Self-Funding And Deposit Hoarding

Once again, this is an unedited draft of a section that would go into my banking manuscript. It follows onto the previous example.

In the extended example of how new bank loans are self-funding when we look at the entire financial system (including bond markets), one might attempt to critique it based on the idea that the depositors that are the recipients of spending that is financed by new bank loans (which creates deposits that are transferred) might hoard the deposits — preventing re-circulation back to the bank that extended the loans. (Alternatively, recipient banks might hoard reserves.) Such criticisms might seem plausible since the example uses convenient numbers to make life easier for the writer/reader — what happens if behaviour is different?

Bank Self-Funding Example

This is a potential section for my banking manuscript. It probably needs some diagrams, but I do not want to spend too much time on them if they end up not being used.

One way to get a better handle on the mechanics of the overall banking system is to work through an example that includes some of the important features we want to capture, but avoiding extraneous details. The example I am using has the following features.

Banks, Intermediation, And Pass-Throughs

This is a topic that is of interest for my book on banking. It may overlap some existing texts written some time ago (which is creating a future editing problem). Note that I refer to “this book” which should be read as “previous articles scattered around on my Substack.”

A somewhat arcane point of debate is whether banks are “(financial) intermediaries” or not. The reason why this is supposed to matter is whether banks exist to match savers or borrowers, or whether they “create saving.” From my perspective, the problem is the term “intermediary” as it is too vague, and should be replaced by the somewhat less common term “pass-through entity.” This is yet another example of how heterodox/orthodox economic debates have drifted into terminology disputes over decades. I will first explain the debate as I see it, then touch on the debate as framed by others.

MMT Documentary - Finding The Money

There is a MMT documentary now out — “Finding the Money.” I have not watched it yet, as it is on a streaming service I recently dropped. (My family rotates through the various streaming services, so I will watch it once we swap around again.) Obviously, I cannot give any recommendations about it, but it sounds like a good introduction to some of the debates.

Unfortunately there was a lot of howling on X (the everything app) about one aspect: the economist Jared Bernstein had a bad interview based on running into a question that he had not thought much about (I believe it was along the lines of “why would a floating currency sovereign borrow its own currency?”). The unfortunate thing is that there were a lot of activists playing this clip up, which then was picked up by right wing political opponents of Bernstein. This then led to a backlash by liberal-left mainstream types about Bernstein being set up. (From my understanding, other mainstream(-ish) critics of MMT came off better within the documentary.)

Japanese Yen

The rapid decline of the Japanese yen — recently stabilised by a (presumed) round of intervention — has brought forth the usual “currency crisis” discussion from the usual suspects (people you do not want to listen to for macro views). I cannot say that I am following Japan closely right now (I used to in the now distant past…), so I will just make a few generic points.

• 1The yen is a floating currency, and no sector in Japan borrows in foreign currencies to any large extent. Historical currency crises are artefacts of managed exchange rate schemes or foreign borrowing.
• Although I would prefer a more timely data source, the chart above from the IMF World Economic Outlook database shows Japan’s current account surplus. The Japanese private (and public) sector have accumulated a large amount of financial claims on the rest of the world. A drop in the value of the yen increases the value of those foreign currency assets. Sooner or later, if the yen gets stupidly cheap, repatriation looks interesting for Japanese savers.
• Pretty much everyone wildly over-estimates the effect of exchange rate movements on domestic inflation. The price level in Japan (as measured by the CPI) has barely budged since the mid-1990s, while the yen has done any number of wacky things over that period.
• Could Japanese government bond yields rise? Sure, why not? The problem with JGB doom stories is that most of those Japanese savers with foreign currency assets have implicit/explicit actuarial liabilities denominated in Japanese yen. Higher JGB yields are exactly what they want to see.
• Although I am in no great position to understand why Japan intervened, the most likely reason was that they disliked how disorderly the previous decline was. Nobody in the private sector wants to catch a falling knife. But once the intervention takes out some of the weaker hands, it acts as a signal for other actors to start buying yen, creating a two-way market again.

Email subscription: Go to https://bondeconomics.substack.com/ 

(c) Brian Romanchuk 2024

Currencies And Inflation

This is a sub-section that I forgot to include in my previous article that discussed inflation and financial assets. This is for a section of my manuscript that replaced two problematic sections. I kept this new section as lightweight and brief as possible; I might add more content later.

Currency trading is somewhat unusual in that the price reflects what is happening in two different currency zones. If we want to discuss how currencies relate to inflation, we should keep in mind that we should be talking about the inflation rate in the two currencies. For example, if the inflation rate in Canada is 2% and the inflation rate in the United States is also 2%, the effect of inflation on the Canada-U.S. exchange rate should cancel out.

Financial Assets And Inflation

This article is a complete re-write of two existing sections of my manuscript. I was unhappy with the sections, and they were blocking my progress. I decided to throw in the towel, and just cut the text down to the minimum. The text probably needs work, but it is no longer going to be black hole for revisions.

The beauty of the Cantillon Effect is that it gives a simple relationship between inflation and financial asset markets. Allegedly, people who somehow get “new money” first rush out and buy financial assets, driving up their price. This then leaks out into consumer prices. The problem with simple rules related to financial asset prices is: why are the people who discovered them all getting rich using them?