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About Wandering_Dog

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  1. A ledger is not a legal instrument. It's just a method for tracking something. If someone writes into a ledger that they own or owe something, or have X of some currency, this is not a legal right or obligation, its just an arbitrary number in a ledger. Swap line contracts dictate how much a foreign CB can borrow and what the fx rate will be. The ledgers are just tracking how each entity has used the contract. Say the ECB and Fed enter a swap line contract for $10, and when the ECB requests $10 the Fed inadvertently types in $100, this entry has no impact on the contract. The contract prohibits such an outcome, and the parties must correct the error, in this case the Fed deletes a zero. [I went looking around the Fed website for an actual contract but didn't find one. If you take a look around online you'll find one eventually]. In the Thai Baht example, the US spent the Baht on something, and it promised to repay that amount in the future. The Thai CB must be interested in creating some kind of economic activity by making that loan. Maybe it wanted the US Gov to spend on goods and services in Thailand, which would increase GDP. Then later, when the US needs to repay, it has to engage in some form of economic activity to reacquire Baht from other account holders. When the US refused to repay, those deposits sit out in the economy, in some Thai commercial bank, rather than being removed from the economy by the repayment. If the Thai CB wanted, it could freeze the accounts of the recipients, in order to reduce any additional economic activity, such as if they were concerned about inflation or financing terrorism. Does it matter? Sort of: those deposits are purchasing power. If the Thai CB had given them to you, and you bought Lambo's, then you get Lambo's and the economy gets increased demand for luxury sports car imports. Is that good for the Thai people in general? Probably not. The Thai CB could loan out for spending on anything, but its constrained by the legal system not to, and this is an entirely different conversation about how we choose to organize our economy politically, who holds the power to create purchasing power and why. That power has been delegated to commercial banks. Excess reserves mean that some group of people made bad loans, and had to sell assets to the CB in order to make debt payments, which defends the (asset) price level. So, the system became fragile, the CB intervened, and now there are excess reserves and the commercial banks are scared. They think by tightening lending standards they will reduce their risk exposure to future defaults, but they actually are just reducing the amount of deposits in the economy, which increases defaults. This is a feedback loop. So yes, I think. Technically CB "money" is also credit, as its a non-convertible liability. How you want to define things in English is up to you, the speaker, just make your definitions clear. Credit is money. Note that money is not created through a 'fractional banking' process. Just let that go. Bank loans create their own deposits. The bank is purchasing a security from you (the loan) in exchange for its own liabilities (the deposits). If you want to get specific, think of everything in existence as having a parameter value called "moneyness". This parameter takes a value between 1 and -1, when its 1 its used for final settlement of any contract on Earth, when it's 0, its unusable garbage that no one wants, when its -1 it's harmful radioactive waste (like an oil future in March). And this parameter changes over time according to the behaviour of system participants themselves. So, in your example, a Fed reserve deposit has a moneyness value of 1, it is the final unit of settlement. But ironically, the moneyness of reserve deposits changes depending upon the system itself: If someone had an account at the Fed with $10 in it, you couldn't accept it in payment because you have no account at the Fed. [moneyness ≠ 1] If you have an account at a commercial bank, you can accept it, the bank can hold the deposit on your behalf. [moneyness = 1] If they convert those reserve deposits to cash at the Fed, you can accept cash anytime. [moneyness = 1] If you are a store that doesn't accept cash, you won't accept cash. [moneyness ≠ 1] So all credit is money, but it's moneyness varies--sometimes it's not really money at all, it depends.
