RE: FX/Money Supply/Banking System - harkness thread

["Leticia Arroyo Abad" <asecon@xxxxxxxxxxxxxx>]

Gregoire wrote
> 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.

Perhaps I didn't follow your thought, but if a bank performs this
operation, it does not expand the money supply if they buy financial
assets, otherwise it will pour these "extra funds" to credit operations.
Sorry if didn't catch the idea.

> 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?

If you have these "less liquid assets" in your portfolio and a domestic
banking crisis arises, I would like to know how you can respond!! I think
that a limit should be established in order to prevent this situations.