Thursday, 24 January 2013

The non-existent shortage of safe assets.

Introduction / summary.
Journalists, academics and economics bloggers have recently taken to worrying about the alleged shortage of safe assets.
This alleged shortage results from the fact that a number of assets regarded as safe before the crunch are clearly no longer safe: e.g. collateralised debt obligations based on dodgy mortgages, and the debt of Euro periphery countries.
The above individuals can stop worrying. The only important consideration here is whether this alleged shortgage results in the excess saving of money, which in turn might lead to paradox of thrift unemployment. And if paradox of thrift unemployment does appear, then the solution is easy. It was spelled out by Keynes decades ago and more recently to advocates of Modern Monetary Theory: have the government / central bank machine print money and spend it into the economy (and/or cut taxes).
Problem solved. Yawn, yawn.

More details.
This article on the alleged shortage of safe assets by David Beckworth at least sets out clearly what he thinks the problems are, which is more than can be said for this article by Simon Wren-Lewis.
Beckworth’s first reason is that safe assets perform the function of money, thus a shortage of safe assets means a shortage of money. As he puts it: “The first reason is that many of these safe assets serve as transaction assets and thus either back or act as a medium of exchange.” (Hayek actually made the same point – see p.1 here.)
Well now, if there is a perceived shortage of money, private sector entities will save money (as pointed out above) which will result in Keynsian paradox of thrift unemployment. And the solution to that problem was pointed out above.
 Beckworth is also concerned about how the above alleged money shortage impinges in shadow banks!! Hilarous. Who cares about institutions which act like banks while pretending not to be banks? These institutions should be regulated just like normal banks, as pointed out by Adair Turner, head of the UK’s Financial Services Authority.
What other “shadow” or “back street” entities are we supposed to feel sympathetic for: abortion clinics, distilleries, drug dealers - the mind boggles.
Another point that concerns Beckworth is the Triffin dilemma. That’s the fact that when the currency of one country (or relatively few counties) come to be regarded as “the world’s currency” or a safe asset, that country is then forced to run a deficit and issue more of the currency than it might like. And the problem with that according to Beckworth / Triffin is that the sheer amount of currency issued then makes the currency no longer safe.
Now is there really a problem there? When there is so much of the currency sloshing around that starts to look unsafe, everyone will go for another currency: something they are doing right now!! That is, it’s not just U.S. dollars that savers choose to hold: they also go for Swiss Francs, Euros, Pounds sterling, etc.
As long as there isn’t a SUDDEN or CATASTROPHIC loss in confidence in the currency concerned, there’s no big problem. I.e. as long as any reduced demand for a country’s currency is not too sudden, the relevant country can run an external surplus and re-absorb the currency. And have their ever been any examples of a SUDDEN and CATASTROPHIC collapse in the value of a currency of a world reserve currency? Not that I know of. The pound sterling has declined in value at a very slow rate relative to the dollar since WWII. No big problem there. And since the US dollar became the world’s reserve currency, there haven’t been any catastrophic collapses. But even if such collapses were to occur than that makes currencies no different to other assets. For example there is the occasional stock market collapse: 1929 etc. House prices are not exactly 100% stable. Thus so long as changes in the value of currencies are not TOO DRAMATIC, the Triffin dilemma is very weak criticism of using a currency as a safe asset or a form of saving or (like the US dollar) as the World’s currency.


  1. "As long as there isn’t a SUDDEN or CATASTROPHIC loss in confidence in the currency concerned, there’s no big problem. "

    If you are a net importer, then a sudden and catastrophic collapse in your currency would require that the central banks of those exporting to you did not intervene to prevent their currencies going sky high.

    Notice that the Swiss didn't let that happen with their currency against the Euro.

    Export led economies are not going to stand idly by and let their markets evaporate when they have a costless tool available to them to stop it.

  2. I agree that the tool the Swiss have at their disposal to deal with the problem is “costless”. In fact it’s better than that: if the world is determined have have (to put it figuratively) bits of paper a country can turn out at no cost, and the country can’t make a profit out of that, it really needs its head examined.

    What the Swiss should do is implement a zero rate of interest plus a slightly higher rate of inflation than they might otherwise plumb for: say 3%. That means they make a nice profit at the expense of their “creditors”. But the Swiss are good at making money, so presumably they’ve worked that one out.


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