Re: [gang8] Re: Is Bernanke Behind The Rallies? Query to Barkley

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Henry:

The suggestion that Japan's "trade surplus (in dollars) [can] drain the yen
money supply at a faster rate than BoJ injection, because dollars earned
from trade is not fully reconverted back into yens" is incoherent.

1.  A "trade surplus (in dollars)" = increase in Net Foreign Assets.

2.  The Monetary System uses Yen to buy "trade surplus dollars".

3.  I.e., the "trade surplus" is "fully reconverted back into yens."

Gunnar



----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <gang8@xxxxxxxxxxxxxxx>
Cc: <bjm@xxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
Sent: Tuesday, June 24, 2003 10:36 PM
Subject: Re: [gang8] Re: Is Bernanke Behind The Rallies? Query to Barkley


>
> Gunnar:
>
> With all due respect to IMF bread and butter stuff, you are losing me as
> to what your point is.
>
> See BoJ Explanation of "Monetary Staistics":
>
> http://www.boj.or.jp/en/stat/exp/exbase.htm
>
> Henry
>
> Gunnar Tomasson wrote:
> > Henry:
> >
> > In terms of Monetary Survey entries - the bread-and-butter stuff of IMF
> > staff analysis of monetary developments -  the proposition that:
> >
> > When the BoJ buys dollars, it keeps the yen exchange rate low and
> > increases the Jpanese trade surplus (in dollars), draining the yen
> > money supply at a faster rate that BoJ injection, because the dollars
> > earned from trade is not fully reconverted back into yens,
> >
> > means - and can only mean - one thing.
> >
> > Namely,  that "the Japanese trade surplus" - more Dollars being
exchanged
> > for Yens - does NOT show up as one-to-one INCREASE in the Monetary
Survey's
> > YEN component.
> >
> > Gunnar
> >
> >
> > ----- Original Message -----
> > From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
> > To: <gang8@xxxxxxxxxxxxxxx>
> > Cc: <bjm@xxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
> > Sent: Tuesday, June 24, 2003 8:58 PM
> > Subject: Re: [gang8] Re: Is Bernanke Behind The Rallies? Query to
Barkley
> >
> >
> >
> >>Foreign asset held by Japan (dollars) rose by Y29.22 trilllion and
> >>domestic credit 0.29.
> >>
> >>Why does that not support what I wrote?
> >>
> >>Henry
> >>
> >>Gunnar Tomasson wrote:
> >>
> >>>Henry:
> >>>
> >>>I just checked out Japan's Monetary Survey in the June 2003 issue of
the
> >>>IMF's International Financial Statistics.
> >>>
> >>>Between Year-end 1999 and 2002,
> >>>
> >>>(a)  Foreign Assets (Net) rose (in trillion yen) from 44.77 to 73.99;
an
> >>>increase of 29.22, while
> >>>
> >>>(b) Domestic Credit rose from 712.82 to 713.78; an increase of 0.96,
> >>
> > with
> >
> >>>Claims on Central Government (net) and Private Sector rising by 57.06
> >>
> > and
> >
> >>>falling by 60.47, respectively.
> >>>
> >>>The increase in Foreign Assets (Net) does not square with the
following:
> >>>
> >>>
> >>>
> >>>>>When the BoJ buys dollars, it keeps the yen exchange rate low and
> >>>>>increases the Jpanese trade surplus (in dollars), drainging the yen
> >>>>>money supply at a faster rate that BoJ injection, because the dollars
> >>>>>earned from trade is not fully reconverted back into yens.
> >>>>
> >>>Gunnar
> >>>
> >>>
> >>>
> >>>----- Original Message -----
> >>>From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
> >>>To: <gang8@xxxxxxxxxxxxxxx>
> >>>Cc: <bjm@xxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
> >>>Sent: Tuesday, June 24, 2003 1:35 PM
> >>>Subject: Re: [gang8] Re: Is Bernanke Behind The Rallies? Query to
> >>
> > Barkley
> >
> >>>
> >>>
> >>>>My analysis has been checked out at a high level in the BoJ with whcih
I
> >>>>have private contact.
> >>>>
> >>>>In more than two years since the zero interest policy announcement,
the
> >>>>BoJ has significantly expanded money as measured by the monetary base,
> >>>>which is bank reserves plus currency in circulation.  The monetary
base
> >>>>is up 34 percent since the Bank of Japan began its new policy.
However,
> >>>>broader measures of liquidity that are more closely associated with
> >>>>general price increases have not grown nearly as rapidly for reasons
> >>>>stated above. The growth rate of broad money, which includes
individual
> >>>>and business deposits at banks, has hardly increased at all.
