Financial Markets, Money and the Real World
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Financial Markets, Money and the Real World

Paul Davidson

Paul Davidson investigates why the 1990s was a decade of financial crises that almost precipitated a global market crash. He explores the reasons why the global economy still struggles with the aftermath of these crises and discusses the possibility that volatile financial markets in the future will have real impacts on whole industries and national economic systems.
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Chapter 9: Trade Imbalances and International Payments

Paul Davidson


A Keynes-Post Keynesian monetary view of transactions between nations, whether the nations are in an unionized monetary system (UMS) or a nonunionized monetary system (NUMS), suggests that any persistent payments imbalance creates a liquidity problem for both nations. The liquidity problem for the (deficit) nation that cannot pay for all its imports with its current export earnings (plus net investment income and net unilateral transfer payments) is how the nation is to finance the excess of payment obligations over its international receipts. Initially exporters in the export surplus nation provide net short-term trade credit (finance) to the importers. This temporary short-term trade credit gives the deficit nation time to obtain longer-term funding of any persistent international payment liabilities. For the export surplus nation the less pressing liquidity issue involves choosing which international liquid time machines it should use to store its surplus international earnings (international resource claims). Classical economic theory argues that any observed international payments imbalance is only temporary and cannot persist. Some classical real adjustment mechanism will automatically eliminate the payments imbalance. Both surplus and deficit nations have equal roles to play in this hypothetical classical adjustment mechanism. Classical theorists believe that any liquidity problem, if it exists at all, is transitory and will not affect the global real income in the long run. In discussing classical adjustment mechanisms, Harry Johnson claimed that any liquidity problem, as suggested by Keynes’s monetary theory, is irrelevant. ‘In fact the difficulty of monetary theory can be...

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