Friday, May 5, 2017

Neil Wilson — Savings are an Export Product

New economic thinking about savings, international trade, and open economies.

Modern Money Matters
Savings are an Export Product
Neil Wilson


Matt Franko said...

Zombie food....

Nick Edmonds said...

The distinction between sterling assets held by someone in the US as opposed to someone in the UK is that, on the whole, people in the US prefer to hold dollar assets rather than sterling ones. So, to be persuaded to hold sterling assets, they need to see sterling as "cheap". The more sterling assets they are forced to hold (forced in the sense that the trade flows mean it must be so), the "cheaper" sterling needs to be.

The concern is not that US parties will rush to spend their sterling on UK goods, it is that they will try to exchange it for dollars (or maybe just another foreign currency, as part of global asset allocation). Of course, as they cannot actually do so in aggregate, all this does is make sterling even cheaper until enough people are willing to hold it.

That's the idea. Of course, how big an issue this really is is very hard to pin down.

Neil Wilson said...

"So, to be persuaded to hold sterling assets, they need to see sterling as "cheap"."

That's the standard line. It's a load of rubbish.

If one currency goes down, then from the other view the currency goes up.

How is the Yen doing against the dollar?

The standard argument doesn't stack up with the way the real world works.

If you want to sell anything at all in an export led policy you have to take the currency of the place where the demand is. Or you don't even make the sale.

So you have a domestic financial system that makes money allowing people to do just that. And it does it by taking the asset and discounting it into the local currency - either directly via the banks or indirectly via sovereign wealth funds, pension funds, central banks or whatever.

Nick Edmonds said...

I think there's an risk here of confusing the currency used for settlement with the question of balance sheet exposures.

It makes little difference what currency is used for settlement of trade flows. Say a UK importer buys from a US exporter and pays sterling. The US exporter then sells sterling for dollars in the fx market. Alternatively, the UK importer agrees to pay in dollars. So he has to go into the market and buy dollars for sterling. The same trade. Whichever way it is done someone somewhere has to take on the same currency position (or cancel an existing position). The question is what does it take to make them do so, because they're not doing so simply to be helpful and accommodate the trade flows. (Of course, I'm not suggesting it's one particular person taking the position - it's the net effect of what everyone's doing - and not just those in the US and the UK).

Matt Franko said...

"If one currency goes down, then from the other view the currency goes up. "

Because the fiscal agents on both sides exchanging those reserve assets have effectively fixed capital for the he period in question...

Neil Wilson said...

"It makes little difference what currency is used for settlement of trade flows."

Correct it doesn't and that's not the point.

The question is, who is the counterparty?

It can be the bank itself. Because banks, particular multinational banks with reserve accounts on both sides, can create money.

So the GB branch transfers the Sterling deposit to the credit of the US branch and the US branch simply marks up the deposit for the customer in the usual fashion.

Foreign currency is just a loan asset to a bank, and loans create deposits.

Nick Edmonds said...

OK, so I'm not entirely sure what you're saying here, but let me have a go.

By the counterparty here you mean the other party to the fx trade done by either the importer or the exporter, right? So that's the bank.

The bank is paying dollars and receiving sterling under a spot fx trade. If it was a forward fx trade, it would be like creating a loan and a deposit. The bank would book a deposit to its money market dollar book and a loan to its sterling book. But a spot fx trade creates neither (assuming we're talking about same day settlement.)

The fx trade involves the bank taking on an fx position. Even if it does no offsetting trades it still needs to match its dollar payment and sterling receipt. If nothing else, this means it borrows dollars in the interbank and lends sterling. Neither of these creates money (interbank balances not being included in money supply measures).

In the simplest possible closing of the circle, we could assume it borrows dollars from the exporter's bank (which has received the dollars deposited by the exporter) and lends sterling to the importer's bank (who has on lent to the importer), so everyone is square. Now we have created money, because the sterling loan to the importer has increased the dollar money supply as evidenced by the increase in the exporter's bank balance. The sterling money supply has not changed.

However, this does not get round the fact that the bank has taken on an fx exposure. However, we settle it and whatever money is created or destroyed doesn't make any difference to that. So, we have to ask ourselves why has the bank decided to take on this position. It will not be simply to accommodate the customer. It will only be because the dealer's view has changed.

Why that view has changed is what we need to get to (and I don't claim to know what drives fx markets, although I am aware of various theories). The stuff about how settlement is achieved and the fact that banks can create money as and when needed is obviously important in making sure the trade can happen, but it's not really relevant to that question.