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Playing Humpty Dumpty: More On The Definition Of “Balance Of Payments Crisis”

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Posted on 29 April 2021 by Philip Pilkington Article of the Week from Fixing the Economists “When I use a word," Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean - neither more nor less."My previous piece on the Kaldorians and their insistence on misusing well-established economic terminology to make their argument that the Eurozone crisis is a balance of payments crisis (BoP crisis) met with all sorts of calls for definitions. No matter how many I provided the calls continued, like a small child asking “why" over and over again.Please share this article - Go to very top of page, right hand side, for social media buttons.Anyway, for the sake of posterity here are some more instances where a BoP crisis is clearly being defined as an inability

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posted on 29 April 2021

by Philip Pilkington

Article of the Week from Fixing the Economists

“When I use a word," Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean - neither more nor less."

My previous piece on the Kaldorians and their insistence on misusing well-established economic terminology to make their argument that the Eurozone crisis is a balance of payments crisis (BoP crisis) met with all sorts of calls for definitions. No matter how many I provided the calls continued, like a small child asking “why" over and over again.

Playing Humpty Dumpty: More On The Definition Of


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Anyway, for the sake of posterity here are some more instances where a BoP crisis is clearly being defined as an inability for an entity with a sovereign currency being unable to meet its obligations to another entity with a sovereign currency. On page 230 of the IMF’s Balance of Payments and International Investment Position Manual: Sixth Edition it is written:

14.39 There are many situations in which it may not be feasible to rely on private and official resources to finance a current account deficit on a sustained basis. If a deficit is unsustainable, the adjustment will necessarily happen through change in the willingness of market participants to provide financing or depletion of reserves and other financial assets, or a combination of both. Such adjustments may be abrupt and painful (up to the possibility of a balance of payments crisis).

Or again:

14.42 If large amortization payments are due in the near future and expected financial inflows are not sufficient to cover payments falling due, it may be necessary to undertake adjustment measures beforehand to avoid more drastic measures required for dealing with a subsequent balance of payments crisis.

Clearly the IMF considers a BoP crisis to be one in which the funding of a current account deficit is at issue. This, of course, cannot happen in the Eurozone anymore than it can happen between states in the US because of the existence of the Target2 mechanism for balancing payments.

Fortunately or unfortunately, I really cannot be any clearer than presenting the IMF’s own manual on the issue. Of course, those that want to continue to play Humpty Dumpty and make up their own definitions of words will not relent. Why? Because when smart people make such stupid mistakes they often feel the need to dig their heels in rather than issue a mea culpa. But in doing so and continuing to play at being Humpty Dumpty it is only their own credibility they will damage.

Update: Serial Humpty Dumpty Ramanan has responded to my original post. In his latest post he gives us a nice definition of what a “balance of payments" is, but no definition of what a “balance of payments crisis" is. Of course, from his highly idiosyncratic use of the term toward the end of the piece we can see that he does not use normal vocabulary. This is enormously ironic given that, in the past, Ramanan has been insistent that others use standard definitions of terms because if they do not “one gets hodgepodge and/or endless redefinitions". Indeed. Of course, when it comes to trying to debunk MMT Ramanan’s double standards slip into the mix and we get “hodgepodge and/or endless redefinitions".

Update II: Here is more evidence that the IMF recognises a BoP crisis to be one in which the country in question cannot receive funding, leading to substantial downward pressure on their currency:

Why do balance of payments problems occur?

Bad luck, inappropriate policies, or a combination of the two may create balance of payments difficulties in a country - that is, a situation where sufficient financing on affordable terms cannot be obtained to meet international payment obligations. In the worst case, the difficulties can build into a crisis. The country’s currency may be forced to depreciate rapidly, making international goods and capital more expensive, and the domestic economy may experience a painful disruption.

The Irish euro, of course, has yet to depreciate against the German euro signalling that once again, the Eurozone crisis - despite being in part due to trade imbalances - is not a BoP crisis.


This article was first posted 02 September 2013.


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