1.
A loss of confidence in the US Treasury would also cause capital flight as domestic entities send their wealth abroad.
I am curious as to how financial wealth is sent abroad other than by taking cash out in suitcases. There are two side to every trade and if one party sells currency to purchase another currency, someone has to buy the currency. A currency cannot leave its currency zone other than by taking cash abroad as far as I can tell.
If sellers of a currency are more anxious to sell a currency than buyers are to buy, the exchange rate will decline (cet par), and the domestic currency will fall relative to other currencies in which the sellers of the currency prefer to save. But there is no actual outflow barring taking cash abroad.
And what happens when foreigners hold balances (save) in another currency? They purchase government securities in order to reap the interest. For example, the PBOC has in effect a large time deposit at the Fed.
It seems to me that terms like "capital flight" and "outflow" do not represent the reality. Rather, assets simply change hands in the market and don't actually "go" anywhere. The changes occur on books denominated in that unit of account. If it is in USD it transpires in the USD currency zone, etc.
2.
The reduction of demand for US public debt could be greater than foreign holdings of US public debt.
QE demonstrated that the Fed has the power not only to set the policy rate independently of the monetary base, but also it has the power to increase its balance sheet without limit, and if it chooses to set the prices it desires along the yield curve by standing ready to increase quantity as necessary.
Angry Bear
Is there a model in which a Country which borrows in it’s own currency has a Greece style crisis ?Robert Waldmann
10 comments:
This is all down to the 'country centric' view of currency zones. Atomistic and completely isolated from the impact on the rest of the world.
We will get nowhere until analysis starts with the entire world and breaks that down into currency zones.
All the nonsense over 'current account deficits', 'capital flight' and other garbage disappears when you look at the horse from a different angle.
Any issues in those areas can be directed solely at bank policy that doesn't understand banks create money, rather than intermediate. If you have banks that create money, you don't want them creating money to sell on FX exchanges. That is clearly going to be contra to public policy.
"but it doesn't seem to have gotten through."
LOL!
It went "through," Tom, but your answers were clearly too rational and probably made the author look idiotic.
I echo Matt's sentiments, exactly.
Strikes me that “financial wealth” is indeed “sent abroad” when someone sells US dollars. Reason is that (as Mike says) when that sale takes place, the value of dollars declines and the value of other currencies rises. At the extreme, dollars become near worthless on the World market (though not necessarily WITHIN the US). In contrast the value of other currencies rise.
That’s a definite fall in the financial wealth of holders of dollars (including those living in the US), and a rise in the financial wealth of everyone else in the world.
Tom suggest convert your reality based comments over to some nebulous metaphors and they will probably sail right thru....
But Ralph what about foreign holders of USD balances who have to report in the currency of the nation where they are registered?
Lets say the EUR/USD goes back to 1.40 over the next year... if the foreign entity has 100B in USD balances at the Fed today, that converts to 93B EUR at 1.07... so say the USD gets crushed back to 1.40 over the next year and they still have the 100B in USDs... THEN that same 100B in USDs converts to 71B EUR and they have to report a (93B - 71B =) 22B EUR LOSS for the year no?
so how has their financial wealth increased when they have to report a 22B EUR loss for the year?
I would not argue that their REAL terms have been reduced as for the EUR/USD to go back to 1.40 the EZ exporters would be then getting A LOT more for their goods in USD terms vs current...
iow the real effects the financial NOT the financial effects the real...
"Reason is that (as Mike says) when that sale takes place, the value of dollars declines and the value of other currencies rises."
And if other currencies rise they sell less stuff, which causes their economy to shrink. Which is why export led countries then intervene to buy up the 'spare' currency.
Hence why you end up with sovereign wealth funds, and chinese central banks stuffed full of USD.
Cet. Par. never is. Certainly not in the dynamic feedback network between currency zones.
You don't even have to sell dollars in order to "send them" abroad.
There's been for decades a huge Eurodollar market in London, ready to receive such dollars.
Suppose Exxon decides to transfer $ 10 million from its deposit account at Bank of America in NYC to another of its deposit accounts at the branch of Société Générale in London.
The transfer is registered on the financial account of the U.S. BoP. The U.S. acquires an asset vis-à-vis abroad (the Exxon account at Société Générale) and incurs a liability to the rest of the world (Bank of America now owes a deposit to the London branch of Société Générale).
No dollars have been exchanged for Pounds or any other currency. No reserves have left the Fed. And Société Générale now has a dollar account (but no reserves at the Fed) in NYC. Thus, it can now expand its balance sheet by issuing loans in dollars and creating new deposits denominated in dollars. Such deposits are "dollars", but not part of the U.S. money supply. And of course - since Société Générale does not have access to the Fed's discount window - its dollar deposits are at higher risk for a bank run than deposits of domestic (U.S) dollars.
Many authors would likely call such operations "capital flight" - yet they don't even impact the dollar exchange rate.
"Consider a case of hyperinflation. In that case, I don’t think a central bank can make the market clearing price of long term bonds high even by buying all but one of them (and if it buys all of them the highest bid for it’s bonds will still be low). This is essentially the case I consider — a hyperinflation starting for no particular reason. Obviously this doesn’t happen in the real world, but it can happen in some standard economic models. "
If it doesn't happen in real world then why bother?
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