Jen v. Setser on exchange rates and global adjustment
It is fair to say that I see the world very differently than Dr. Jen. He thinks imbalances are a natural byproduct of globalization. I think they are a natural byproduct of undervalued exchange ratesin the emerging world and Japan and massive growth in the emerging world’s official assets.
He interprets the fall in the q4 current account deficit as evidence that exchange rates don’t matter, and thus there is little need for the dollar to move more. A rise in the US savings rate triggered by the housing retrenchment is all that is needed. He wrote in his weekly note:
“The sharp drop in the US C/A deficit in 4Q was a validation of the benefits of a world rebalancing through income, rather than through exchange rates.”
I, by contrast, interpret recent data as evidence that exchange rates do matter – not the least the exchange rate between the dollar and a barrel of oil.
The fall in the dollar cost of oil was the biggest reason for the fall of the q4 current account deficit. But it wasn’t the only reason. US export growth has been strong since 2004. Why? Probably because of the lagged impact of the dollar’s 2002-04 fall. And when I look at the regional data, I see even more evidence that exchange rates matter.
Both Asia and Europe grew strongly in 2006 — i agree with Jen on one point, there was a "rebalancing" of the sources of global growth in 2006.
The US current account deficit with Asia, though, is still rising, while the deficit with Europe and the NAFTA countries is heading down. Why? Presumably because European currencies – and the loonie – have appreciated, while Asia has resisted currency appreciation.
This pattern – adjustment with Canada and Europe, but not with Asia – was quite apparent in the monthly trade data as well.
The January data adds to the growing body of evidence suggesting that non-oil imports really did stall in the second half of 2006 as US growth slowed. Non-oil goods imports have been stuck around $131b a month since June. January 2007 non-oil goods imports were only 2% higher than January 2006 non-oil goods imports. That trend – if sustained – does set the stage for a reduction in the trade deficit so long as oil stays where it is and growth outside the US remains strong. The evolution of the broader current account balance though depends on the income as well as the trade balance.
So what explains the fall in the pace of non-oil import growth? A fall in the pace of growth from China? Not really. US imports from China are still growing at a 20% y/y clip. Overall US imports from the Asia-Pacific are up by around 12% — i.e. they are rising as a share of GDP. US exports are doing quite well in Asia, but the US trade deficit with Asia is still rising.
What of old Europe? US imports from Europe writ large were by up a bit less than 3% y/y in January; those from the eurozone are up a bit more, but at 4.5% they aren’t growing all that fast either. The US trade deficit with Europe is falling.
And then there is Canada. It is clear that the combination of a slumping housing sector (think lumber), a slumping US auto sector (think how close Detroit is to Canada) and a relatively strong Canadian dollar are having a rather significant impact. US imports from Canada in January 2007 were about 6% below what they were in January 2006. December 2006 imports were 10% lower than December 2005 imports.
The main reason why overall non-oil imports haven’t been growing is simple: Non-oil imports from Canada have plummeted, offsetting the rise in non-oil imports from Asia.
What of the export side? Well, exports to Asia are growing at a decent rate, as one would expect given strong Asian growth. But given the huge gap between what the US imports from Asia and what it exports, they are not nearly fast enough to keep the deficit from rising. Europe isn’t growing as fast as Asia, but US exports to Europe are really booming. The January y/y growth numbers were out of the world –US exports to the EU were up 29% on a y/y basis in January. The monthly data isn’t seasonally adjusted and can be influenced by the timing of various holidays and the like, so that growth pace seems a bit too high. But the December growth rates were also solid – 17%. Europe is doing its part. Its current account deficit is falling because of a falling oil bill and rising exports to the oil states. Its surplus with the US is shrinking.
The basic story is consistent. The US deficit with Canada and Europe is heading down, the US deficit with Asia is rising. So tell me again why exchange rates don’t matter?
