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Exchange Rate, Deficit, Trade Balance

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Alexei B.Miller
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Vlaxia
Post: #1
Exchange Rate, Deficit, Trade Balance

Helsworth with his infinitely sexy has encouraged me to deviate from the usual course of economic planning and implementation that has fueled positive GDP growth in all the Gazprom templates for many years.

He and many other players have encouraged me to seek balance seek the well-being of my virtual citizens. This is a massive deviate of course from running the country like a massive corporation (because that's what they were) and actually running a state proper. Quite recently I would say I have been successful in that goal of seeking a balance but i'm not used to pulling and influencing certain economic levers and factors to achieve these goals.

I'm pondering different ways to influence the savings rate. According to Helsworth maintaining a trade deficit "leverages the domestic population" which can contribute to a neg savings rate.

But what are some ways to mitigate the effect of having a trade deficit effect the savings ratio?

My current strategy has been to increase interest rates to give savers incentive to save while I figured out how to gain a trade surplus. So far compared to observations in my previous states where I lowered interest rate to stimulate growth this strategy has actually blunted the the decline of the savings ratio which I believe is keeping capital inflows high and steady in Novorossiya.

I'm not sure if maintain a fairly valued currency contributes to the problem. But I have kept the ruble high in hopes that it would keep living cost down. But I can't help to rely on the time proven strategy of devaluation to support higher exports. However if we look at modern Germany with the previous strong Deutsche Mark and the still strong Euro we see German maintaining high exports despite its neighbors in trade deficit...

So this leads me to believe that Ars matrix leaves out some qualities that give states advantages over others. I been here 3 years and still don't have this all together!


"Hitler wanted to destroy Russia, everyone needs to remember how that ended"

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11.06.2014 04:15
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Helsworth
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Post: #2
RE: Exchange Rate, Deficit, Trade Balance

Germany is having net exports (being a net importer of aggregate demand) because the periphery is running trade defficits against Germany. The adoption of the euro by the other countries, allowed them to be "germanized" from a financial standpoint. Back in the day, the other countries could only compete with german exports by devaluing their currencies. German manufactured products have always been perceived as higher in added-value. Once these countries adopted the euro - all of this changed.

In some templates, it's far easier to achieve a positive trade balance than in others - like the smaller templates. So you'll have to squeeze all advantage from task options, budged changes, and reforms.


The blue lines represent the capital account, the balance of non-residents. When it's in the negative, it means the rest of the world is running a trade deficit against the EZ.
Note: another name for trade deficit is capital account surplus.

Ergo, in order to allow some other sector to shoulder the corresponding deficit of the foreign sector's surplus - the government fiscal deficit needs to be large enough to do that.
For example, during Andrew Jackson's administration, after he ended the 2nd National Bank and caused the Banking Panic - and the country faced price deflation from several causes - the economy actually grew. And at the time, the federal government was actually running a small budget surplus. Well, I looked at the capital account of the US during the 19th century over that particular period.

You can see that in '35 up to '45 that american exports were above imports. And imports actually fell faster than exports - yet the net was still favorable for the US. Of course, in those times, you didn't have a free-floating fiat regime.
Once again, double-entry bookkeeping...
(S-I)+(G-T)+(X-M)=0

PS: The graph measures only goods, not services or raw materials. And it measures averages over 5 back to back years.


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This post was last modified: 11.06.2014 08:57 by Helsworth.

11.06.2014 08:52
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Alexei B.Miller
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Vlaxia
Post: #3
RE: Exchange Rate, Deficit, Trade Balance

Novorossiya is growing at 5% a year which is not good considering Novorossiya is not a developed economy with its small GDP but increasingly high accumulation of capital.

I'm looking for ways to preserve the growth, but make it sustainable. Eventually raising the interest rate will be become impractical and can risk seizing up the entire economy due to cost of credit increases. However on long-term high interest rates will be good because Novorossiya will have huge levels of money for capital markets (long-term investments) and regular banking operations. I was planning to cap interest rates at 8% to preserve the savings ratio until trade surplus.

Speaking on trade surplus, this quarter is budget season. I was pondering a increasing the tariff at small increments at 2 to 3% a year while boosting foreign status via task options. Would a boost to foreign status prevent or blunt reactions to my protectionist policies? I'm looking to avoid devaluation, only to use it as a last ditch effort to increase exports.

