Here’s the basis for this essay, from New Economic Perspectives.

Conclusion: One sector’s deficit equals another’s surplus. All of this brings us to the important accounting principle that if we sum the deficits run by one or more sectors, this must equal the surpluses run by the other sector(s). Following the pioneering work by Wynne Godley , we can state this principle in the form of a simple identity:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

Because of accounting Foreign Balance + Balance of Trade = 0. Foreign Balance is the corresponding accounting entity to Trade Surplus or deficit which balances the books.

The equation becomes

Domestic Private Balance + Domestic Government Balance = Balance of Trade

Let’s define some terms:

• $ Balance denominated in US Dollars: eg $ Domestic Private Balance
• E Balance denominated in non-US dollars: eg E Domestic Private Balance
• Exchange Rate, US Dollars to Non US Dollar

For the US the equation becomes:

$ Domestic Private Balance + $ Domestic Government Balance = $ Balance of Trade

And for everyone else with no dollar denominated government debt, it becomes:

E Domestic Private Balance + E Domestic Government Balance = $ Balance of Trade

Which we’ll shorten to

E Private Balance + E Government Balance = $ Balance of Trade

Notice for non-US currencies, the assumption is that the trade balance is denominated in dollars, because of the dollar’s status for the world’s reserve currency. Trade deals (especially oil) are (usually) paid in dollars.

If the exchange rate for a currency goes down, then more local currency is required to acquire dollars.

But the Government of E has at one time or another “borrowed money,” that is, it has an interest bearing account for domestic bondholders at its Central Bank denominated in E, and in dollars Denominated in $, and pays interest on both. Therefore:

E Private Balance + (E Government Balance + $ Interest) = $ Balance of Trade

Now let’s examine the need to settle trade deals in dollars in two cases, trade surplus, and trade deficit, and an interest payment in dollars of $100

• Trade Surplus

$ Balance of Trade = 100, (a surplus) so the sectoral balance equation becomes

E Domestic Private Balance + E Domestic Government Balance + $ 100 = $ 100

E’s economy has enough dollars to pay the non-sovereign interest, and the economy of E of has enough dollars to pay the $ denominated interest, and require no additional dollars, and is independent of those who issue dollars (The US).

• Trade Deficit

$ Balance of Trade = ($ 50) , (a deficit) so the sectoral balance equation becomes

E Domestic Private Balance + E Domestic Government Balance + $ 100 = ($50)

Which leads to 3 questions:

1. Where does E get the $150 required to buy its oil and pay its interest (or other import)?
2. Who is in control of the policies by which E obtains the $150 required?
3. Is E still sovereign (independent of external controls)?

Some answers to question (1) are:

1. E can borrow more dollars, but that’s going further and further into debt.
2. E can export goods, but by definition world trade balance is zero so some countries must run deficits and some must run surpluses.
3. E can allow foreign investment, which buy E’s assets in dollars, but this has the consequence of increasing E’s outflow of dollars, on assets owned by foreigners. There is also a limit to the assets E has which can generate “rent” for foreigners.
4. E can export people and hope remittances from $ can balance its import needs. Good luck with this. Some small countries have tried it; it may help some, but overall does not solve a balance-of-payments problem caused by importing more than a country exports.

As you can see, there are no truly good answers to question (1). No matter what choice a debtor country makes, the only way out of the debt trap is to increase its sales to the country with which it has a negative trade balance. Typically, for small countries, this may be very difficult to do successfully. Therefore, they become debtor nations internationally, and must continually pick their best answer to question (1). Consequently, their international debt tends to increase rather than decrease, or they become asset stripped and then the debt increases, unless the creditor nations forgive some of the debt. The negative balance of payments creates a debt trap that gets harder and harder to surmount, over time.

One way out of this trap was avoided in the past was the regime which existed up to the 1980s: Restricted trade and a focus by all countries on local production.

Conclusion

Non-US countries with trade deficits are, in the strict sense, NOT SOVEREIGN, because they have to use another country’s currency to settle their international debts, and therefore must follow rules and requirements set by that country. Therefore, MMT does not apply to their economies. They are stuck in a neo-liberal trap, enforced by the World bank and IMF as debtor colonies of the US.

One can only assume that TTIP, TAFTA and probably TISA expand the dollar empire, providing One Ring To Rule Them All.

The Banks rule, all others are debtor serfs.