Exchange rates don’t just matter. They are central to what is unfolding. The Chinese want exchange rates low because of political considerations: unemployment could destabilize the country. The rest of Asia pretty much has to follow suit or lose market share (and employment).
But the other side of the story is also interesting. The Europeans are willing to tolerate a high valuation because it sustains buying power for an aging population. The US, but for a slightly different reason: like every late-stage empire, it needs a strong dollar to finance the war.
But economics requires that things tend toward equilibrium, independent of political considerations. That puts very powerful forces in play for devaluation of the dollar.
Exchange rates matter, but only to a degree. Canada is a poor exapmle because most of its tradeable assets, lumber and oil, are replaceable by other competitors in the world. I believe Canadian exports would grow again, should price of oil go up (and Canadian dollar stayed strong), because then the total cost of harvesting and transporting lumber from Asia(Indonesia) would be higher than getting Canadian lumber. Similarly, I believe Chinese exports would be driven down (even with a weaker yuan) by replacements elsewhere(e.g. Vietnam and Africa). The problem with China is that many of its exports aren’t easily replaceable yet.
I am curious though about composition of US exports to Europe. What’s driving the export growth and our competitive advantage?
Ex-rates matters of course, unless one wants to deny 300 years of economic theory. David Hume wrote some magnificent essays on this subject already in the 1770s: they still look much better than many things produced now.
But income growth matters as well (for the same reasons as above) for the trade balance (or CuA).
So the subtler challenge to BS (in dr. Jen’s spirit) is the following.
1. US economic growth (including aggregate supply, or productive capacity growth, not just the demand side) was elevated to abnormally high and unsustainable rates by K-inflows in the last 8 years. It had to come down (via a number of channels, too long to describe them here).
2. Since US growth was bound to slow (structurally, permanently), this was bound to lower US imports
3. Hence at current ex-rates, the (rate of growth of) the US “structural” trade deficit was lower than what appeared to be in recent years.
4. Therefore, the US dollar as a whole was not so overvalued as some (BS) kept arguing for years (and are still arguing)
5. Dramatization of global imbalances, too early, was bound to lead its proponents to wrong forecast, both on financial mkts and on economic trends.
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As for the Japanese surplus and the Yen
– by the way a good example, if not an outright proof, that central banks’ direct intervention on forex mkts matters very little for the US dollar’s overall value, hence for US global imbalances: unless one looks only at how big CB reserve growth is, and turns a blind eye on how big private transactions are, relatively speakng, both stocks and flows –,
As for the Japanese surplus and the Yen, yes the US deficit with JP is still rising, but this does not in any way imply the irrationality of mkt participants: interest rates differentials keep the Yen to levels where the US deficit (rate of growth) is higher (than Europe, etc.). If it didn’t, then one should start worrying about mkts’ rationality. It follows that predictions of a Yen sharp appreciation were bound to be wrong again and again; until interest rates converged. Since now JP interest rates are the last to converge (as compared to EU), it is obvious to me that the Yen accelerated its appreciation against the $ only after the Euro have set new highs against the US$.
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A final note on China. The Chinese will appreciate seriously against the dollar only if they must, i.e. when pressures become “too high to bear”. I mean financial & economic (real) pressures, not just political pressures. When will pressures on China sharply increase? When the Yen will appreciate!, thus leaving China misaligned against the last big competitor, as almost the only game in town for currency speculators, who will blaster Chinese K-controls.
When will the Yen appreciate? When the US slowdown becomes clear: March-April-May 2007. How long will China resist, then? My guess is one-two months: then they will give up. June. So June is the perfect timing for a Yuan appreciation. How will they do it? We’ll see if they do it with one big move or by accelerating their crawling peg. Alternatives? None. Only a rebound of US growth can save the Yuan’s peg to the dollar.
Once there were other ways open to China (rising real wages, taxing exporters to invest in remote areas), now it’s too late. A Yuan ex-rate appreciation move is the only policy at hand rapid enough to respond to the rapidly mounting pressures. I already wrote this in October.
