MMT
/So I wanted to follow up on the end of my post yesterday where I said I wanted to talk about Modern Monetary Theory (MMT). It is all the rage, as I said. Lots of people are looking into it, some of which looks really interesting, especially for big countries like the US. Current interest rates clearly seem to indicate that deficits don’t matter (and yes, I know that’s not all there is to MMT). But there has always been some concern that MMT cannot apply to emerging markets, to phrase it another way, would these economies be able to implement MMT effectively.
I listened to this podcast by Fadhel Kaboub, a professor at Denison University in the States. He clearly believes that it is possible, but it takes monetary sovereignty.
For him, monetary sovereignty isn’t just about printing your own currency, although that’s part of it. It also means that taxes are paid in the currency, that the currency floats and that the government sets interest rates. The government must be able to purchase anything that is for sale in that currency. Finally, external borrowing is a no-no.
SOURCE: WORLDBANK, INVESTING.COM, VIETECON CALCULATIONS
The last is the hardest, especially in an open economy. As this author argues, most countries will have to borrow at some point. If monetary sovereignty exists on a spectrum, then for Vietnam, the country is only partially sovereign.
1) It prints its own currency, the Vietnamese dong (currently around 23,000 to the USD).
2) It controls interest rates.
3) Taxes are paid in VND.
4) The government can buy most of what it wants in VND. Only imports require other currency.
NOTE: THESE DATA REPRESENT EXPORTS AND IMPORTS OF GOODS, SERVICES AND PRIMARY INCOME (BOP, CURRENT US$) SOURCE: WORLDBANK, VIETECON CALCULATIONS.
5) The currency isn’t really floating. It is “stabilized” with the government keeping it within a band. The central bank has a standing offer to buy the currency at various rates (VND23,200 currently). If the Central Bank is stuck with that, then it means that the country does not have monetary sovereignty. The chart on the right above shows how little depreciation there is compared to inflation. That means the government needs to keep attracting foreign exchange in order to support the currency.
6) And of course it has a lot of external borrowing, as we discussed yesterday.
What’s surprising to me is that there is so much external borrowing, when it really seems like the balance of payments isn’t that bad (based on my calculations). The chart above shows a pretty close balance with exports and imports increasing in tandem. I need to look into this a bit more.
As part of the balance of payments, I want to look at some key drivers for current account deficits/surpluses in emerging markets:
Energy imports/exports. Vietnam has been an exporter of oil, but it also imports oil and soon gas. As long as the country needs to import energy, it will be hard to have real monetary sovereignty. This ties into my view that the government should just be investing in renewable energy.
Food imports/exports. Food production is actually pretty strong, especially for rice, which is the main staple. So this is unlikely to be a big threat.
Imports of high-value equipment. Is Vietnam importing high-value products and exporting low-value products? If so (and probably is true) means that the country will be stuck on this hamster wheel. What I mean by that is that they need more imports to export more, and so they never really get to any sovereignty.
Anyway, just some quick thoughts on MMT and Vietnam. I want to do much more of this, but I personally need to do more research into it. It is an interesting way to look at economies, especially developing economies.