Endogenous Currency Valuation
While the concept of an "equilibrium" CTE or exchange rate is useful for conceptualising foreign exchange markets, it misrepresents how currency values actually emerge and stabilize endogenously, according to MMT. Currencies do not have an intrinsic value that can be determined independently and then imposed upon an economy.
Rather, a currency's value reflects the demands placed upon it to facilitate exchange across borders and in domestic economies. And demand depends almost entirely on spending, especially government spending.
Without ongoing government spending, there would be no basis for a stable currency value or equilibrium CTE.
Demand originates from spending, so aggregate demand and a currency's value remain undefined without spending.
Only by sustaining sufficient demand through budget deficits can a government ensure full employment, price stability, and a balanced position in both its currency and trade accounts.
Trade balances may ultimately influence the CTE, but they themselves depend on and follow existing patterns of production, exchange, and spending in an economy.
Exchange rates adjust endogenously to the balance of trade flows and the overall balance of payments. So while budget deficits might impact exchange rates or trade balances in the short run, they are essential to managing demand, stabilizing prices, and achieving external balance over time, according to MMT.
Interest rates provide a secondary tool for signalling demand pressures or inflation risks, but they do not primarily determine demand or anchor inflation in the way that government spending does, according to MMT. A balanced budget is neither feasible nor necessary. And high debt levels pose no risk of insolvency for governments that issue their own currency. The only meaningful limits are real resource constraints and high inflation hazards.
The concept of equilibrium CTE values obscures how currencies and economies naturally self-stabilize endogenously.
An MMT perspective brings the realities of currency, demand, spending, balance, and full employment potential into clear view.
The value of money emerges from how it is used in practice to facilitate exchange, not from rigid constraints.
Government spending is essential to generating demand and ensuring prices remain consistent with full productive capacity and employment. Exchange rates, trade balances, interest rates, debt levels, and budget balances all follow naturally from the purpose they serve, not the other way around.
Overall, MMT, as understood and described by Modern Monetarist Theorists, provides a more coherent and compelling framework for understanding modern economies and their financial systems and currency values.
Dominate Social Media with Postwise.ai 🚀
Are you struggling to gain traction on social media? Do you spend hours trying to craft the perfect post only to see mediocre results? There's a better way.
Introducing Postwise.ai, the breakthrough AI solution for creating viral social media content.
💡 Leverage the power of 1000+ writers and machine learning to generate hot-trending posts in minutes.
⏰ Save time by simply entering your topic or key message—we'll optimize the wording, hashtags, images and more to maximize engagement.
📈 Watch your followers, likes, and sales skyrocket thanks to our proprietary GrowthToolsTM and link plugging.
💰 24/7/365 support from our social media experts ensures your campaigns are finely tuned for success.
Dominate your competitors and revolutionize your social media marketing; just use the affiliate link below.
here
If you enjoyed this post, please consider buying me a coffee by pressing the button below.
Each morning, The Sample delivers one compelling article tailored to your interests. The Sample scours blogs and newsletters to find the most insightful content on the topics you care about, then send you the best article to read with your coffee. If you enjoy what you read, you can subscribe to the writer or publication with one click.
The Sample is your daily window into the ideas and conversations shaping the world. Let us be your bespoke guide to the internet—sign up now to start reading.