Regards
gheorghius — much as you criticize my views, it seems like we basically agree on the rmb (we both want to be long rmb/ short $ … or at least would if we had open access to interest bearing rmb assets). but i do think the $ is overvalued v. a range of emerging economies, not just China, and i gather you don’t …
No no, I trust your judgement on some bilateral exrate that you consider “overvalued” vs US$, beyond China.
And when I criticize your views, it’s because it’s more funny to argue than to agree: but indeed I share a majority of your views, and I sincerely appreciate your work, I like it.
I just think that US imbalances OVERALL are mkt based and that the US$ alltogether is not (too) misaligned . When reality does not fit your views you tend to blame CBs or irrational mkts (thus implying “we in this blog are brighter than consensus”), whereas (ok, mkts can go wrong but)I stimulate you to look for failures in your own “model” or view of the world.
More precise definitions, again, would help. US$ “overvalued” against the Yen? “Overvalued” against what benchmark? Do you have in mind an exrate that makes trade almost balanced? But this is not the usual meaning of an equilibrium exrate. Mkts currently imply an annual appreciation of the Yen against the $ of 5%, don’t you think this is consistent with sustainable global adjustment? If it is, shouldn’t we consider the Yen “more or less correctly priced”?
Gheorghius wrote,
“– by the way a good example, if not an outright proof, that central banks’ direct intervention on forex mkts matters very little for the US dollar’s overall value, hence for US global imbalances: unless one looks only at how big CB reserve growth is, and turns a blind eye on…”
And if one tries to look at everything and turn a blind eye to nothing, then what?
I guess “it’s more funny to argue than to agree.”
ALOL (almost LOL)!
Why US Dollar Hegemony is alive and well
http://www.ppionline.org/ppi_ci.cfm?contentID=254218&knlgAreaID=108&subsecID=127&FREM=Y&sid=170814&mid=22001
” A thousand years ago, just as today, a few major currencies served as the world’s reserves and mediums of financial exchange. Nor is the large role of a few big currencies much different: 66 percent of the world’s identified foreign reserves are in dollars, 25 percent in euros, 7 percent in yen and sterling; and only 2 percent in the world’s other 150 national currencies. In reserve — Governments now hold about $4.8 trillion in reserve, three times the $1.5 trillion figure of a decade ago. Some observations:
The US dollar is involved in over 80 percent of currency transactions and remains the world’s major reserve currency. The IMF identifies allocations for about $3.15 trillion of this figure, with dollars accounting for 66 percent of the total, euros, 25 percent, yen 3 percent, and sterling 4 percent. China and Japan are the largest reserve holders, together accounting for about $2 trillion of the $4 trillion.
The big accumulation of reserves is in developing countries, which held $0.9 trillion in 1996 and now hold $3.4 trillion. This reflects cash piled up in Russia and the Persian Gulf through oil sales, along with the determination of Asian countries to build up cash reserves either against the risk of a second financial crisis, to promote exports, or both at the same time.
The euro’s reserve role is growing. European Currency Units, deutschmarks, French francs, and Netherlands guilders combined to make up 17 percent of the world’s financial reserves in 1996; the euro hit 19 percent in 2000, and now is at 25 percent of reserves. Yen reserves have shrunk from 7 percent to 3 percent of the world total, while sterling and Swiss francs remain about the same.