  2. It's fun to think about. The swaps have been unwound, you can check out the Fed's balance sheet here and the track swap line changes here. I was talking about on a CB's ledger. The CB USD swaps are settled on the Fed ledger with USD. If the US CB enters into a contract to borrow Baht from the Thai CB, the position is recorded on the Thai CB ledger. It is settled there when another account holder at the Thai CB transfers Baht to the Thai CB (which is recorded as deletion of that money). The US CB will record something on their own ledger accordingly, but that US ledger entry doesn't have any effect on the contract between the US and Thailand, its just an accounting entry. Resolution of the contract would be in the contract terms or fall into some international court according to existing international law, here you'd have to talk to the more legal-focused economist types for specifics. In general however, there is nothing preventing the US from saying 'eh, whatever' and not ever getting anyone on the Thai CB ledger to transfer that Baht, and the Thai CB is of of luck (but not really, its just accounting entries to them). Because Thailand has no power over the US legal system. Pretty much. It's just typing in numbers in a computer. Operationally its probably similar to opening Excel and typing +100 in cell A1. The Fed has no control over the total money supply, its fully privatized (by commercial banks and shadow banks). If the Fed gives you an account at the Fed, and marks up your account by 1000, and you then spend that, they they would be affecting the money supply. To control it, they would have to take a much more active role dictating lending to the banks themselves, such as in Japan post WW2. Reserve balances are uncorrelated with bank lending. There may even be a case for negative correlation, as high excess reserves is a signal of fragility, and banks don't lend into that environment, they tighten lending standards instead. When assets roll off the CB balance sheet, the total amount of reserve deposits decreases, as the reserves are used to pay off the maturing asset and the CB only accepts reserves as payment. For this to occur without any issues, the structure of obligations must be robust, as the total amount of settlement balances is decreasing. Typically, this is not the case. Given some level of reserve deposits, banks then take on additional risk using those deposits as a 'foundation' assumed to always exist. This is the basis of Minsky's financial instability hypothesis: reckless behaviour only increases over time, it never decreases. There is nothing stopping banks from improving their behaviour, reducing risk, lending more productively. Empirically, the opposite always occurs. So yes, the balance sheet may reduce as the assets roll off. However, you will generally see a large increase to the balance sheet as the structure collapses and intervention is required to defend the price level. Fed RR can be seen here.
  3. I'm not sure exactly what you are asking. Answering the question directly as you asked it, if CB's held less fx reserve deposits, then they would have less assets, the other CB would have less liabilities, and subsequently the BS's would be smaller. Is this relevant? Not in the context of your question, as far as I can tell. A CB balance sheet, denoted in its own currency, is just accounting entries. It's meaningless just like numbers are meaningless. They can mark up (down) accounts as they see fit, whatever numbers are on the ledger (and all the off balance sheet entries). It doesn't matter. Why. CB's have a legal obligation to clear markets. It's not optional. How they choose to act in order to fulfill those legal obligations can vary according to each institution, whether they mark up bank accounts, buy bonds, etfs, distribute cash, their actions follow typically some economic ideological framework and they answer to (quasi) democratic institutions like parliaments, who craft the laws, and the courts who interpret whether or not the law is being applied correctly (supposedly). But they must type in those numbers when its needed, period. And they won't run out of numbers. So, the idea I think you are pursuing, is one in which CB's don't lend to each other and markets don't clear. Which, as we saw in March, would have resulted total economic collapse had they not typed in some numbers in their ledgers to get reserve deposits to those who needed them. Hence, the idea that balances of reserve deposits in the ECB's account at the Fed should be reduced, because smaller balance sheets are better, is not particularly important, so long as the law governing CB's is the law we have (price stability). The CB's don't care, nor should anyone care, as you can create and delete those numbers anytime. All that matters is that markets continue functioning (clear). Next question would be, well, why are balance sheets increasing, why hasn't this happened in such a way before? Simple answer: in the past the system crashed. People got wiped out, we had depressions, then wars, as high unemployment creates political instability that pushes for centralized employment programs funded by the CB. The fact that the CB balance sheet has lots of assets on it means that banks made loans that won't be repaid, and letting them default would reduce the price level, and the CB is defending the price level by purchasing those zombie loans (and we're ignoring that they are defending the asset price level, not consumer goods prices). Whether its by liquidating USTs to give balance sheets the short term