Re: Is Bernanke Behind The Rallies? Query to Barkley

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Warren Mosler wrote:
> > > Right.  In general, 'loans create deposits.'  The
> > > deposits thus created are liabilities of the
> > > institution involved.  This can happen anywhere in
> >
> > the
> >
> > > world, as you indicate.
> >
> >
> > When the Fed increases the dollar money supply by
> > buying up treasuries
> > through its open market operation, it deposits the
> > dollars proceeds
> > (high power money) in its banking system increasing
> > the excess reserve
> > based on which banks can make more loans.  The
> > initial high power money
> > is a credit deposite in the banks, derived from
> > proceeds from buying
> > state debt (government debt).
>
>
> Only half the story.  With a fed funds rate target
> above 0, the fed then sells either tsy or its own
> notes to keep the rate from falling to 0 and stay at
> 1%.  So net financial assets remain unchanged (as they
> do even in the case of a 0 rate policy).

Yes, when the FFR approaches zero, a chemical change occurs to interst
rate policy and its effects, making it inoperative and producing
unintended consequencies, such as delfation.  Imminent death alters both
perception and rationality.


> > Japanese trade surplus in dollars also increases
> > dollar deposite in
> > banks world wide.
>
>
> ??? When Toyota sells cars for $, one $ account is
> debited and another credited, that's all.  Unless the
> $ are borrowed to buy the car.  Only then does $
> 'money supply' as defined as bank deposits increase.
> Just like any other loan creates deposits.

Very few cars are sold as cash transactions. All exports are financed
with loans and install payments, securitized.

>  when the banks are within the US,
>
> > the deposits are in
> > dollars and when the banks are outside of the US,
> > the deposits are in
> > euro-dollars.  Both types of deposits increased the
> > dollar moeny supply.
>
>
> right, as above.
>
>
> > The question is: do you have a problem with the
> > observation that
> > Japanese trade surplus in dollars increased the
> > dollar money supply and
> > shrinks the yen money supply, other things being
> > constant?
>
>
> As above, it's the borrowing of $ US that increased
> the money supply as defined.  But net $ financial
> assets have not increased, as there is always a loan
> and a deposit, netting to 0.

What happens when the loan is in yen and the deposit is in dollars.
This is a daily occurance for Toyota.

> Likewise, the yen money supply has not shrunk, unless
> yen loans were repaid.  And without govt/boj
> intervention net yen financial assets remain
> unchanged.

The yen loans used to be not fullly repaid, just rolled-overed backed by
dollar deposits.  But central banking and NPLs resolution are forcing
the yen loans to be repaid or written off.  That shrinks the yen money
supply.

Thank you for agreeing.

Henry