A bit surprisingly, no Asian currency has yet begun to take on a role as a reserve comparable to that of the dollar and euro. “
If you care about capital preservation of your family’s wealth, some highly recommended weekend reading:
Why Collapsing US Subprime mortgage finance endangers the Global financial system
http://www.atimes.com/atimes/Global_Economy/IC17Dj01.html
Gheorghius — we do disagree on the impact of central banks on the market. they are in my view the number one reason why EM exchange rates are undervalued (they intervene to keep em that way), and the portfolio decisions they make — along with the oil funds — also in my view (and this is more debatable) exercise a significant influence on the g-3 exchange rates. Their preference for euros and pounds over yen as an alternative to the $, for example, is one reason why the yen is rather weak (in my view). I agree with jen and macroman on this point. $900b (EM reserve growth + oil fund growth) gives you a certain influence.
your 5% appreciation of the yen v $ comes i think from uncovered interest parity … and the short-term rate differential … but there is a growing body of work suggesting that uncovered int. parity doesn’t really hold — hence the popularity of carry strategies. so I am not sure i find that argument totally persuasive — even though i certainly would like 4 years of 5% yen appreciation, i am not sure that is in the cards.
What we have here is Jenconomics. Not only don’t deficits matter but also exchange rates. Certainly, short-term trends may exhibit atypical patterns, but in the long run, things tend to track conventional economic wisdom. For that reason, I stick with Setser (and Roubini).
Tom Marney:
“And if one tries to look at everything and turn a blind eye to nothing, then what?”
Tom, one would then quickly notice that not just financial wealth (stocks of assets), but even (currency) flows are overwhelmingly private. Thus, speaking of DIRECT INTERVENTION OF CBs (not of other CB policies), one should say that this interventions has only a very marginal impact on the overall value of the dollar. Hence it is the mkts that hold the overall value of the dollar where it is. Thus BS would have to prove that currency mkts are “irrational” to maintain his views about an impending disaster in global US dollar currency mkts, which is not as easy, since mkt players bet their money while he doesn’t.
Consider first the facts:
A) Currency mkts overall:
- Currency Trading Totals $3 Trillion a Day in 2007 (it was $1.5 trillion/day in 1996 and 2.7tr/day in 2006)
- 80% of it involves the US$
- London alone accounts for a third of all currency trading, or $1 trillion per day
- Just to offer some perspective: the $3 trillion figure is ten times the value of daily stock and bond turnover, and a hundred times the value of daily goods and services trade.
B) The role of CBs in currency mkts:
- Governments altogether now hold about $4.8 trillion in reserve
- The IMF identifies allocations for about $3.15 trillion of this figure, with dollars accounting for 66 percent of the total, euros, 25 percent, yen 3 percent, and sterling 4 percent.
- China and Japan are the largest reserve holders, together accounting for about $2 trillion of the $4 trillion. See http://www.imf.org/external/np/sta/cofer/eng/index.htm
- Flows and The growth of CB reserves - The big accumulation of reserves is in developing countries, which held $0.9 trillion in 1996 and now hold $3.4 trillion.
Now compare these data - It is quite clear that, however impressive when you take them out of the broader context, CB reserves are relatively minuscule (and their and recent growth almost irrelevant for mkt flows).
There is another more fundamental disagreement with BS, which - given it’s bed time now - I cannot present in full. The theory of speculation shows that in order for a market price in liquid mkts to remain close to equilibrium - it is enough to have a small fraction of “smart money”. So a few CBs, even if they had a meaningful influence on mkts, if they toop exrates far away from equilibrium, would arise equal and opposite forces that would restore mkt prices close to equilibrium. I just mean it here as a hint, not as an argument.
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Brad: it seems to me that you are repeatedly confusing my claims that the US$ is broadly close to equilibrium and that CBs do not have much impact on the dollar’s overall value , with the impact that some (third world country) CBs have on their bilateral exrate against the dollar: I think it is unfair. It is obvious that China, for one, determines its exrate with the help of direct intervention (although mostly through K controls): will you please take note that this is an accepted truth for everyone? The dollar’s overall value is something else. My view is that if US CuA was truly unsustainable the dollar would depreciate more against free floating and tradable currencies, whatever the Chinese etc. do.
On the UIP of on the forward rate, I think your argument about whether the UIP holds or not is totally irrelevant.
