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(i) they only represent the physical area of the United States, not the US dollar currency zone (ii) they are in a reporting currency, not the operational currency of the holdings (iii) they cover just the banks, which means you'll get flows in and out of cash and other government securities.
Therefore what you highlight could be explain numerous ways - for example the shift of US dollar deposits from outside the reporting area to inside the reporting area, from (say) a fixed exchange rate area, or just repatriation of Eurodollars.
It's better when you switch the MMT viewpoint of looking at the financial circuit of the entire currency area, excluding other denominations from that area and adopting the 'stock of debits/stock of credits' definitions of Assets/Liabilities, which avoids the largely artificial separation on the liability side between capital and deposits that isn't really relevant for structural analysis.
“i) they only represent the physical area of the United States, “. Neil Those are called maps...
ii) they are in a reporting currency, not the operational currency of the holdings .. I know, and these institutions have to apply an exchange rate between the two currencies while maintaining compliance with all other financial regulations... this causes them to adjust the rate up or down in response to changes in the price of their other assets which can vary independently of the exchange rate...
Neil there is no “liability side” , there is “a side that liabilities are on”... the right side.,, or Credit side...
The separation between Capital and Liabilities isn’t “artificial “ (you sound like a Monetarist with injecting this word here btw knock it off...) A = L + C it’s Accounting 101... it’s not “artificial “ it’s the way the Accounting abstractions are taught... at least here in the US...
“Debit simply means left side; credit means right side. Remember the accounting equation? ASSETS = LIABILITIES + EQUITY The accounting equation must always be in balance and the rules of debit and credit enforce this balance.”
“ Neil there is no “liability side” , there is “a side that liabilities are on”
Stop with the BS Matt. You know exactly what he’s saying
I agree with the criticism of Stockmans use of artificial, reeks of gold standard bullshit but Neil is using it in place of arbitrary which is true. Accountants have made up their rules and terms for measurement. You even admit as much with your..... “ it’s the way the Accounting abstractions are taught... at least here in the US...”. So we teach accounting science different than how Europe or Australia teach accounting science? Good thing we do t teach Chemistry science or Physics science differently.
Charting ‘net due’ over last decade shows large dollar flows, possibly Eurodollar repatriation which would leave foreign sector short the US dollar. I believe that would lead to adjustments in exchange rates.
Another ‘theory’ is pallets of cash dumped around the world, working their way back into the US financial system. The decade long ‘net due’ chart aligns with political disruptions, Arab Spring, Syria, etc.
‘Net due’ fell during theTrump administration and are now hard negative.
If this theory is correct, it would be most useful to know which countries are involved.
"The separation between Capital and Liabilities isn’t “artificial “ (you sound like a Monetarist with injecting this word here btw knock it off...) A = L + C it’s Accounting 101"
I'm starting to call this the "accountants fallacy". It is just as wrong as the household analogy. It's a failure to let go of a prior thought pattern and shift a point of view.
When you draw up a set of accounts at the firm level you are reporting to a set of owners. Therefore you want to decide what is owned by third parties and what is owned by those you are reporting to. And even then it's arguable.
That is utterly irrelevant at the economic level when you are looking at the currency area. There is no set of owners to report to. All you want to know then is what the flows and stocks are between the arbitrary groupings you've drawn across the boxes. At this level there is no material difference between a 5 year term deposit and a 5 year capital bond.
In MMT we are doing bookkeeping, not drawing up accounts. There is no liability recognition. There is just a stock of debits which is matched precisely by a stock of credits. To the extent that if you consolidate the sectors completely to just one currency area sector the entire financial circuit disappears completely.
Capital and Equity are largely meaningless concepts in stock/flow analysis.
"possibly Eurodollar repatriation which would leave foreign sector short the US dollar."
It's won't. There isn't a fixed amount of dollars. They are created on demand as required by the exchange system via the standard mechanisms of the FX process.
I’ll bite. I’ll agree there isn’t a fixed amount of dollars or any other fiat currency for that matter.
I also agree demand determines the amounts created.
What is missing is the relative value or exchange rate between two currencies with differing demand.
If all Eurodollar accounts held at foreign banks were transferred to US banks, there would be a shift in demand for US currency as the foreign banks would have to pay US banks to borrow or purchase US dollars to make those transfers.
I’ve heard very smart people say this shift in demand for Eurodollars would have no effect on exchange rates. Too magical for me.
11 comments:
Matt, what is your theory?
I asked someone that used to work for the Fed if they could breakout the numbers based on country. He said no such luck.
Dave I don’t per se have a Theory.... I have a Science degree so I just try to stick to the Science...
iow I can understand what they are doing thru looking at these these Accounting abstractions...
I have probably well above average training in Finance & Accounting Science... for someone who didn’t degree in those Disciplines...
