If we look at the full history of financial crises around the world, one could argue that crises related to external debt and/or fixed exchange rates are dominant. Such crises could represent an entire chapter of this book. However, I will only offer a brief overview of the subject. From the perspective of recession forecasting, the addition of a fixed exchange rate regime adds a new wrinkle to analysis: at what point will the peg fail, causing a crisis? As I will discuss below, this is quite different than an analysis of the domestic economy, which one might hope is amenable to something resembling econometric analysis....Bond Economics
The External Sector And Financial Crises
Brian Romanchuk
“The willingness of counterparties to offer them U.S. dollar wholesale funding or via hedges (cross-currency basis swaps) waned, and they were forced to turn to their central banks’ swap lines with the U.S. Federal Reserve. ”
ReplyDeleteIt’s not “willingness”; the regulatory ratio is (A-L)/A; the CB policy to increase Reserve Assets (reification error “pump in money!”) at the depositories increases both A (Reserve Assets) and L (Deposit Liabilities) .. so the numerator remains unchanged while the denominator A increases causing the regulatory ratio to decrease to the threshold minimum and the credit market shuts down creating a “crisis”... it’s not that they are “unwilling”, banks cannot increase other credit-type assets as the addition of the Reserve Assets causes the regulatory ratio to drop to statutory minimums... until more balances are added to bank shareholders equity (A-L) via govt equity investment in the banks...
The system is regulated... it’s not “free floating!” as MMT says... it’s regulated..
(A-L)/A = 0.12
see
https://en.m.wikipedia.org/wiki/Voltage_regulator
for similar applied mathematics...
Matt so what you're saying is all those reverse repo
ReplyDeleteie: #PBOC injects 100 bn yuan via open market operation (7-day reverse repo) on Thursday
— YUAN TALKS (@YuanTalks) July 18, 2019)
is effectively temporarily reducing the regulatory ratio, in this case for 7 days and then back again?