FX/Money Supply/Banking System - harkness thread

["Gregoire de Nowell (ci-devant)" <GN842@xxxxxxxxxxxxxxxxx>]

Harkness' "Incomes and Exchange Rates" made perfect sense
to me, and that being the case I am optimistically thinking
that my questions on this topic may be less off target
than I had thought. So I'll try to ask this again:

A country runs an export surplus.  As a result, the
banks of that country (say, Japan) find themselves
recurrently coming into large quantities of FX.  They
CAN turn around and resell that FX, get their own
currency, and the effect would be, as Leigh says,
not to increase the money supply.

But what if said banks use the FX to add to their
portfolios *foreign assets* such as
Tbills, Wilshire Blvd, or skyscrapers in NY?  What
would prevent their being able to use this long-term
asset base as "backing" for additional deposit
liabilities (subject to the usual gradations
of "highly liquid" vs. "less liquid" assets) in
their domestic currency?  Might that not have
an expansionary effect, *unless* there were some
kind of regulatory stipulation putting a limit
on the number of foreign assets that may be used
to balance domestic demand deposit liabilities?

greg nowell