Furthermore, if my currency is valued higher than average foreign currency why are my living cost averaged closer to the average state? This was my purpose to maintaining higher currency so citizens would have less cost more income and more to save. It seems that there are several factors eroding the savings ratio, yet it seems that even though Novorossiyans have more disposable income their savings rate plummets and foreign savings ratio increases. This can't be based squarely on trade deficit can it?

Also, I'm contesting your theory of deficit spending in this game at least. I think governments borrowing even during rises during the business and economic cycle immediately contribute to a more rapid end to that cycle. Why? Because government borrowing sucks up credit and contributes to higher interest rates with the reduction of available and cheap credit. As government is not the most efficient distributor of wealth and investment; this leaves other more economic activities which could be carried out more efficiently by the private sector (whose losses aren't backed by tax payer dollars).

I understand that sometimes a government may deficit spend to create demand to spur growth, however many libertarians see this as an intervention into the nature of the business cycle which is boom and bust! Most libertarians including myself believe that the free market is capable of running the economy because the drive for profit creates an automatic incentive to be EFFICIENT yet the need to draw customers to your product will encourage quality so therefore you get a balance between cost and quality which equals value...We libertarians believe in smaller government one government which shall merely defend the national boundaries and enforce contracts and protect liberty and personal property among some other concepts of law and order.


"Hitler wanted to destroy Russia, everyone needs to remember how that ended"

Vladimir Putin

11.06.2014 19:51
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Helsworth
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Post: #4
RE: Exchange Rate, Deficit, Trade Balance

In Ars-Regendi, the interest rate has a tendency to go up - when public debt is pilling up above your GDP quickly. However, that which creates the debt (in large enough size) also prevents rates from going up. As you will see im my example below.

As I've explained to you numerous times, the notion that government deficits crowd out investment is pure myth. It's the other way around - larger fiscal deficits put DOWNWARD pressure on interest rates. Cause when the government runs bigger fiscal deficits, the government is creating more net financial assets (more net dollars) than it destroys via taxation. And the corresponding surplus of the nongovernment sector matches the fiscal deficit to the penny.

And to further show that Ars-Regendi doesn't necessarily respect the orthodox (mythological view) here's my state of Prospero.
http://www.ars-regendi.com/state/129440/haushalt.html
Fiscal deficit % of GDP: 69,4%
Debt to GDP ratio: 329%
Nominal interest rate: 1%
Savings ratio: 9.27 %
Exports: 5,721 trillion
Imports: 2,963 trillion

Higher interest rates DON'T support long-term investment. You're giving too much importance to (fictious knowledge of monetary policy) monetary policy - which is a blunt instrument at best - while ignoring fiscal policy; the true back-bone of the economy.

If you want a large net commercial surplus, simply implement the Protectionism reform. As far as my experience goes with it, the reform doesn't affect your domestic consumption.

As for your last statement, that's pure ideology rooted in a priorism; a tenet that's clearly been refuted by history and empirical research.
I recommend you visit this thread and start reading.
Debunking austrian economics 101:
http://forum.ars-regendi.com/debunking-a...26333.html

Btw, do you libertarians read your Carl Menger?

Quote:
“Government thus has to intervene in economic life for the benefit of all not only to redress grievances, but also to establish enterprises that promote economic efforts but, because of their size, are beyond the means of individuals and even private corporations. These are not paternalistic measures to restrain the citizens’ activities; on the contrary, they furnish the means for promoting such activities; furthermore, they are of some importance for those great ends of the whole state that make it appear civilized and cultured.

Important roads, railways and canals that improve the general well-being by improving traffic and communication are special examples of this kind of enterprise and lasting evidence of the concern of the state for the well-being of its parts and thereby its own power; at the same time, they are/constitute major prerequisites for the prosperity of a modern state.

The building of schools, too, is a suitable field for government to prove its concern with the success of its citizens’ economic efforts.”


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This post was last modified: 11.06.2014 20:31 by Helsworth.