I don’t have to resort to figurative language I can understand it directly thru these abstractions... due to training I have had,,,
Always got to be careful with these reports
(i) they only represent the physical area of the United States, not the US dollar currency zone
(ii) they are in a reporting currency, not the operational currency of the holdings
(iii) they cover just the banks, which means you'll get flows in and out of cash and other government securities.
Therefore what you highlight could be explain numerous ways - for example the shift of US dollar deposits from outside the reporting area to inside the reporting area, from (say) a fixed exchange rate area, or just repatriation of Eurodollars.
It's better when you switch the MMT viewpoint of looking at the financial circuit of the entire currency area, excluding other denominations from that area and adopting the 'stock of debits/stock of credits' definitions of Assets/Liabilities, which avoids the largely artificial separation on the liability side between capital and deposits that isn't really relevant for structural analysis.
“i) they only represent the physical area of the United States, “. Neil Those are called maps...
ii) they are in a reporting currency, not the operational currency of the holdings .. I know, and these institutions have to apply an exchange rate between the two currencies while maintaining compliance with all other financial regulations... this causes them to adjust the rate up or down in response to changes in the price of their other assets which can vary independently of the exchange rate...
Neil there is no “liability side” , there is “a side that liabilities are on”... the right side.,, or Credit side...
The separation between Capital and Liabilities isn’t “artificial “ (you sound like a Monetarist with injecting this word here btw knock it off...) A = L + C it’s Accounting 101... it’s not “artificial “ it’s the way the Accounting abstractions are taught... at least here in the US...
https://www.pbs.org/newshour/economy/david-stockman-were-blind-to-t
Stockman: “This is an excess of artificial credit that’s being fueled by all the central banks.”
This “artificial!” word is not a word we want to be using... the monetarists use that word all the time when they don’t understand something...
https://courses.lumenlearning.com/sac-finaccounting/chapter/general-rules-for-debits-and-credits/
“Debit simply means left side; credit means right side. Remember the accounting equation? ASSETS = LIABILITIES + EQUITY The accounting equation must always be in balance and the rules of debit and credit enforce this balance.”
This is totally unnecessary criticism
“ Neil there is no “liability side” , there is “a side that liabilities are on”
Stop with the BS Matt. You know exactly what he’s saying
I agree with the criticism of Stockmans use of artificial, reeks of gold standard bullshit but Neil is using it in place of arbitrary which is true. Accountants have made up their rules and terms for measurement. You even admit as much with your..... “ it’s the way the Accounting abstractions are taught... at least here in the US...”. So we teach accounting science different than how Europe or Australia teach accounting science? Good thing we do t teach Chemistry science or Physics science differently.
I have theories for things I don’t understand.
Charting ‘net due’ over last decade shows large dollar flows, possibly Eurodollar repatriation which would leave foreign sector short the US dollar. I believe that would lead to adjustments in exchange rates.
Another ‘theory’ is pallets of cash dumped around the world, working their way back into the US financial system. The decade long ‘net due’ chart aligns with political disruptions, Arab Spring, Syria, etc.
‘Net due’ fell during theTrump administration and are now hard negative.
If this theory is correct, it would be most useful to know which countries are involved.
"The separation between Capital and Liabilities isn’t “artificial “ (you sound like a Monetarist with injecting this word here btw knock it off...) A = L + C it’s Accounting 101"
I'm starting to call this the "accountants fallacy". It is just as wrong as the household analogy. It's a failure to let go of a prior thought pattern and shift a point of view.
When you draw up a set of accounts at the firm level you are reporting to a set of owners. Therefore you want to decide what is owned by third parties and what is owned by those you are reporting to. And even then it's arguable.
That is utterly irrelevant at the economic level when you are looking at the currency area. There is no set of owners to report to. All you want to know then is what the flows and stocks are between the arbitrary groupings you've drawn across the boxes. At this level there is no material difference between a 5 year term deposit and a 5 year capital bond.
In MMT we are doing bookkeeping, not drawing up accounts. There is no liability recognition. There is just a stock of debits which is matched precisely by a stock of credits. To the extent that if you consolidate the sectors completely to just one currency area sector the entire financial circuit disappears completely.
Capital and Equity are largely meaningless concepts in stock/flow analysis.
"possibly Eurodollar repatriation which would leave foreign sector short the US dollar."
It's won't. There isn't a fixed amount of dollars. They are created on demand as required by the exchange system via the standard mechanisms of the FX process.
“ It's won't. ”
I’ll bite. I’ll agree there isn’t a fixed amount of dollars or any other fiat currency for that matter.
I also agree demand determines the amounts created.
What is missing is the relative value or exchange rate between two currencies with differing demand.
If all Eurodollar accounts held at foreign banks were transferred to US banks, there would be a shift in demand for US currency as the foreign banks would have to pay US banks to borrow or purchase US dollars to make those transfers.
I’ve heard very smart people say this shift in demand for Eurodollars would have no effect on exchange rates. Too magical for me.
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