By the way, what does it mean “holds” in your context? The body of evidence that I know still debates whether there are risk premia - and if they exist they are certainly very small - or whether the forward rate is an unbiased, and possibly the best predictor of future spot exrates (although it is not an efficient predictor at all).
But the point is another. Current mkt equilibrium on the Yen/dollar is based on an expected Yen appreciation of 5%, full stop. If the Yen/$ today was at 90 instead of 117, as you would probably like, then with current interest rates a man investing in yen would have to still believe in a 5% annual appreciation (the Yen/$ at 68 in 2012), else he would be running a charity fund in favour of dollar holders (because: why to let down a 5.5% yield in $ if you don’t expect compensation elsewhere?). I think if people had these expectations today, they would be wrong and the Yen misaligned (too appreciated), whereas the very fact that people believe today (of course, UIP!) that the Yen will appreciate 5% on average per year allows me to say that, since we both agree that this price path (leading to a Yen/$ around 90 in 2012) would be almost good enough to make global imbalances fully sustainable, THEN it follows that the Yen is not (much) misaligned (my estimate is a misalignment of about 5%, until of course interest rates differentials change).
Regards
Gheorghius,
You raise an interesting point about how influential central banks are. I note that you make the point that the yen is not so undervalued given the interest rate differentials. But how are those interest rates fixed? By central banks with tiny balance sheets in relation to the sizes of their money markets. I have long been puzzled by this - and so too have better economists than me, such as Ben Friedman in NBER Working Paper 7420. Either the net flows represented by central banks are influential on the margin, or else central banks are guiding the market to where it just would go anyway. Can anyone shed any light on this puzzle?
Central banks have virtually absolute control over the level of short term interest rates in their home currency, at least in the short run, provided they are willing to live with the consequences of interest rate targeting on other markets, including exchange rates. The only way in which central banks can be unsuccessful in targeting short term interest rates is if they give up for other reasons (e.g. untenable exchange rate consequences).
The technical explanation is relatively easy, I think. Central banks have virtual total control over their ability to run their home country bank reserves at surplus or deficit levels relative to required minimum levels. E.g. if they want to keep short rates low, they run surplus levels. The greed of individual banks motivates them to avoid a disproportionate share of non-interest bearing surplus reserves, which causes them to bid up the prices (yields down) of interest earning money market assets in order to replace 0 interest earning bank reserves with interest earning money market assets. 0 interest rates are a bound, as in Japan, but banks are unlikely to forgo the alternative of earning interest, no matter how low, again unless they are specifically motivated by the fear of other consequences. There is virtually no technical limit to central bank capacity for tightening or easy system requirements in this regard. (The technical implementation of a ‘helicopter Ben’ deflation fighting scenario merely involves an expansion of the Fed balance sheet in this way. The technical implementation of an inflation fighting scenario is squeezing the hell out of system reserves while increasing the funds rate.). This is all possible because central banks control their home currency monetary base as a closed system, tightening or easing the levers as they desire. It is the ultimate form of leverage.
FX is different, I guess, but I know and understand less about it. It seems to me there is no comparable closed system whereby exchange rates per se can be driven and held in one direction (without technical limit) by simple central bank intervention. FX reserve management is a tool, but is not nearly as powerful in the limit as domestic reserve control. I think this is because there is no corresponding persistent and unremitting control over the motivation of banks to buy or sell foreign exchange the way there is with domestic currency reserves and money market assets. The FX market in this sense is much more wild west than domestic short term interest rates (at a technical level). FX is also a much larger asset valuation market than short term interest rates, which are essentially an income market - banks are motivated by greed to increase their income or avoid income losses when responding to central bank reserve settings. Thus, ‘tiny’ central balance sheets exert huge absolute control over domestic reserves and corresponding behavioral motivation of interest rate players, but they exert little control (relatively speaking) over FX players (not to downplay the enormous leverage of Japan for example with its reserves, but that doesn’t approach the level of technical control it would have over domestic interest rates).