11.06.2014 20:23
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Alexei B.Miller
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Vlaxia
Post: #5
RE: Exchange Rate, Deficit, Trade Balance

You haven't addressed all my questions, and i'm a business major not an economics major but I DO have knowledge of monetary policy and fiscal policy but again never claimed to be an economist!


"Hitler wanted to destroy Russia, everyone needs to remember how that ended"

Vladimir Putin

11.06.2014 21:27
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Helsworth
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Post: #6
RE: Exchange Rate, Deficit, Trade Balance

Alexei B.Miller Wrote:
You haven't addressed all my questions, and i'm a business major not an economics major but I DO have knowledge of monetary policy and fiscal policy but again never claimed to be an economist!

You can be a welder or a shopkeep, it makes no difference. The authority argument is a pseudo-argument.
Many established academics have knowledge of monetary policy and fiscal policy - just not the knowledge pertaining to our own monetary and banking system. The concept of endogenous money eludes them, let alone double-entry bookkeeping. So was I at first; until I was made to see reason by the chartalist theory - which explained everything from a logical and operational standpoint.

I believe I addressed your questions. Increasing tariffs won't impact your international rep all that much; otherwise I would not have recommended protectionism.

As for interest rates, in real life, they don't matter they way you think they do. The natural interest rate of fiat money is 0! Anything else above that is determined by the currency monopolist. In a monetary system, the macro-laws are created by the currency monopolist - the currency issuer and all others are currency users.
Unemployment is a monetary phenomenon. The purpose of issuing public debt is not to finance anything; it's but a decision that the public will hold bonds rather than reserve balances earning interest (IOR).

Quote:
1 – The government creates money by spending it. Every time the Treasury writes a check to a government supplier or employee, it is creating money.

2 – The government destroys money by taxation. Every dollar that is collected by the IRS and the other various tax-collecting agencies of the United States of America is destroyed. It simply disappears.

3 – The government subsidizes savers by creating interest-bearing Treasury Bonds. These bonds give private savers a safe place to put their money, and the interest rate paid on these bonds makes them more or less attractive to savers. Higher interest rates means a higher rate of government subsidy to lazy investors. By doing this, the government can encourage them to take their private money out of the economy, and thus discourage inflation by destroying demand. Or, by lowering interest rates, it can encourage them to find other, better-paying investments, and thus hopefully encourage economic activity by stimulating demand.

4 – There is no direct connection between these three activities. Tax revenues do not fund spending any more than Treasury Bonds fund government spending, because the Treasury of the United States is infinitely solvent in US Dollars and can create as many of them as it wants, at any time, for any reason.

5 – The real purpose of taxation is to give value to the US Dollar. People need dollars to pay their tax liabilities. A secondary purpose of taxation is to destroy money in the hands of private persons, thereby destroying demand and discouraging a variety of activities.

6 – A common argument against deficit spending is that it will cause inflation. But what is inflation, anyway? Current measures of inflation almost exclusively define it in terms of wages and prices - that is, the evil and bad inflation is almost exclusively defined as a rise in wages. Asset price inflation - that is, the rise in stock prices, investment values, and real estate value - somehow is not included in the common measures of inflation. Strangely enough, those are the kinds of things the 1% happen to own.

7 - Government spending (that is, monetary creation) creates wage/price inflation if those government dollars are being used to buy things that are in short supply. If it's being used to buy up things that are sitting around idle, such as the labor of teachers, then it's not going to be inflationary.

8 - The destruction of money via taxation should never be thought of as "funding" the government in any way, but rather as a way to reduce inflationary pressures and to manage economic actions. Taxation should really be targeted at those areas of the economy where too much money has built up, and thus which might be able to create inflationary economic distortions. For example, massive inherited incomes and ridiculous CEO pay that, in the search for easy returns, fuels the Wall Street casinos and thus creates asset price inflation.

9 – The National Debt, that is, the total of all outstanding Treasury Bonds, is a tool to manage the behaviors of savers and investors. As the Treasury is infinitely solvent, all decisions about the size of the National Debt should be made with particular economic and behavioral goals in mind. There is no reason at all to connect the rate at which Treasury Bonds are created to either tax rates or spending levels, except in terms of the larger economic goals of the government as a whole.

