Our exploration of MMT's approach to international trade has established the multi-level analytical framework and addressed specific theoretical critiques from Steve Keen. We've seen how distinguishing between different levels of analysis--from real resources to employment effects--resolves apparent contradictions. In this post, we'll examine how these analytical levels manifest in actual trade operations and why this matters for macroeconomic policy.
The Operational Reality of Foreign Exchange
Neil Wilson's "Anatomy of an FX transaction" demonstrates that while the process starts with money creation, the desire to eliminate currency risk ultimately reduces it to an exchange of savings. Both Keen and Mosler agreed with this characterisation.
The key insight from MMT's analysis of FX transactions is that trade doesn't create new net money--it changes the ownership of existing currencies. After all steps in a transaction, what has changed is who owns which currency, not the total amount of each currency.
Keen's Fundamental Contradiction on Money Creation
Despite previously agreeing with Wilson's analysis, Keen made claims earlier this year that directly contradict this understanding. In his forthcoming book "Money and Macroeconomics from First Principles for Elon Musk and Other Engineers," Keen explicitly states:
"As shown in Chapter 2, 'The First Principles of Money' (page 8 et.seq.), a government budget deficit creates money. Similarly, a trade surplus—or more correctly, a surplus on the balance of payments—also creates money."
He further claims:
"Therefore, at the level of the private banking system, and in the aggregate, the effects of a government deficit and a trade surplus on the money supply are identical."
This represents a fundamental contradiction in Keen's position. Either:
Trade surpluses create money in the same way as government deficits (his current claim), OR
FX transactions ultimately reduce to exchanges of savings rather than money creation (his previous agreement with Wilson)
Both cannot be simultaneously true. This contradiction reveals a critical flaw in Keen's critique of MMT's approach to international trade. By failing to maintain analytical consistency about the nature of international monetary operations, Keen's critique loses its foundation.
The reality, as we will demonstrate in our balance sheet analysis in Post 4, is that trade does not create new net financial assets in the global system. It merely redistributes existing currencies between entities. This is fundamentally different from government deficit spending, which does create new net financial assets.
The Multi-Level Framework in Action
This operational reality reveals why analysing trade through multiple levels is essential. Consider how a typical export transaction manifests across our five analytical levels:
Real resource level: A physical product leaves the exporting country (real cost)
Financial flow level: Currency ownership shifts between entities (neutral exchange)
Capacity utilisation level: Production scales may benefit from larger markets (potential benefit)
Employment level: Jobs may be supported by export production (potential benefit)
Sectoral balance level: Private sector financial positions may improve (financial benefit)
What appears contradictory to Keen — claiming exports are both costs and benefits — becomes coherent when we specify which analytical level we're addressing. Keen perceives contradictions because he flattens these distinct levels into a single plane of analysis. This is precisely why he misinterprets the "exports as costs" statement as a policy prescription rather than a starting analytical position.
The contradictions Keen identifies stem from trying to analyse all five levels simultaneously without recognising their distinct operational contexts. For instance, saying "exports are costs in real resource terms but may provide employment benefits" appears contradictory only if we fail to distinguish between resource analysis and labour market analysis.
MMT's sophisticated framework recognises that understanding the real resource costs of exports isn't to halt all exports but to ensure policymakers properly account for what is actually being sacrificed when pursuing export-led growth strategies. By integrating these five levels, we gain a comprehensive understanding that no single level can provide alone.
The Relevance to Macroeconomics and Trade Theory
Contrary to Keen's assertion, MMT's approach to international trade is highly relevant to both macroeconomics and trade theory precisely because it provides a multi-dimensional framework that conventional approaches lack. By understanding the operational realities of monetary systems and sectoral balances, MMT provides insights that help policymakers:
Recognise the real resource constraints that limit policy options
Develop strategies for managing exchange rate effects
Address structural trade imbalances through targeted industrial policies
Implement buffer stock approaches to manage economic stability
Focus on real social needs and environmental benefits rather than arbitrary financial targets
Keen's fundamental misunderstanding stems from attempting to evaluate MMT's trade analysis through a one-dimensional lens. MMT purposely begins with the real resource perspective because conventional economics systematically neglects this level of analysis, which often treats financial accounting identities as if they were objectives in themselves.
What's particularly striking about this debate is its persistence. Despite numerous exchanges between MMT scholars and Keen over the past seven years, the core disagreements remain unresolved. This suggests the issue goes beyond a simple misunderstanding to reflect fundamentally different analytical frameworks
The purpose of MMT's framework is not to maximise imports and minimise exports as Keen suggests, but to understand how trade fits into the broader macroeconomic framework. By distinguishing between different levels of analysis, policymakers can develop strategies that:
Recognise when pursuing exports genuinely serves the domestic public purpose
Identify when trade surpluses represent missed opportunities for domestic well-being
Understand the specific constraints facing different types of economies
Develop appropriate policy responses that address real rather than imagined constraints
While thoughtful in many respects, Keen's critique fundamentally misses how MMT's multi-level analytical framework transforms our understanding of international trade. By treating MMT's analysis as if it operated on a single level, Keen misconstrues a sophisticated framework as simplistic policy advice.
In reality, MMT's approach allows us to see beyond the mythical financial constraints that favour private corporations and the financial sector, focusing instead on real constraints centred on natural capital and human well-being. This perspective — analysing international trade through multiple interconnected levels — is essential for developing trade policies that serve the public purpose rather than narrow financial interests.
With this conceptual groundwork established, our next post will provide a detailed balance sheet analysis of a typical international trade transaction, demonstrating how the accounting reality validates MMT's insights about real resource flows. In the final post of this series, we'll examine Keen's latest contradiction regarding money creation and trade surpluses, showing how it fundamentally undermines his critique of MMT's approach to international trade.
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