Rebel,
you raise an even broader point, that involves the core of macroeconomics and monetary theory. No doubt CBs have a powerful control over short term interest rates, as JKH explains; no doubt short term interest rates powerfully influence exrates; no doubt, on the oher hand, as Ben Friedman argues, innovations in both money demand and supply repeatedly erode CBs’ power (although is I debatable whether this is a trend or not).
Setting aside the issue of monetary innovation, tiny BC budgets do guide short term interest rates (hence heavily influence financial mkts and more modestly the whole economy) because CBs still have substantial control over DOMESTIC money supply, hence they can both set DOMESTIC interest rates and depreciate if they wish their DOMESTIC exrate relatively to what financial mkts would do (see China). What they cannot do with their tiny budgets is to appreciate their currency by mere “intervention” unless financial mkts agree; nor heavily influence other currencies’ exrates.
Unfortunately, even good economists sometime forget that partial equilibrium analysis, as impressive as it may be, cannot lead to general conclusions. So the intervention by some CBs in forex mkts in support of the US$, as impressive as it may be, per se should not lead to conclusions about the impact of CBs on the overall value of the dollar.
Gheorghius –
you write: “recent growth almost irrelevant for mkt flows”
on this I disagree — and it is probably the root of our disagreement. I don’t think the recent growth in CBs reserves is irrelevant for net flows. the numbers you cite are gross turnover — and CBs are small there. The order flow literature i think helps explain why - one transaction in the fx market triggers a chain of transactions as the market searches for someone who wants to hold a euor or dollar. but the current global equilibrium hinges on a growth in net overseas holdings of dollars. All the gross turnover in the world is irrelevant if investors are not willing to increae their claims on the US by @ $900b. And right now, private investors aren’t willing to do so — making CBs important. and for the reasons outlined above, i suspect CBs also shape the relative value of the yen/ euro. On this i think I agree with both macroman and jen.
The dollar can be at close or close to fair value on a broad basis and still be substantially overvalued in certain bilateral cases. Whatever one thinks of the former, most analyses would suggest that the latter is currently the case against the likes of RMB.
However, let’s put the “tiny” CB balance sheets in perspective here. Over the last few years, reserve growth in China, Russia, India, and Taiwan has exceeded the growth in the broadest US monetary aggregate still reported by the Fed. Combine that with the reserve growth of similar institutions + sov wealth funds, and you have a fair packet of change.
While these amounts appear to pale in comparison with average turnover in foreign exchange, please bear in mind that prices in these markets are set on the margin. And in the case of EUR/USD or GBP/USD, the introduction of a large marginal buyer of the European currencies has had a substantial impact, and continues to do so to this day. This can be demonstrated by the fact that any currency that has had a stable/rising share in reserve portfolios is generally thought to be overvalued (USD, EUR, GBP) and any currency with a falling share in reserve portfolios (JPY, CHF) is generally thought to be weak, as are the CBs domestic currencies (with a couple of exceptions.)
In other words, what these guys buy is strong, what they don’t buy is weak. Sounds like an impact to me!
I read a paper recently that suggested that as total credit growth (money supply) declines and inflation pressures rise (money demand), it is completely in the realm of possibility to see interest rates rise above total credit growth - somewhere probably in the 7% area. The author suggests that this will lead to cascading defaults and could quite likely implode the Federal Reserve.
This is not my thesis, but I’m pondering it and curious if anyone else has anything constructive to add, either for or against this idea.
jkh,
Thanks for your interest!
OK, I should have said that I can see how central banks can control interest rates, but not without taking over the money market themselves.
Suppose that borrowing from the central bank is the sole source of central bank money, and assume that the banking system is initially in equilibrium at any given floating interest rate, which applies (albeit with some spread) to deposits and loans. If the central bank uses its marginal position to lower the interest rate, it has to supply at least all the extra loan demand itself, and possibly more if the lower interest rate is passed on to the depositors and they reduce deposit supply in response. It does not take a large change in the interest rate and much elasticity in loan demand and deposit supply for the central bank to end up being most of one side of the market. And vice versa if the central bank tries to raise the interest rate.
