actually weaken the position of the USD as a reserve currency; it's a position built on military might and trust. The former is still there for the time being, but the latter is burnt for decades to come.
> the reserve currency issuer to [...] run a trade deficit
Once services are factored in, the USA is actually running a cash flow surplus, e.g. with the EU (not sure on a global scale, but I wouldn't e surprised). It also attracts 70% of the world's investments, way more than its actual economic weight. I wouldn't be surprised if foreign direct investment into the US went significantly down as a result of last week's self imposed foot shooting
> Tariffs provide an income stream for the US
From what I heard, the chilling effect on consumer spending and company investments is such that tariffs are historically a fiscal net negative. They may provide the numbers - on paper - for the Trump administration to slash taxes on the wealthy, but if true over the medium term US debt is going to baloon like never before. Having been born in a country with over 120% GDP in debt, I see the effects on a yearly basis, where administrations are at the mercy of the markets for anything they wish to do, and constantly teetering on the edge of default. This would be even more complicated for the USA: Italian public debt is owned by Italians who are among the most effective savers on the planet; US individuals are among the most indebted, so US sovereign debt is owed to foreigners
> If the US can do this correctly
doesn't seem to be the current path
> US is subordinate to the BRICS nations as a monetary union
They would have to agree among themselves first. I don't see that happening anytime soon. China and Russia have long-running territorial disputes, and the latter is on the edge of collapse due to the war in Ukraine. Same for China and India. And when it comes to Brazil, the USA seems to be hell bent on painting China as a more reliable business partner than themselves.
> Ever heard of the solidus, denarius, or drachma?
I have. These currencies however did not fall due to financial collapse, but due to good old military conquest (by the Romans and the Barbarians respectively)
> policymakers seem content with sacrificing the market and the near term health of the economy for the long term continued global dominance of the currency
This doesn't fit with Trump's character profile: transactional, short-termist, distrustful, narcissist. He sounds like he wants it all, and wants it now at whatever cost to others. Doesn't sound like he's getting it tho.
The US only prints domestic dollars either through fiscal (Treasury) or monetary (The Fed) mechanisms. In the case of the Fed, they simply grant license to the domestic banks to issue money in the form of loans, (a mortgage is newly printed money,) and so relies on domestic demand for its creation. The Treasury has a more direct ability to print as in the "stimmys" during covid. Both of these are domestic dynamics.
If you don't already understand it, have a look at how the Eurodollar works. (Eurodollar University on Youtube is a good primer.) In this essay, I'm mainly talking about the Eurodollar system, i.e. US dollar debt owed by non US entities to non US banks. This dynamic represents strong and persistent demand for US dollars outside of the US. There is also strong and inelastic demand for dollars to buy oil (petrodollar). These two systems combine to create the inelastic ex-US dollar demand I cited in the essay.
Tariffs are a tax. The main mechanism by which most nonUS entities get dollars is in trade with the US. If you want less of something, in this case trade, tax it. So the outflowing supply of USD to ROW is decreased against relatively inelastic demand -> dollar strength. Combine this with Triffin's observation that the reserve currency issuer who uses the reserve currency domestically must by definition run a trade deficit in order to supply dollars to ROW (while also desiring a trade balance or surplus to keep its currency strong and stable) and you can see how the nonlinear dynamics of this international money flow can create surprising outcomes like those I argue for in the note.
Many trillions of US debt is held by foreign entities. In the short run, ROW can get plenty of $$ without worrying about less trade. It seems as that is case as dollar in weakening and treasury interest rates are rising.
Great to see you back Ken! I'm just wondering when we move onto a Phase 2 or 3 with capital controls and how these might be implemented. This is a definite Bull in a China shop moment.
"This will do two things; it will reduce the seigniorage ..., and it will reduce dollar demand"
It will also do a third thing: It will reduce the supply of dollars. When nations abandon the dollar, the change will be (counter-intuitively) deflationary.
Most dollars originate at private banks, as loans. If the world stops holding dollars, it means companies and nations stop borrowing dollars from banks. When you pay off outstanding loans, the dollars will stop existing.
Abandonment of the dollar will cause its value to rise, not fall.
Bingo!
Super interesting analysis of the underlying dynamics that could be unfolding. My only observation would be that the international monetary system is so complex and intertwined and the rate of change brought on by this administration so fast that the actual medium and long term implications seem extremely difficult to predict. Just subscribed and look forward to what you write next in those very unusual times!
Thank you and welcome! Great point about the difficulty in predicting the effects of this step change in policy. The global financial system is like a vast network of pipes carrying water. This change is like the shock waves that create water hammers in steam heating. The magnitude of this change and its rapidity almost guarantee that pipes will burst somewhere.
Very good Ken, glad to see a new post from you, and a thought provoking one to boot.
