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Putin_Slil — Russia's international reserves grew by $3.8 billion between May 8 and 15B

Russian central bank selling rubles apparently to keep the exchange rate from rising and hurting exports and import substitution.

Fort Russ

Russia's international reserves grew by $3.8 billion between May 8 and 15B

Putin_Slil
Original Russia's international reserves grew by $3.8 billion between May 8 and 15
Translated from Russian by J.Hawk

The Whole World Runs A Capitalism & Macro-Economic "Barro" Experiment, And The Results Come Out Opposite To Theory

(Commentary posted by Roger Erickson)



This is just astounding. Was there ever another peep from Barro?

Bill Mitchell Unearths Yet More Options [not taken] for Europe

If this occurred in the field of physics - or any other science/engineering field - they'd IMMEDIATELY change the theory ... to fit experimental facts.

But not us!!! We just pretend it never happened, and try twice as hard to make the failed experiment-on-ourselves work "right" - right?

There are a number of astounding findings Bill Mitchell is dredging up about the Monetarist backlash against reality. I'll only mention one, for the sheer lack of imagination it shows.

“[Imaginary] multipliers and marginal propensities to consume ordinary goods and services would be relatively larger under [imaginary settings] than under quantitative easing/new bond financing of budget deficits.”

Wow! We’re trying to let ad hoc accounting rules dictate to unpredictable reality? What would Maxwell, Boltzmann, Einstein & Planck say? Or Alfred Nobel? Is there an Ignoble Prize in Economics?

What to do about the "banking reserves" which our fiat currency accounting methods throws off as a nominal side effect of any economic growth? How about some imagination? If we can run Carbon Credit Markets which trade Carbon Credits for reducing greenhouse gases, why not a Public Purpose Market that trades PublicPurpose Credits for draining nominal banking “reserves” as well?

If you listen carefully, you can actually hear the sound of reality re-entering the faint minds of double-entry accounting gnomes. Despite all odds, they haven't made an entry for net national growth on their ledgers, opposite the entry for net banking reserves.

Stay tuned for the next episode of the hit tragecomedy:

Accounting Rules Reality

or One Class Flown Upside Down Over The Cuckoo's Fully Amortized Nest

Starring: Du Bell 'entry, as Big Purse

The moral? When capitalists come to a fork in the road .... they stick it to themselves? (With apologies to Robert Frost.)

Perhaps we need to consider some paths less taken?

Steve Randy Waldman — Why (and when) interest-on-reserves matters…

Central banking is chiefly about liquidity provision and monetary policy is about interest rate setting. Reserves function to support these operations and the size of the monetary base has little significance out of this context. Looking at reserves is essentially looking at the wrong thing. Modern central banks are committed to providing enough liquidity for the payments system to clear and use the amount of excess reserves available in interest rate setting when they do not pay IOR and choose to set a target rate greater than zero. That's all that is relevant and trying to make more of reserves is just confused.

Interfluidity
Why (and when) interest-on-reserves matters…
Steve Randy Waldman

John Carney — An outdated monetary policy model stirs fears of Fed policy

John Carney debunks the myths about reserves, money supply, bank lending, and inflation. Will will the people who need to hear it, like Rick Santelli and the Zero Hedgies, read it?

CNBC NetNet

An outdated monetary policy model stirs fears of Fed policy
John Carney | Senior Editor

Stephan Ewald — Cash Is King

So there’s this convoluted debate between Steve Waldman and Paul Krugman about the nature of base money. Izabella Kaminska from FT Alphaville wrote today a nice summary. Waldman and Krugman label their various arguments as wonkish. I would refer to this debate as a very helpful exercise to completely obscure the subject: what is the nature of base money?

GIGO
Cash Is King
Stephan Ewald

IPS — Internal Audit Warns of IMF Politicisation by the U.S.

The International Monetary Fund (IMF)’s internal auditor has criticised the Fund’s recent policy on foreign currency reserves, and has offered an implicit warning that the United States’ outsized influence within the institution has resulted in policy that was insufficiently evidence-based.
The findings, which were publicised in an unusually narrow report on Wednesday but follow months of discussion, are seen as a victory for a bloc of “middle income” developing countries, particularly China, that have advocated hoarding larger stockpiles of foreign currency as insurance against the effects of the international financial crisis.

Inter Press Service
Internal Audit Warns of IMF Politicisation by the U.S.
Carey L. Biron

The Chicago Plan Revisited - by the IMF

commentary by Roger Erickson

An IMF working paper is suggesting "100% reserve backing for deposits."

??

How, exactly, can one have 100% reserve backing for deposits in a fiat regime?

First, deposits are already FDIC insured (given, up to a limit).

Second, why bother with "reserves" (whatever they mean by that term)? We're already have the case that loans create deposits, and trigger corresponding changes in "bank-reserves."

Unless I'm totally confused, these IMF authors seem very confused. Orthodox economics seems to get curiouser & curiouser all the time. They could start by at least defining what they mean by "reserves." They seem to be mixing metaphors, which inevitably leads to irrational policy advice.  Broken semantics and monetary policy don't belong in the same mix.

The Chicago Plan Revisited http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
http://www.imf.org/external/pubs/cat/longres.aspx?sk=26178.0

Jaromir Benes & Michael Kumhof. August 01, 2012
Summary: At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.


Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Steve Keen to Mish — Why banks can't lend reserves

That "increase reserves to increase lending" argument is so hard to shake, but reserves can't be lent from simply from a double-entry bookkeeping point of view.

The way that accountants keep track of the "assets equals liabilities plus equity" rule is to record an increase in assets as a positive and an increase in liabilities as a negative (your liabilities rise, so a negative gets bigger). Reserves are an asset [of the bank], as are loans, and shown as a positive. Deposits—which are created by a loan—are a liability and shown as a negative.

So to lend to a customer, a bank has to show a negative on that customer's accounts. This can be matched by a positive on the loans entry--because the loan has increased in size. No problem.

But if banks were to lend from reserves, they would need to record a minus there--reserves have fallen. And on the liabilities side, they want to ... also show a negative. Whoops! No can do.

The end result of this logic is that reserves are there for settlement of accounts between banks, and for the government's interface with the private banking sector, but not for lending from.Banks themselves may (if they are allowed--I simply don't know the rules here) swap those assets for other forms of assets that are income-yielding, but they are not able to lend from them.

Read it at Mish's Global Economic Trend Analysis
Notes From Steve Keen on "Lending Reserves" and "Debt Jubilees"
by Michael "Mish" Shedlock

See also Mish's Can Bernanke Force Banks to Lend by Halting Interest on Excess Reserves?

Ralph Musgrave — The root cause of Spanish banking problems

Ralph manages to propose full reserve banking without mentioning "full reserve" by marshaling some provocative points. With the huge level of private debt overhang that Steve Keen has been going off on for some time, it seems clear that there is too much credit being extended for the system to bear even if the lending were prudent, in that an exogenous shock to the system could bring down the house of cards in a debt-deflationary spiral.

Read it at Ralphonomics
The root cause of Spanish banking problems

by Ralph Musgrave

Edward Harrison — What about all those excess reserves at the Fed?

Bottom line: The Fed’s excess reserves are not inflationary. As Greg Ip noted in 2009, "Reserves have not been a relevant constraint on bank lending for decades, if ever. Bank lending is constrained by customer demand and by capital." Forget about excess reserves. The Fed’s easing simply doesn’t have a lot of influence in a world of overleveraged households lacking in credit demand. And Fed communications of inflation and interest rate policy is not going to be a make-or-break policy tool. If we want to get the economy on the right track, we will need to focus on jobs.

Read it at Credit Writedowns
What about all those excess reserves at the Fed?

by Edward Harrison

Keen on Krugman

It should never have gone this far. Krugman should have conceded long ago. The flurry in the blogosphere has been unrelenting, and Steve administers the coup de grace here.

Read it at Steve Keen's DebtWatch

Ptolemaic Economics in the Age of Einstein 

by Steve Keen

UPDATE: My comment at Krugman's blog:

Does Professor Krugman realize that the US and world were operating under a convertible fixed rate system in 1963 when Tobin Brainard was published and that Nixon closed the gold window on August 15, 1971, putting the US on a non-convertible floating rate system, which the rest of the world ratified by treaty in August 1973? Please see Basil Moore, Horizontalists and Verticalists, 1988. And this is not just what the MMT crowd is saying; it's also Post Keynesians and Circuitists. Moreover, there are Fed and BIS papers denying that there is a money multiplier. This is a losing battle, Professor.

Explaining the recent spike in interest rates

There’s been a lot of chatter about the recent enormous “spike” in interest rates. I want to make some comments and observations.

First, this spike, while large in percentage terms over such a short period is really tiny in nominal terms. Take a look:

Once you have a little perspective the “enormous spike” becomes a joke.

Second point:

Rates are anchored by Fed policy and that doesn’t just mean short term rates, it means rates all along the curve. Whatever the Fed funds rate is will be reflected further out. A 10-year yield is nothing more than a reflection of Fed policy over that term. And since the Fed has been very clear about its intention to keep rates low and maintain a “highly accommodative” policy stance out until 2014, there is not going to be some big move up in rates. We’ve probably already hit the upside ceiling for rates.

Third point:

The rise in rates over the past several weeks has been due to a number of things, one of them being an improving forecast for the U.S. economy AND a dissipation of fears of a European meltdown. (In my opinion, the jury is still out on both of these views.)

In addition there has also been a largely unnoticed, but fairly sharp decline, in reserve balances over the past few weeks. (See chart below.) This has been due to the Fed allowing existing positions on its balance sheet to “roll off” (i.e. proceeds from maturing securities are not reinvested) AND a large amount of bond issuance by the Federal Government this month to cover expenditures, which has not been offset yet by Fed monetary operations.

On that last point, notice the recent upturn in reserve balances on the chart below. The Fed is once again stepping in to add reserves. Bottom line, the bond selloff is probably over.

Israel to invest portion of reserves in US equities

The Bank of Israel will begin today a pilot program to invest a portion of its foreign currency reserves in U.S. equities.

The investment, which in the initial phase will amount to 2 percent of the $77 billion reserves, or about $1.5 billion, will be made through UBS AG and BlackRock Inc. (BLK), Bank of Israel spokesman Yossi Saadon said in a telephone interview today. At a later stage, the investment is expected to increase to 10 percent of the reserves.

Read it at Bloomberg
Israel to Begin Investing Reserves in U.S Equities Today
by Alisa Odenheimer