Moreover,
> >>>>bank lending has not increased due to a liquidity trap.  As the
Japanese
> >>>>trade surplus adds to Japan’s dollar reserves, yen deposits and loans
> >>>>remain stagnant.  Even after adjusting for loan write-offs, bank
lending
> >>>>was down 2.6 percent in 2002 and consumer prices continue to fall.
> >>>>
> >>>>The reason the increase in the growth rate of the monetary base has
not
> >>>>resulted in higher growth of loans and deposits at banks, or a rise in
> >>>>prices, is not, as some economists suggest, that the increase in the
> >>>>monetary base has not been sustained for long enough.  Nor are more
> >>>>increases needed in reserve balances banks hold at the BoJ, a key
> >>>>component of the monetary base.  The traditional anti-inflation bias
of
> >>>>the central banking regime has deprived policymakers of any historical
> >>>>guide in overcoming persistent deflation.
> >>>>
> >>>>The current round of global deflation is caused by weak demand
resulting
> >>>
> >>>>from the effects of dollar hegemony as sustained by a global central
> >>>
> >>>>banking regime regulated by the Bank of International Settlement
(BIS).
> >>>> The neo-liberal globalization of trade and finance prevents all
> >>>>non-dollar economies from effectively increasing their local currency
> >>>>money supply for domestic development.  To avoid speculative attacks
on
> >>>>their currencies, all increases in local currency money supply must be
> >>>>channeled to fuel export for trade surplus in dollars.  This shrinks
the
> >>>>exporting economies’ own money supply while adding to the dollar money
> >>>>supply to fuel the dollar economy at the expense of non-dollar
> >>>>economies.  Consumers in non-dollar economies are robbed of purchasing
> >>>>power because low wages are necessary to compete in the global export
> >>>>market to accumulate trade surpluses in foreign currencies, mostly
> >>>>dollars.  At the same time state credit cannot be used to finance
> >>>>domestic development to raise income for fear of inducing speculative
> >>>>attacks on the local currencies.
> >>>>
> >>>>Neo-liberal economists argue that the main reason why the increase in
> >>>>the monetary base has not yet worked in Japan is due to non-performing
> >>>>loans (NPL) in the banking sector.   They point out that funds loaned
by
> >>>>commercial banks and spent by borrowers create deposits at other banks
> >>>>that can then be lent out to other borrowers.  According to
> >>>>neo-classical monetary economics, this is the way an increase in the
> >>>>monetary base (high power money) leads to an increase in the amount of
> >>>>broad money and higher prices, through the money creation power of
> >>>>banks.  But banks that are burdened by NPLs do not seek out new,
> >>>>profitable loan opportunities, even when they have excess reserves.
> >>>>Neo-liberal economists argue that a change in banking policy that
> >>>>effectively deals with the NPL problem will lead to more banks and
more
> >>>>businesses seeking out new opportunities and creating new loans. They
> >>>>make this argument all over Asia, in fact, all over the world.
> >>>>
> >>>>For Japan, they argue that solving the NPL problem would significantly
> >>>>increase the ability of the BoJ to increase broad money, increase bank
> >>>>lending, and raise the price level.  This is like arguing that after
you
> >>>>leave the gas running in the kitchen stove without first lighting it,
an
> >>>>explosion would result when you finally light it. Therefore you must
now
> >>>>turn off the gas and open all the windows and there is no alternative
to
> >>>>suffering uncooked food for a while until the air is clear.  But
> >>>>neo-liberals are careful to not tell you that it was they who first
> >>>>suggested that you blow out the pilot light of national banking.  If
the
> >>>>pilot light of national banking had remained lit, the economic kitchen
> >>>>of Japan would still be producing delicious hot food.  Turning the gas
> >>>>on without a lit pilot light will cause an explosion again, no matter
> >>>>how many times you open the window to clear the air temporarily.
> >>>>
> >>>>A recent BoJ report highlights the nature of the NPL problem,
> >>>>effectively arguing that NPLs are not simply the legacy of the old