reserve deposits they need to make payments today, or buying HYG etfs or loaning directly to businesses. The size of the balance can thought of as a reflection of poor historical decisions by both banks and firms and that the structure of those obligations is connected in such a way that if they fail the CB's must intervene in order to uphold their legal obligations. Is this a contradiction of my previous statement, that the numbers don't matter? Context matters: Are the banks and firms colluding to extract purchasing power from a system that continually consolidates wealth and power; are CB balance sheets being exploited? This question is about social classes, power, politics, etc. Your question, if I read it right, it about CB monetary operations. From an operations perspective, it's not important. From a political perspective, it's extremely important. Is this distinction clear? Anyway, you can reduce the CB balance sheets only by improving the allocation of real assets, so physically restructuring businesses whose incomes do not cover their debt payments, then absolving the debt. These ponzi firms, or zombie firms, borrow in order to pay their debts, and prior to the crisis about 20% of global (or US?) firms qualified as "zombie". And this system continues expanding (more debt, bigger CB interventions, bigger CB balance sheet) so long as the loans banks created go towards unproductive investments, namely financial transactions like acquisitions/stock buybacks/home mortgages for existing homes/etc. Lastly, I'm seeing some references to "fractional reserve banking" in this thread. Bank do not collect then lend out deposits, banks create deposits themselves. If someone is lending out a portion of their assets, they are a fund, or a bank-in-name-only. The US has no reserve requirement, so the idea that money is multiplied up according to some required reserve is mathematically nonsense, there is no empirical evidence supporting it. It's dead. Sorry to be the bearer of bad news for those who were taught this model of the financial system.
  4. Sounds like an angry neoclassical economics response. Monetary Post Keynesians predicted this crisis, the last crisis, QE's impact on prices, and much more. You can whine all you want about your models, you're wrong.
  5. That is what just happened. Without fed intervention, everything would have gone to zero. The Fed is really skewing your perception here. Just FYI, no one was buying, not even treasuries.
  6. The tax is a drain, its not spent back into the economy by the gov. You can see this for yourself by actually running the balance sheets.
  7. This is false. Gov doesn't tax to spend, your causality at the Federal level is reversed.
  8. More importantly however, is that inflation is not a function of the "money supply". The amount of money can impact prices, but its a small component for what is currently used to define inflation, which is consumption goods--these prices are sensitive to workers negotiation power, which is impacted by wage rates, household debt, and union representation. These prices are not particularly sensitive to increases in bank loans because the distribution of income and wealth is skewed away from workers.
  9. No, the money expires, regardless of who holds it, at the specified time. The question you want to answer is why would anyone accept money that they can't spend, if they are the final recipient. You can close that circuit lots of ways, the most obvious is to compel by law acceptance of the currency (legal tender) and for the gov to accept the balance from the final recipient for future tax payments. The money supply has not increased. Another way you can close it is by forcing all recipients to spend the balance on debt, while offering some kind of in kind gov transfer or tax credit for recipients with positive net worth. What it means is you clear out debts without substantial long term structural impact on the quantity and distribution of bank deposits or consumer preferences.
  10. Right... You have an account, it is represented by a positive number, something like 5.56. Then you have another account, represented by another number, say 5.57. The first account will have a balance of 5.56 USD until you die, the bank fails, or the currency is no longer supported. The second account will be reduced to 0 next monday, so you have until sunday 23:59 to spend the 5.57 of USD_time_limit_Monday. Say you don't spend it, the balance falls to 0. The idea is that you have multiple currencies which trade at par for one another, but some have characteristics which leads them to recirculate very quickly, then disappear. You can't build meaningful structures of debt on top of it, because of its temporal characteristics. People don't save it, because they can't. And any fear you have of permanently distorting the money supply is eliminated, because this currency disappears on a set date (for example). You can imagine an infinite amount of such denominations of money, decreasing with time, decreasing with transaction number, decreasing with whatever, give it a think.
  11. 'Run the system' means you enter some code on your computer to create a model and run a simulation. If you ran an economy with BTC or XRP in reality, you get a crash and then everyone abandons the currency. If you somehow forced everyone to not abandon XRP or BTC as the unit of account after the crash, civilization as you know it will end, as everyone becomes occupied with killing creditors, credit, and payment systems.
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