Friday, February 24, 2012

Money as a store of wealth

Nick Rowe has a post that decries the idea of money as a store of value. He asks:

How much would I have been willing to pay for my house if the seller had imposed a condition that I could use it as long as I wanted but could never sell it again, or rent it out to someone else? Less than I paid for it, but still a positive amount. It yields a flow of services even if I can't sell that right.
How much would I have been willing to pay for the S20 note in my pocket if the seller had imposed a condition that I could use it as long as I wanted but could never sell it again, or rent it out to someone else? Nothing.
My response:

That's the same question a value investor asks before buying a stock.
The answer usually comes to something like, if I can pay $50 for a stock that is worth $100, then even though I can't resell it in the market I'll still buy it. Because the stock can't be resold, that $50 in value has to be realized through dividends. But if the stock is prohibited from ever paying a dividend, this value can still be realized by the firm repurchasing and canceling shares at higher prices.
I'd say roughly the same applies to central bank notes. If I can buy a note for far less than it's worth and hold it till the central bank begins to mop up the supply notes and cancel them, then I'll go ahead with the transaction. Since central banks are less opportunistic than firms and therefore less likely to announce buy backs, I'd only buy at a huge discount. A huge discount to what? The value of its bonds, bills, gold, buildings, and forex. In sum, the price I'd be willing to pay for non-transferable bank notes is not "nothing" but some number >0.
The store of value vs. medium of exchange argument is one of the oldest arguments in monetary economics. I don't think the answer is is binary, as in either/or. Rather, there is some sort of way to properly configure the two concepts into a logical whole. The answer would be a lot easier if the twin concepts medium of exchange and store of value were to be defined first in a microeconomic sense. In a sense, this sort of integration of monetary economics with microeconomics goes against the grain, since this would be making microeconomics more like monetary economics, and not vice versa, which has been the general approach taken by the whole microfoundations of money enterprise.

Sunday, February 5, 2012

The Idiot's Guide to the Federal Reserve Interdistrict Settlement Account

The argument about ECB Target2 imbalances, an argument which began in mid 2011 with this article, continues to be reignited in various arenas. One component of the argument is the comparison of Target2 to the Federal Reserve’s mechanism for settling inter-Fed settlement imbalances; the Interdistrict Settlement Account.

Because the various debaters often have such diverging views on how the Interdistrict accounts are settled, I’m donating this post to the blogosphere with the goal of ensuring that the debate doesn't founder on faulty comparisons of Target2 to the Interdistrict Settlement Account. As such, I'm going to talk a bit about the history of Interdistrict settlement, how the process has changed over time, and how it works now. Once that's done I'll bring the discussion back to Target2 in order to pin down the comparison in a more robust way. I don't claim to know everything about these mechanisms; I've just spent a few weeks educating myself, so if I am wrong on any aspect leave me a comment.

In first learning about these two mechanisms I had a very meta reaction. By meta, I mean the same sort of reaction faced by anyone asking who watches the watchers?  In this particular case, the more appropriate question is “who clears for the clearers?” 

Another thing that makes the Target2 and Interdistrict settlement mechanisms so fascinating is that, within the monetary architecture, they are “core”.  Take out the core and the whole structure disintegrates.

Yet despite their centrality to the superstructure, nobody (except for a few cloistered central bankers) really knows much these mechanisms. It is only now that imbalances are cropping up that we the public find the inclination to catch up on how these arcane but vital systems function.

All sorts of commentators have already explained how Target2 works and the imbalances that have arisen. I won’t touch on these; just search Google for Target2. What follows is a discussion of the Federal Reserve Interdistrict Settlement Account.

Saturday, February 4, 2012

IMF and SDRs

A few thoughts on the IMF and SDRs over at the Money View.

The IMF and the SDR program are difficult to de-consolidate:

As far as I know, the IMF doesn't run the SDR program on its own balance sheet, it just administers the SDR program. Using your example, the EU and the US issue promises to currency which are held in some mutual account managed by the IMF, and that account in turn issues SDRs back to the EU and US. So in effect, the IMF doesn't swap its own promises with the EU and the US. Rather, the US and EU are swapping promises with each other with the IMF as facilitator.

That being said,

The last time I checked, the IMF was the largest owner of SDRs, all held on its own account. 
Here is the current distribution of SDRs across nations and institutions.