In fact, the system, at least as relating to short-term interest rates, is not closed. A lot of central bank money is held outside the banking system as banknotes. Fed open market operations involve trading central bank money long term bonds. If the market does not like the short term rate the Fed tries to impose, it can offset this in its participation in these operations. And even if the system was closed, abusing it too much would encourage the growth of other types of money.
Notwithstanding Nouriel Roubini’s rant on the other channel about lack of regulation being responsible for the asset price boom, I do think that monetary policy is primarily responsible, and I would not be surprised if some of the explanation lies in the minutiae of the way that monetary policy is conducted.
RebelEconomist -
Thanks for your response. I’m not an economist, but have developed a few rebellious theories of my own. Yes, I agree, central banks respond to the public’s demand for notes in circulation in a generally passive way, and to that extent this part of the system is not closed. But I would maintain that the supply of bank reserves is under close control of the central bank, and is closed. Moreover, this is the aspect that is critical to central bank targeting of short rate levels. And the bank can take into account the stock of bank notes outstanding in modeling its inflation models if it wants to. I agree also that dealers can back away from bond auctions when they want (no doubt this happened a lot in the Volcker Fed era), but that doesn’t change the bank’s ability to control short rates in such an environment, including the general level of repo rates that will finance those bonds. In an inflationary environment, or a foreign exchange crisis, a central bank may back off its short term rate posture as a result of changing its monetary policy, but not because it doesn’t have technical control over the level of short term rates. Finally, credit growth is a function of credit demand at any level, plus the banking system’s mode of credit supply (e.g. recent trend to review and tightening of standards as a result of the subprime fiasco). And broadly defined money supply is in fact a technical function of credit supply from banks - when you take out a bank loan, the first thing that happens is the bank credits your deposit account - that’s new money supply. That’s a fact because it’s a function of double-entry bookkeeping (a useful discipline in banking that might also have been helpful at Enron).
Central banks do not have small balance sheets. They have gigantic balance sheets.
If they claim to have small balance sheets, it’s only because they’re not listing their primary asset or their primary liability.
Their primary asset is the monopoly right (”patent” in the original meaning of the word) to produce an unlimited quantity of national currency. Obviously this right cannot be priced in the currency itself, but it could easily be priced in another currency. For example, suppose the government of Nigeria outsourced the right to produce Nigerian naira. I’m sure Wall Street would be quite happy to price this for them.
This right cannot actually extract all the assets of an entire nation, because if it is abused too much people will find ways to hide from it. But its value is certainly in the same general ballpark. This is hardly a “small” number.
The primary liability of the CBs is the right of ownership (that is, actual control) they extend to their respective national governments. CBs may be “independent,” but they are not sovereign. All their granted powers can be rescinded at any time. Their managers are agents, not principals.
Of course, it may be silly to analyze CBs in terms of double-entry accounting as if they were private entities. One can always fall back on the chartalist chestnuts of Hegelian Keynesianism. No one ever got fired for being too respectful of the State. But if you want to treat these institutions as nondivine entities for purposes of mere bookkeeping, you have to do it right.
I confess that I am unable to understand BS’ last reply, nor guess by how much the devastating ratios on currency turnover (Private/CBs) would be reduced by BS’s “corrected” data (from 300:1 to 60:1? Does it make any difference?). But I would very much like to learn, and if BS could suggest any reading on this order flow literature and how on earth “one transaction in the fx market triggers a chain of transactions”, I would appreciate. Macroman: your argument seems a tautology: since you and BS (and half of the people out there) believe that the currencies that CBs don’t buy (Yen and FFSS) are “weak”, then this is a proof that you are right etc. Not very convincing. But again, I’d be glad to read more if you have any good literature to make your points clearer. Many thanks to all who replied me.