Frances Coppola — Floors and ceilings

No, this isn't a post about derivatives. It's about the relationship between reserves and safe assets. I think it is time I brought the two together and created a unified explanation of the behaviour of safe assets in the presence of excess reserves which earn a positive rate of interest....

It is not sensible to ignore non-banks in the conduct of monetary policy, especially in a financial system as disintermediated as that in the US. Both money and government debt are needed by the financial system: the balance between the two is currently distorted and this is having untoward effects, especially on the shadow banking system whose lifeblood is the collateral that is becoming scarce. A large part of the problem is the assumption that money is solely the responsibility of the central bank, and debt is about government financing. As I've said before, for a sovereign currency-issuing government neither of these is true.  Monetary and fiscal policy are both ways of managing money: they affect the economy in different ways because of the different institutions through which they work. And short-term government debt and currency are both "money" as far as financial markets are concerned.

The central bank is the lender of last resort - or perhaps more accurately, as Perry Mehrling suggests, the DEALER of last resort - for banks. And because non-banks don't have central bank support but can use government debt as a risk-free asset, effectively the Treasury is the lender or dealer of last resort for non-banks. Banks and non-banks together make up the financial system. Therefore we can regard fiscal policy as monetary policy applied to non-banks, and monetary policy as fiscal policy applied to banks. Interest rates are monetary taxes: taxes are fiscal interest rates. They do the same job on opposite sides of the bank/non-bank divide, i.e. controlling the total amount of "money" (in its broadest sense) in circulation. And there is of course a considerable overlap, since in reality the divide between banks and non-banks is entirely artificial: interest rate policy affects non-banks and taxation affects banks. Central banks and governments therefore are partners in the management of the financial system as a whole. 

Coppola Comment
Floors and ceilings
Frances Coppola
(h/t Andy Baltchford via email)

Putin Needs Reserve Feet to Put Into His Mouth?

commentary by Roger Erickson

In a truly odd post, Russian dictator Vlad the Pootie says: "If we want to get rid of unnecessary derivatives and raise the discipline and stability of the global financial system, we must go over to a multitude of global reserve currencies."

About what you'd expect from a midlevel KGB thug? Any nation is already free to adjust it's reserve currency holdings at will. As Warren Mosler has repeatedly noted, it doesn't matter what currency sales occur in, rather what currency people prefer to save liquid currency assets in.

Pootie goes on to say "If there was only one global reserve currency, the issuer of the currency would always be tempted to use it in its own interests." Ya think? Yet isn't the issuer of every currency free to act in the interests of the issuing country? Am I missing something here, except gang (i.e., class) warfare spilling across national borders?

Only rational thought that currently comes to my mind is that Pootie wants the Saudi's to stop denominating their oil contracts in $US. Given the volume of Saudi oil sales - and more importantly, the limits the Saudi prices establish in all oil pricing - that Saudi policy does tend to drive the currency of most oil-buyers a bit towards a peg with the US.

Still, every nation has many options, and there are always ways for agile group policy to explore all the options available to a given nation. Methinks Pootie doth complain too much?

When you really do have only cutthroats as friends, Disraeli's advice still rings true: "Never complain. Never explain." Or have I subjected that to backwardation? :)

ps: Can someone tell Pootie that we don't want a stable world economy? We absolutely need an insanely dynamic, agile world economy ... or we're toast.