100% agree with this article. Even though i voted for trump, im not 100% sure trump is thinking about how tariffs could reduce dollar demand globally. Stablecoins will help treasury indirectly reach folks (tether is a buyer of tbills) in the global south hungry for digital dollars, but some may forego dollars for bitcoin…maybe that is the plan; stablecoins coins secured with tbills is the gateway drug to bitcoin, which usa now has a strategic reserve of
My man! Back to writing. Well done, and I'm aligned with your perspective. The impact on my portfolio has been extremely painful, but I'm on board with the strategy. Wild times!
Sometimes I just have to let the intrusive thoughts out onto paper and impose on my kind readers :)
a bunch of sloppy thinking in this post, even if some points are accurate. firstly a nation can’t be forced to default in a sovereign currency they themselves issue as a floating currency (ie no pegs, no obligation to back with gold or whatever). the reason why the world had to move away from the gold standard is because it creates too much tension between nations. read Karl Polanyi in “the Great Transformation” about how the gold standard destroyed the historical balance of power between the great powers of Europe. the other part of it was that as economic growth exploded in the post WW2 period, gold extraction couldn’t keep pace with the need for expansion of the money supply. gold bugs always have misty eyes for gold but they don’t understand macroeconomics so fall into delusions about what gold back currencies can achieve. they also disempower the government of any sovereign currency issuing nation state of the power to purchase private resources, including labour, for the good of the nation, to build infrastructure to lift living standards and to run a welfare state and address inequality. issuing fiat currency allows for the state to tax and that allows for it to address the inherent and accelerating inequity that capitalist economies promote.
Thank you for saying that there is accuracy in some of my points.
The US has defaulted several times and the need to do so was an imposition placed upon us by the global macroeconomic situation (ie. other countries). In 1933, FDR defaulted by revaluing gold. In 1971, we defaulted by depegging from gold and revaluing gold. No country likes discipline and wants to decide its own monetary policy so gold as a basis for money is always resented. It is resented because you get your monetary policy from physics and the rate at which you can mine the stuff which curtails how fast you can grow the money supply.
Inflation is a slow motion default and is therefore the current preferred method of default; you get to stay nominally solvent while defaulting in real terms. But that isn't going to get the US out of its current predicament unless we 1) retain the reserve currency and 2) massively restructure the deficit so that inflation has a puncher's chance of catching up one day.
The thing I want to highlight in this piece is that there is a deep and growing tension in the global monetary system. The US can either continue business as usual and risk losing the reserve currency or it can face it head on and possibly reboot the dollar in a way the keeps it as the, or at least a, reserve currency. My belief that they are attempting the latter was only reinforced this week by the 90 day pause. They don't want to break the system they are trying to maintain and they almost had a Liz Truss moment. Someone find me a head of lettuce.
i’m well aware of the BRICs movement to an independent payment system. China already issues currency swaps with developing nations so they can be paid for goods exported to China in USD so they can start to get out from under the fascist control of the IMF and World Bank which knowingly saddle developing nations with crippling conditions and onerous debt repayment schedules. If China and India stop warring over everything they can, and there are signs this is happening, then the USA has already lost their hegemony for the 21st Century they spent so long setting up by doing so much to destroy democracy in other countries (not to mention back home with Citizen’s United etc etc).
The US put the writing on the wall seizing foreign assets of Russian kleptocrats. it told other would be oligarchs to look for another currency and nation to store your wealth in. that’s already underway in BRICs . countries. it will happen for sure and USA will start to see less trade in greenbacks and US Govt Bonds. i don’t think that’s actually a bad thing necessarily. US hegemonic power has been pretty bad for many countries in the world during the 20th century, however Americans want to view that.
“nflation is a slow motion default and is therefore the current preferred method of default; you get to stay nominally solvent while defaulting in real terms. ”
this incorrect. a slow motion default would still end up in a default. a nation issuing their own currency may choose to default but in the absence of debt denominated n a foreign currency they will never, ever, be forced default. (possibly political forces could encourage a president to do so).
so i think the concept of “inflation as slow motion default” is an unhelpful metaphor for a concept that needs no métaphore. people understand what inflation is, it’s the currency losing buying power over time. you can also have the economic problem of the currency maintains value or increasing value over time in which case those with savings are disinclined to invest in new business ventures, this can also hurt an economy.
of course inflation is problematic. either the absence inflation (negative or zero inflation) creating a more dismal outlook for commerce or inflation that becomes too high and triggers an inflationary feedback in the economic system are things for the central government to avoid. but inflation can’t just be avoided using (weakly conceived neoclassical) monetary policy or with just some vague ideas about the fiscal position (surplus or deficit). what matters when deficit spending (which is the norm for reasons already explained) is **where** the central government spends money into the economy.
if a nation définit spends to invest in a fully renewable energy power system and electrifies much of their industry and buildings currently dependent on fossil fuels then it has a deflationary impact on the broader economy. why? because renewable energy is broadly speaking significantly cheaper than fossil fuels today so energy consumers, that is households, commercial ventures and industry all end up paying less for their energy. (even coal mines and plants in India out PV panels on the roofs to collect cheaper energy than they can self produce using coal!).
