a quick response: there’s a just so story about floating exchange rates as a force for balance. in analogy to the old species flow story, the theory is surplus countries’ currencies would “naturally” appreciate, rendering their tradables less affordable, correcting imbalance. 1/

the problem with this is lots of things affect currency valuation, including mercantilistic trade policies intended to sterilize and prevent currency appreciation. 2/

in general relying on “nature” to get what you want won’t work unless you also monitor and encourage nature in running its course. entropy rules in the absence of intentional infrastructure, even if “nature” in some sense provides the grain you are going with. 3/

a close analog to a foreign payouts tax is the devaluations perennial deficit countries would periodically engineer, like southern europe in the pre Euro fix days. 4/

and that worked (i think, i’m not looking at data now, but my matchbook mental history suggests) at limiting deficits, both directly by changing current prices, but also because creditors had limited willingness to risk holding deficit country own-currency debt. 5/

one might imagine using currency reval alone to try to engineer a norm of balance, not relying on “nature” to take its course, but to insist that deficit countries issue scrip to buy FX and depreciate until something close to balance is achieved. 6/

but that’s going to be a much harder sell to deficit countries than a tax on foreigners, as it makes all imports more expensive. and motivated surplus countries can sterilize to counter. and creditors understand FX fluctuations as potentially reversible. 7/

with a foreign payouts tax, deficit countries gain twice (tax revenue first, balance later), and losses are realized, asymmetric, not reversible by fluctuation. the tax has a level, so it can be titrated intentionally between a gentle nudge towards balance or a sharp insistence upon it. 8/

a foreign payouts tax works even between countries that share currencies, the US and Ecuador, Germany and Greece. (i’d prefer the Europeans strengthen fiscal union and redistribution, and so not need to constrain balance internally, but they’re not there yet.) 9/

currency revaluation is a complexifier for a foreign payouts tax. a tax-imposer’s currency might plausibly devalue (bc there is less foreign demand for its now tax-impaired assets) or appreciate (as participants in longstanding trade arrangements try to share incidence of the tax, as w/tariffs) 10/

but the virtue of the tax is the taxer can overwhelm the caprices and fluctuations of FX markets by adjusting an instrument, rather than hoping chaotic market forces do the job for them under what again is a kind of just-so story. /fin