The upshot of all this is that all this talk of government deficits and a ballooning national debt is pure delusion. Too many people think of money as if we were still on the Gold Standard, and it was possible in some way to "run out" of money. The only real limit on government spending is the capacity of the American economy and American workers to produce the goods and services the government and the private sector wish to consume. So long as there is mass unemployment, we are nowhere close to reaching the limit of that capacity.

Given all that, what would the best possible solution to another standoff over the debt ceiling? Honor it, stop issuing Treasury Bonds, but keep on spending just like before.

Think about it another way – if the government really ran a budget surplus, that would mean that the government is draining money out of the private economy every year, and destroying it. What possible purpose could that serve? How would a vampire state such as this be desirable in any way, shape or form? It is much better to think of the government as the life-giving sun, providing an endless supply of energy for human activity.

If all this is true, then why are so many people so committed to the false and destructive idea of a balanced budget? Part of it, of course, is pure ignorance. Many people simply don't realize the difference between a government with a sovereign currency and a household on a fixed income. However, in my opinion, at least a few people out there don't want the government to add money to the system unless it's going to them. They want to have all the money, and to maximize their relative position in comparison to the ordinary citizen. It's not enough to be rich – they want to be a new class of feudal lords, and to use their total monopoly over private money and private credit to make everyone else grovel before them. But they can't do that if the government is out there, creating money and giving it to the people who need it, and thereby stimulating economic independence. They don't want an independent and healthy private economy – they want their own bank account to be the sum total of the economy, and the people to be a mass of indentured servants.


Plus note; there is no state in the world who's running positive public debt. Just because you can do it in Ars-Regendi, doesn't mean it's worthile in the real world. Even Australia's government, who sometimes achieves a small fiscal surplus - has to issue public debt in order to satisfy its own monetary policy goals.
And as for building a government surplus on net exports; sure, it's a sound way - or rather - the only solid way to do it without triggering a recession. To build that government surplus on the shoulders of the foreign sector's deficit. However, nonresidents can only leverage themselves so much until they can't anymore. The nongovernment sector (private domestic sector and foreign sector) can only run deficits by leveraging themselves up to a point, before they will inevitably go bankrupt. ONLY the government sector can run deficits without going bankrupt - because he is the currency issuer.
If the US government were to have run perma-balanced budgets, then the nongovernment sector wouldn't have grown at all. Since new net financial assets can only enter the nongovernment sector via vertical transaction.


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This post was last modified: 11.06.2014 22:36 by Helsworth.

11.06.2014 22:19
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Alexei B.Miller
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Vlaxia
Post: #7
RE: Exchange Rate, Deficit, Trade Balance

Your getting me hot over here with your knowledge Helsworth....stop it before I kidnap you and lock you in a cage to teach me economic for the rest of your days as I rub body oil over me and listen to opera.


"Hitler wanted to destroy Russia, everyone needs to remember how that ended"

Vladimir Putin

11.06.2014 23:08
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Helsworth
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Post: #8
RE: Exchange Rate, Deficit, Trade Balance

Alexei B.Miller Wrote:
Your getting me hot over here with your knowledge Helsworth....stop it before I kidnap you and lock you in a cage to teach me economic for the rest of your days as I rub body oil over me and listen to opera.

Promise you'll at least pay me a decent minimum wage. Daumenhoch


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12.06.2014 08:55
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Alexei B.Miller
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Vlaxia
Post: #9
RE: Exchange Rate, Deficit, Trade Balance

Helsworth Wrote:

Alexei B.Miller Wrote:
Your getting me hot over here with your knowledge Helsworth....stop it before I kidnap you and lock you in a cage to teach me economic for the rest of your days as I rub body oil over me and listen to opera.

Promise you'll at least pay me a decent minimum wage. Daumenhoch


The free market would value your minimal wage valuation to be at 12.50/hr since you will receive free housing, food, and access to modern utilities as well as complimentary disposal of your male reproductive fluids via a sensual and lively event coordinated by myself.


"Hitler wanted to destroy Russia, everyone needs to remember how that ended"

Vladimir Putin

14.06.2014 05:07
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Richard Wilson
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Post: #10
RE: Exchange Rate, Deficit, Trade Balance

This is sounding kinky Big Grin

14.06.2014 10:31
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