> >>>>bubble days, but reflect continuing problems in the banking sector.
> >>>>There is truth to that observation, but the BoJ report fails to note
> >>>>that the NPL problem is a bastard child of central banking.  The BoJ
> >>>>argues that the NPL problem must be addressed quickly.  And there is
> >>>>also truth to that view.  Problem loans do exert a heavy toll on
banks.
> >>>> Heavily burdened banks lose the ability to focus on new lending to
new
> >>>>business opportunities.  A banking system that is weighed down by bad
> >>>>loans cannot fulfill its role of gauging risk and return and
channeling
> >>>>savings to the most profitable investments.  Banking problems also
exert
> >>>>a heavy toll on the economy.  Borrowers who are not servicing NPLs are
> >>>>frequently owners of assets -- property, buildings, capital
equipment --
> >>>>that are not being used productively or profitably in a free market.
> >>>>All this is valid, but only in a central banking regime.  Under a
> >>>>national banking regime, these problems remain, but they take on a
very
> >>>>different character.  Under national banking, rather than private bank
> >>>>profits deciding what should be financed, the national purpose decides
> >>>>what is financially profitable.  Furthermore, the claim that cleaning
> >>>>out NPLs in the Japanese banking system under a central banking regime
> >>>>will revive the Japanese economy has not been empirically verified.
It
> >>>>is only part of the snake oil cure promoted by the Washington
Consensus
> >>>>to perpetuate dollar hegemony.
> >>>>
> >>>>
> >>>>Gunnar Tomasson wrote:
> >>>>
> >>>>
> >>>>>Henry:
> >>>>>
> >>>>>Re. the following:
> >>>>>
> >>>>>When the BoJ buys dollars, it keeps the yen exchange rate low and
> >>>>>increases the Jpanese trade surplus (in dollars), drainging the yen
> >>>>>money supply at a faster rate that BoJ injection, because the dollars
> >>>>>earned from trade is not fully reconverted back into yens.  The
> >>>>
> > drainage
> >
> >>>>>from yen into dollars is consitently at a ratio of over 10 to 1, with
> >>>>
> >>>>>the trade surplus running at $20 billion a month and the Boj buying
$2
> >>>>>billion at peak intervention.
> >>>>>Comment:
> >>>>>
> >>>>>I just spent 30 minutes going through Bank of Japan monetary
> >>>>
> > statistics.
> >
> >>>>>Here is a summary of what they show:
> >>>>>
> >>>>>1.  Japan's Monetary Base (in 100 mn. yen) increased by 454,986
between
> >>>>>end-1996 and end-May 2003.
> >>>>>
> >>>>>2.  Japan's holdings of Gold and Foreign Exchange increased by ($mn.)
> >>>>>323,731 during the same period.
> >>>>>
> >>>>>3.  Converted at end-period $/Yen exchange rates, this is equivalent
> >>>>
> > (in
> >
> >>>>>100 mn. yen) to 389,855 - or 85.7% of the Monetary Base increase.
> >>>>>
> >>>>>These statistics do not seem to support your analysis.
> >>>>>
> >>>>>Gunnar
> >>>>>
> >>>>>
> >>>>>
> >>>>>   ----- Original Message -----
> >>>>>   From: Henry C.K. Liu <mailto:hliu@xxxxxxxxxxxxxx>
> >>>>>   To: bjm@xxxxxxxxx <mailto:bjm@xxxxxxxxx> ; pkt@xxxxxxxxxxxxxxxx
> >>>>>   <mailto:pkt@xxxxxxxxxxxxxxxx> ; gang8@xxxxxxxxxxxxxxx
> >>>>>   <mailto:gang8@xxxxxxxxxxxxxxx>
> >>>>>   Sent: Tuesday, June 24, 2003 11:20 AM
> >>>>>   Subject: [gang8] Re: Is Bernanke Behind The Rallies? Query to
> >>>>
> >>>Barkley
> >>>
> >>>
> >>>>>   Basil:
> >>>>>
> >>>>>   The reason is the Japanese trade surplus denominated in dollars.
> >>>>
> >>>With
> >>>
> >>>
> >>>>>   the BoJ increasing the yen money supply, the new yen cannot find
> >>>>
> > its
> >
> >>>>>   way
> >>>>>   into the yen economy because of a liquidity trap caused by zero
> >>>>>   interest
> >>>>>   rate. With the BoJ pushing on a credit string, yen assets remain
> >>>>>   relatively constant despite of excess yen in the banking system.
> >>>>
> >>>The
> >>>
> >>>
> >>>>>   trade surplus in dollars makes the Japanese trade sector a
> >>>>
> > mechanism
> >
> >>>>>   for
> >>>>>   turning yen input into dollar output, shrinking the yen economy
> >>>>
> >>>while
> >>>
> >>>
> >>>>>   expanding the dollar economy through a yen capital deficit into a
> >>>>>   dollar
> >>>>>   capital surplus.
> >>>>>
> >>>>>   When the BoJ buys dollars, it keeps the yen exchange rate low and
> >>>>>   increases the Jpanese trade surplus (in dollars), drainging the
