Sunday, March 4, 2012

Dan Kervick — Interesting piece by Gavyn Davis today in the Financial Times

Dan Kervick comments, "Interesting piece by Gavyn Davis today in the Financial Times. Further evidence that core insights of MMT are penetrating the mainstreamm" and cites this quote:
Davis: It is now widely recognised that a central bank cannot become insolvent in the same way that a private company can. Even if it incurs losses on its assets which more than completely eliminate its equity, it can never find itself in a position where it is unable to settle its debts, at least in its own domestic currency. Most of the liabilities of a central bank come in one of two forms: banknotes, and commercial banks’ deposits at the central bank. It is impossible for the private sector to force the central bank to exchange these assets for any other asset (like gold, for instance), and in any event the central bank can create more of each of them at will. Hence it can never become illiquid.
Read it at The Financial Times
ECB Liquidity Is Not A Free Lunch
by Gavyn Davis
(contributed by Dan Kervick from the comments)


Anonymous said...

The eurozone makes me sick to the stomach. The ECB hands out a trillion euros to banks "to stop them from going bankrupt" and then wags its finger at the Greeks and says it can do nothing to help them. It is the most base and disgusting form of institutionalised hypocrisy I have ever witnessed.

Anonymous said...

"at least in its own domestic currency."

And there is the question, is it not? How does a CB do this in a global economy where everything is intertwined and interconnected?

They can't simply print to infinity, as their currency does the cliff dive. Even our Reserve Status will not save us from the same fate as Greece.

We are the best looking horse in the glue factory.

Joseph Laliberté said...

I guess when he says "it is now widely recognised...", he should have added "by mainstream economists" as I think accountants have been aware of this factoid for some time...

Extract from the section "Liquidity Risk" from the Bank of Canada Annual report (2010):
"As the nation's central bank, the Bank is the ultimate source of liquid funds to the Canadian financial system, and has the power and the operational abiity to create Canadian-dollar liquidity in unlimited amounts at any time."

Matt Franko said...


We dont "print" anymore, it's all done on computer systems these days fyi, check it out.

What is "reserve status" and who or what world body gets to designate if a currency qualifies as a so-called "reserve currency"? Please identify the authority that designates this...


Ralph Musgrave said...

I do sympathise with senior Euro politicians handing billions to private bank shareholders – after all, those politicians socialise with said shareholders, and one doesn’t want one’s next cocktail party turning ugly does one? Moreover, those shareholders probably contribute to one’s election expeses.

If I had an influence where the output of the printing press was channelled, I’d channel it in the direction of the young good looking females of my acquaintance. But everyone to their own tastes.

Mario said...

classic ralph!! LOL

What do you guys think of the seignorage argument he makes in the article? I found that interesting.

It seems to me however that CB's are really created by the government/people. The balance sheet of the CB (or at least it's perceived stability) seems to only affect the global value of that currency. But unless the people take down the CB it's not going anywhere....ever. We are stuck with our CB's until we decide otherwise. They will NEVER go "bankrupt" they will only become unpopular and then thrown out. That's really it. In a sense it is like a relic of the politics of monarchies. Perhaps a pre-cursor to the fall of a CB is it's perceived value based on it's balance sheet and thereby the global value of it's currency, however that is a long, drawn out process, and as we can easily see today, there are many ways to "skin that cat" and keep extending/pretending. thoughts? Also why can't I get emails sent to me of future comments? Help?

Mario said...

"In a sense it is like a relic of the politics of monarchies."

except today there is no need for primo geniture b/c the corporate/government entity takes care of that "issue."

I love what Tom said once about how democracy doesn't scale up so well. Very interesting point indeed. The real question is can we do the impossible....which is achieve a fair and just and balanced republic? B/c that's really where we are headed it seems to the neo-Roman state.

Anonymous said...

Very large countries seem to end up with disfunctional democracies. Look at the USA, or India. Democracy doesn't work as it ideally should on such a vast scale. Smaller countries and international treaties between them might be better, but that's never going to happen in this age of military and financial warfare, where bigger is better.

Anonymous said...

Matt, hopeless so I waon't even try. It's all good and party like it's 1999. There now you have your hopium for the day.