Jamesian Philosophy Refreshed

I came upon a fascinating discussion of the ambiguities in the word "reserve" as commonly used in discussions of banking. Okay, the word "fascinating" is subjective, perhaps especially in that context. Still, this is from a fellow calling himself Dwain Dibley, about whom I know nothing else, commenting in a thread to a post about US monetary policy in Mises.com, a blog on Austrian economics. --------------- Reserves' is one of those ambiguous Fed doublespeek terms that has different meanings and or functions, dependant upon the context in which it is being used. So let's cover some of what the Fed considers 'reserves'. 1) Reserves are: Cash held in bank vaults. 2) Reserves are: Bank assets held on deposit at the Fed. 3) Reserves are: Assets purchased by the Fed in its open market operations. 4) Reserves are: The liquidity provided by #2 and #3 in the interbank settlements system. When the Fed talks about adjusting bank reserves, it'...

We have reached a critical moment in the life of the institution known as a "central bank." A central bank, as many of you likely know, is paradigmatically a bank that is NOT part of the government that it serves, an institution that has both private and public characteristics, and an institution that serves as the grease for macro-economic gears in the machinery of governance. Alexander Hamilton, an admirer of the London model, brought the institution to The United States. We now have a rather peculiar form of central bank, the Federal Reserve Board, created by the Wilson administration more than a century ago. Its peculiarities need not interest us today. But as I said above, we have reached a critical juncture. The central banks of the developed world appear to be running out of their usual arrows. They'll have to come up with something non-traditional when the traditional quiver is empty. What might that be? They might adopt distributed ledger technology -- ...

As we discussed yesterday, if a nation's central bank lowers its interest rates, the usual expectation is that it will weaken its currency. Part of the reason why: it will set up a carry trade, in which profiteers will borrow money at its low rates, then exchange that currency for another currency, that issued by a higher-interest rate country, so these profiteers (I use the term without animus -- it simply means "those seeking a profit") can lend out for a higher rate than the one at which they are borrowing, pocketing the difference. This activity, given supply/demand principles predictably weakens the currency the profiteers are leaving and strengthens that into which they're moving. This brings us back to the mystery with which we began. Australia and New Zealand have both recently lowered interest rates. In each case, though, that has corresponded to a strengthening of the currency. Back in late May, you would have needed 1.39 Aussie dollars to buy a US do...

I'm not sure I understand this, or agree with Bloomberg's analysis, but I'll put it in here anyway. An Aug. 15th Bloomberg story, by Vincent Cignarella (portrayed above), starts with this: The central banks of Australia and New Zealand each recently lowered their benchmark interest rate. According to conventional wisdom, this should have weakened their respective currencies, giving their business a stimulative shot in the arm when functioning as exporters. But that didn't happen. Rather, the lowered interest rates resulted in ... stronger currencies. What's going on? If you don't understand why that result is counter-intuitive, you might want to take a step back, Consider a common FX trader's trick known as the "carry trade." The idea is: borrow money in the currency of a country where interest rates are low, then trade it for the currency of another country where interest rates are high, and lend the money out there. You're buying cred...

It was my twitter feed that first alerted me last weekend to the news that Zambia's President had forced the central bank head in that country out of office and vowed lower interest rates. Good for twitter! this is proof of its value -- the value of net based social media generally -- in tailoring news.   In old-fashioned dead-tree newspapers, whence most of my news used to come (until very recently) the goings-on in Zambia would have been tucked into a small item very deep in the paper, if it was deemed fir to print at all by the papers in the "developed" world. But in fact, I deem it an important, perhaps the biggest one coming at us that day, and I'm glad to have received it when I did. One of the significant facts about the story is that it dramatically demonstrates that central banks are only independent of the executive offices of a country when they are allowed to be independent by those executive offices. In other words, they aren't really all th...

Almost exactly four years ago, economist Paul Krugman wrote the following explanation of the difficulty in defining the money supply for purpose of monetarist analysis. I think it is worth the resurrection. Surely we don’t mean to identify money with pieces of green paper bearing portraits of dead presidents. Even Milton Friedman rejected that, more than half a century ago. For one thing, a lot of those pieces of green paper are pretty much inert — sitting outside the United States, in the hoards of drug dealers and such. For another, checking accounts are clearly a close substitute for cash in hand. Friedman and Schwartz dealt with this by proposing broader aggregates –M1, which adds checking accounts, and M2, which adds a broader range of deposits. And circa 1960 you could argue that those aggregates were good enough. But now we have a large shadow banking system, in which things like repo serve much the same function as deposits; M3 used to capture some of that, but...