same goes for a universal public health system. if the USA had a modern and universal healthcare system then US employers wouldn’t have to add jacked up private health insurance payments to their employee’s wages, that would make their salaries lower and make their company more competitive against importers of foreign equivalent goods and services, and more competitive in export markets. something import tariffs wont do! yet nobody in the USA is talking about universal healthcare to make US exporters more competitive!
same goes for other universal services of the ki;d taken for granted in Europe and even Cuba. good public transport, public health, national public parks and gardens, education (shockingly expensive in USA and Australia while Norway pays not only for university education, but Norwegian students are paid to study abroad for one or more years), public energy companies to break the oligarchy of the fossil fuel cabals destroying a habitable planet. etc etc.
of course a nation can be forced to default under a global gold standard which effectively pegs currencies to each other. this is a stupid system which prevents countries from allowing a natural devaluation of its currency in times of economic hardship relative to its trading partners.
what i said was if a nation issues their own currency and are not in debt to some other nation in a debt denominated in a foreign currency then they will always be able to issue the currency to met interest payments (or pay down capital) on their debt. always. this is a fact. they may choose not to for whatever reason but they can never be in the situation of being forced to default because they cannot get their hands on enough of their currency, they issue it so they will credit up the Federal Savings Act account at their Central Bank and pay the creditors their interest payment. this takes effect by the CB transferring reserves from the reserve account of the Central Government to the Reserve account(s) of the private bank(s) who holds the debt (usually in the form of Government Bonds or Bills) issued by the Central Government
when you use terms like “fiscal discipline ” you are conjuring up the myth that the Central Government of a sovereign nation is to be considered just like a household with respect to savings and spending, credit and debt. nothing could be further from the truth. what is true and easily verified by anybody who has the ten minutes it takes to read about the accounting identity that is known as nations Sectorial Balances, revealed to economists by a brilliant heterodox academic economist Wynne Godley. (https://en.wikipedia.org/wiki/Sectoral_balances)
Godley first explored macro with dozens of sector represented in his equations, but it became evident to himself and others who studied under him that you Cn also simply the nations sectors into two or three sectors. Public and Private. to that you can add the foreign trade sector. Just considering the entire economy as made up of two sectors, the Public sector of the central government and central bank (CGCB for short) and Private sectors (everything else including lower levels of government) what is revealed is the simple fact that a deficit in the Public sector must be a surplus for the private sector, and vise versa, a surplus in thé public sector must be a deficit for the private sector. so public deficits reduce private savings and public deficits increase private savings. Stephanie Keaton explains this in the first chapters of her NYT Best Seller, “The Deficit Myth” really well (https://stephaniekelton.com/book/)). Add in the foreign trade sector (which Is mostly capital flows not trade in goods and services) and you have net three way flows of currency that must all balance out to zero. Again if the CGCB are in a deficit position then there is a net flow of currency to the FT and private sectors combined, it might be that private sector and the FT sector are both in surplus, or it might be that one of these two sectors is also, like the CGCB sector, in deficit, and the remaining sector is in surplus. But it has to always net out to zero.
every times when the US government has taken a fiscal position of surplus it has triggered a recession, usually within a couple of years. sometimes a global recession due to the size and reach of the US economy in the global economy (which has been globalised in some ways since colonialism not just since the 1980s!). that’s because global trade always nets out to zero (obviously, there’s always a buyer for each seller in every transaction) so the private sector must liquidate savings if the government of the largest economy in the world (which USA has been since post WW2) takes a surplus position. people need to understand that Central Governments issuing their own currency need to be in a deficit position for the economy to grow, and this is what most people want most of the time (if not all the time!). as Stephanie Keaton puts it, “their red ink is our black ink”.
* or six directions if you count gross flows and count both directions as seperate flows.
This is a completely accurate picture i’ve given you, if admittedly very simplified, it’s still holds true. just read Bill Mitchel’s blog or Warren. Moseler’s “The 7 Deadly Innocent Frauds of Economic Policy” (http://moslereconomics.com/mandatory-readings/innocent-frauds/ ) for confirmation. these two are considered the fed founders of the framework now known as Modern Monetary (Money) Theory, which is not a policy prescription but a way to understand the flow of money in nations of the post-gold standard, modern world with floating currencies.
dreaming of better days under a gold standard are delusional. read Polanyi to understand how powerful and ultimately very destructive forces were unleashed by the institution of a gold standard. also their just isn’t enough gold production to keep up with economic growth and it would constantly require consensus amongst all nations about its revaluation to allow the relative devaluation of currencies.
if the so called PIGS countries had their own sovereign currencies rather than the Euro, then arguable they would never have got into their debt crisis situations they did post-GFC. and even if they had have, they could have devalued their currencies by supporting their citizens with individual means tested payments which would seen more money for consumers and local employment rebound, and also encouraged exports and tourism. instead hundreds of thousands of 20 to 50 year old citizens from these countries emigrated to other countries outside of he EU in search of employment and still haven’t returned.
Bill Mitchell wrote a book warning Europe not to create a region wide currency for these very reasons, they weren’t a risk, they were a certainty.
noted