More MMT

USD BILLIONS. SOURCE; WORLD BANK DATA, VIETECON CALCULATIONS

So, as I said two days ago, I wanted to look a bit more into what is driving the increase in external debt in Vietnam. It didn’t appear to be the trade deficit, which would be an obvious answer. But I was unsure, so I wanted to extract “primary income” from the calculation and look at just imports/exports (for services and goods) to see. In that case, there has been a deficit but since 2012 the country has been in surplus.

Plus, I also looked at remittances, which is another source of foreign exchange. Remittances have increased drastically in Vietnam, mostly from the US (around 60% back in 2017).

But remember that a current account surplus, actually means that there is more savings than investment. Plus, for the current account to be in surplus, then the capital and financial account must be in deficit. This is just an accounting fact of life: Current Account Balance+Financial Account Balance+Capital Account Balance=0. So we should see a capital account deficit, and this appears to show up mostly in the foreign exchange reserve.

Basically, the country has been exporting a lot. And to make sure the exchange rate is stable, it has had to increase its foreign exchange reserves (although they are actually fairly low at 2.9 months of imports as of May of 2018 - it hops around between 2.5 and 3.5 months).

NOTE THAT THE LEFT-HAND SIDE AXIS REFLECTS BOTH TOTAL RESERVES IN BILLIONS AND RESERVES AS A PERCENTAGE OF EXTERNAL DEBT. SOURCE: WORLDBANK, VIETECON CALCULATIONS

If I am thinking through this correctly, the country exports a lot, more than it imports. And that means that it is saving a lot of that money. Which results in a capital account/financial account deficit. But what is that deficit made up of: a lot of it is foreign reserves, and it has foreign reserves in order to maintain stability in the exchange rate. And it needs stability in the exchange rate to make sure that inflation doesn’t get out of control (for imported items), and so that there is not a liquidity issue because of all of the external debt. Which is being built up to make sure that there are reserves to stabilize the exchange rate. So that there is enough money to pay the external debt.

This is very simplistic and I need to think it over a lot, but I get where these MMT theorists are coming from. With external debt, then you need to keep a stable currency in order to maintain payments on that debt. But that ultimately means that you are saving (by holding large amounts of dollars) and not investing.

The reason why MMT theorists want to implement MMT is to reduce unemployment (or that’s part of it), basically to make sure all human resources are used in an economy. That’s just not Vietnam’s problem, right now. Unemployment is quite low, helped by a very large public sector. I will look into that tomorrow.

But the original point of being on a treadmill to maintain a fixed exchange rate is probably something that needs to be investigated. I want to also look at what is driving imports to see what could be replaced. As I said two days, the big ones for most countries are food, energy and capital goods. Let’s see if that’s the case in Vietnam.