Reading Notes: Ecological Economics Ch. 13: International Flows and Macroeconomic Policy

Herman E. Daly and Joshua Farley

The eradication of trade barriers makes it harder for governments to have an influence on their national economies. Open currency markets mean that in many cases groups like the Fed have little power to control their national economies.

International monetary flows can be broken down in terms of a balance of payments made up of current accounts (the flow of consumable goods in and out of a country) and capital accounts (the ownership of assets in the country by foreign folks, and vice versa.) Money flowing into your country means that your assets are being bought up or your goods are flowing out. In general, the idea is the have a balance of payments that’s neutral.

The US does this by importing real goods and selling assets, largely debt. So wise…

The balance of payments determines the exchange rate for currency. The more money flowing into your country the more people want your currency and the higher the price is. This generally has a balancing effect. When your currency becomes strong it’s cheaper for you to import and your goods/assets become more expensive, so money stops flowing in as quickly. When currency price is allowed to more or less do its own thing like this it’s called a flexible exchange rate.

Some countries don’t want this, because it can cause instability that prohibits growth. (Will people want to own Ghanaian cedis if the price on them could plummet?) So they get their national bank to set up a Fixed Exchange Rate. The National Bank holds on to tons of foreign currency (usually dollars) and buys and sells its own currency to counteract market forces. This keeps currency tied (say, to the dollar). It also stops the country from being able to control its interest rates.

Say the national bank wants to pump currency into the national economy to drive down interest rates and encourage investment. The lower interest rates will just mean that no one wants to save money in your country, the money being pumped in will just flow out to foreign capital accounts and interest rates will stay as they are.

All of this is bad news for national economic stability. If a national economy goes south, the country’s government is often powerless to stop it becuase anything they do will just be countered by international market forces.  It can also create panics. If capital starts to flee a country for no reason, the currency begins to devalue. More capital then flees the country based on the fear that the currency will devalue further. With the currency devalued no one in the country can buy foreign goods and the government can’t sell bonds to raise cash, so the government and economy both grind to a halt.

This is countered by less violent upswings of equal magnitude (that capital has to flee to somewhere) but becuase of wealth disparity (among other things) those upswings do not create benefits which outweigh the problems of sudden collapse. Groups like the IMF, which were initially set up to bolster national economic stability, are now explicitely working to remove trade barriers.

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