yen
> >>>>>   money supply at a faster rate that BoJ injection, because the
> >>>>
> >>>dollars
> >>>
> >>>
> >>>>>   earned from trade is not fully reconverted back into yens.  The
> >>>>>   drainage
> >>>>>   from yen into dollars is consitently at a ratio of over 10 to 1,
> >>>>
> >>>with
> >>>
> >>>
> >>>>>   the trade surplus running at $20 billion a month and the Boj
buying
> >>>>
> >>>$2
> >>>
> >>>
> >>>>>   billion at peak intervention.
> >>>>>
> >>>>>   The fundamental flaw with the Japanese economy is not monetary or
> >>>>>   fiscal
> >>>>>   policy errors but its basic structure of relying on export for
> >>>>>   growth in
> >>>>>   the context of dollar hegemony.
> >>>>>
> >>>>>   Henry
> >>>>>
> >>>>>   bjm@xxxxxxxxx wrote:
> >>>>>    > Henry
> >>>>>    > I am having trouble with this?
> >>>>>    >
> >>>>>    > How can BoJ buying dollars increase the yen MS but not yen
> >>>>
> >>>assets?
> >>>
> >>>
> >>>>>    >
> >>>>>    > And how can a Japanese trade surplus shrink the yen MS? The
> >>>>
> > trade
> >
> >>>>>   surplus
> >>>>>    > must surely increase the yen MS as the BoJ buys dollars?
> >>>>>    >
> >>>>>    > Basil
> >>>>>    >
> >>>>>    > -----Original Message-----
> >>>>>    > From: Henry C.K. Liu [mailto :hliu@xxxxxxxxxxxxxx]
> >>>>>    > Sent: 20 June 2003 21:08
> >>>>>    > To: pkt@xxxxxxxxxxxxxxxx
> >>>>>    > Subject: Re: Is Bernanke Behind The Rallies? Query to Barkley
> >>>>>    >
> >>>>>    >
> >>>>>    > Not guite, Warren.  When the BoJ buys dollars, and it has been
> >>>>>   doing so
> >>>>>    > rather massively in the name of smoothing the rise of the yen
in
> >>>>>   recent
> >>>>>    > months, it increases the yen money supply, but not the amount
of
> >>>>
> >>>yen
> >>>
> >>>
> >>>>>    > assets.  This normally will "import" inflation to Japan from
the
> >>>>>   US if
> >>>>>    > not for the Japanese trade surplus in dollars.  Japanese trade
> >>>>>   surplus
> >>>>>    > runs about $20 billion a month now and BoJ spends about $2 to 4
> >>>>>   billion
> >>>>>    > a month to shore up the dollar (no one knows exactly how much,
> >>>>
> >>>but
> >>>
> >>>
> >>>>>    > surely less than $20 billion a month). The trade surplus turns
> >>>>>   yen input
> >>>>>    > into dollar output thus shrinking the yen money supply and
> >>>>>   contracting
> >>>>>    > the yen economy.  The Japanese trade surplus in
dollars,together
> >>>>>   with
> >>>>>    > the US capital account surplus in dollars, cause deflation in
> >>>>
> >>>Japan
> >>>
> >>>
> >>>>>    > which in turn supports the Japanese trade surplus, which in
turn
> >>>>>    > supports the US capital account surplus, thus causing
spiralling
> >>>>>    > Japanese domestic deflation.
> >>>>>    >
> >>>>>    > Henry
> >>>>>    >
> >>>>>    > Warren Mosler wrote:
> >>>>>    >
> >>>>>    >>--- "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx> wrote:
> >>>>>    >>
> >>>>>    >>
> >>>>>    >>>My point is that lowering the exchange rate of the
> >>>>>    >>>yen will only
> >>>>>    >>>contribute to deflation because it increases the
> >>>>>    >>>dollar denominated
> >>>>>    >>>trade surplus which Japan must reinvest in dollar
> >>>>>    >>>assets, thus shrinking
> >>>>>    >>>the yen economy.
> >>>>>    >>
> >>>>>    >>
> >>>>>    >>The way I see it, when the boj buys $US, for example,
> >>>>>    >>it increases net yen denomimated financial assets of
> >>>>>    >>the non govt sector, just like any other form of net
> >>>>>    >>govt. spending.  It also increases its net savings of
> >>>>>    >>$US, so the process
> >>>>>    >>in fact could be said to be importing US 'inflation'
> >>>>>    >>or exporting Japan's 'deflation?'
> >>>>>    >>
> >>>>>    >>warren
> >>>>>    >>
> >>>>>    >>
> >>>>>    >>=====
> >>>>>    >>Warren Mosler, www.mosler.org
> >>>>>    >>c/o James River Capital Corp
> >>>>>    >>5007 Chandler's Wharf, Suite 201/202
> >>>>>    >>Christiansted, USVI  00820
> >>>>>    >>340-719-8813 office phone
> >>>>>    >>340-719-8804 Fax
> >>>>>    >>Primary email contact:  mosler@xxxxxxxxxxxxxx
> >>>>>    >>
> >>>>>    >>__________________________________
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> >>>>>
> >>>>>
> >>>>>
> >>>>>
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