Must read for non-morons.
Identifies the process by which bank reserve asset levels are increased in the surplus nation China vs. deficit nation USA.
Germane to the current China led situation where they appear to be adding $100Bs equivalent of non-risk reserve assets to depositories this year and causing the current price reduction of risk assets and probably reduction of new credit for financing risk assets.
No bottom in sight right now for price of risk assets in China as $100Bs (equivalent) reserves are added; and some related negative effects on US risk asset prices here too as China this year hacks a page out of the US monetary policy playbook from 2008 and down we go...
By end 2014, the PBOC’s balance sheet totaled RMB33.8 trillion, or USD5.4 trillion using the yearend exchange rate of one US dollar for 6.2052 Yuan. It was equal to 53% of China’s GDP in 2014 (RMB63.6 trillion), and 2.6 time bigger than its size of RMB12.9 trillion at the end of 2006.
Meanwhile, the Fed’s balance sheet rose to USD4.5 trillion, equal to 26% of the US GDP in 2014 (USD17.4 trillion), and 5.0 times bigger than its size of USD903.7 billion at end 2006.
The PBOC’s balance sheet was larger than the Fed’s in both the absolute and relative terms, but the Fed’s balance sheet registered faster expansion. These two balance sheets dwarf the world’s other major central banks’. However, they took different routes to get there.
The Fed’s balance sheet has expanded mainly through three rounds of asset purchases or quantitative easing. As a result, the Fed was holding USD2.46 trillion worth of US treasuries, USD1.74 trillion worth of AMBS at the end of 2014, which make up of 93% of its total assets. The PBOC never resorted to asset purchases. Instead, its balance sheet expansion came mostly from purchasing foreign currencies from inflows.
Comparison of China and US’ Bank Reserves and Their Implications
ECONOMIC REVIEW(A Monthly Issue) April, 2014 Dai daohua, Senior Economist
Bank of China (Hong Kong) Ltd.
8 comments:
Warren Mosler and Bill Mitchell argue that the best arrangement is simply to issue whatever amount of base money (aka reserves) the private sector wants to hold at a zero rate of interest, and have no government borrowing at all.
For Mosler, see 2nd last para here:
http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html
And here: http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf
For Bill Mitchell, see here:
http://bilbo.economicoutlook.net/blog/?p=31715
“no government borrowing at all.“
Well if Treasury issuance is a “reserve drain” then if you don’t issue any bonds how will any reserves get “drained”?
Banks would end up using all of their capital just to finance the reserves and nobody could get a loan for a house or a car from a bank....
Matt, There is no need for "reserve drains" if the amount of base money / reserves issued is just enough to induce the private sector to spend at a rate that brings full employment without exacerbating inflation too much. In contrast, if government borrows too much, then "Private Sector Net Financial Assets" (i.e. the stock of base money and government debt) gets excessive, which results in excess private sector spending, which in turn means that "drains" are needed: i.e. the central bank has to sell debt (i.e. raise interest rates)so as to damp down demand. That's exactly what is happening at the moment: Trump is borrowing too much, so the Fed raises interest rates to compensate.
Re loans for houses and cars, I don't see why an absence of interest yielding government debt stops private banks lending. Banks lend, when they spot viable borrowers, by simply creating the necessary money out of thin air and crediting that money to borrowers accounts. That money is then deposited in other bank accounts. As long as a bank lends just to viable borrowers rather than losers, the fact that the bank doesn't have a stock of government debt is irrelevant. Plus banks need very little reserves for daily settling up purposes.
If govt stopped issuing bonds then reserve assets would skyrocket at the depositories...
We’d be like another Japan with asset prices falling for 30 years... Nikkei last high in 1989...
There is like 20T of US bonds currently issued... banks would need 2T of capital just to finance the 2T of reserves... which they only have about 1T now....
It would crash the whole thing like China is doing this year...
“the central bank has to sell debt so as to damp down demand”
That is not why they sell debt...
Should be : “banks would need 2T of capital just to finance the 20T of reserves“
100% private banks with 100% voluntary depositors would have no capital or liquidity requirements.
Why don't you advocate those, Franko?
Keep dreaming...
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