Example: exports

Another example: a Local Country exporter, LC Exporter (= member of NBPS), exports goods to the value of LCC 100 million to US Importer; the exchange rate is USD / LCC 10.0 (see Balance Sheets 11-13).

BALANCE SHEET 11: LC EXPORTER (NBPS) (LCC MILLIONS)

Assets

Liabilities

Goods

Deposits at US Bank

-100 +100

Total

BALANCE SHEET 12: US IMPORTER (USD MILLIONS)

Assets

Liabilities

Goods

US Bank deposits

+ 10 -10

Total

BALANCE SHEET 13: US BANK (USD MILLIONS)

Assets

Liabilities

Deposits of US Importer Deposits of LC Exporter

-10 + 10

Total

There was no change in the money stock (i.e. there was no change to the local bank's (LC Bank) balance sheet. LC Exporter now sells the LCC 100 million foreign exchange earnings (USD) to LC Bank (see Balance Sheets 14-16).

BALANCE SHEET 14: LC EXPORTER (NBPS) (LCC MILLIONS)

Assets

Liabilities

Deposits at US Bank

Deposits at LC Bank

-100

+100

BALANCE SHEET 15: LC BANK (LCC MILLIONS)

Assets

Liabilities

Deposits at US Bank

+100

Deposits of LC Exporter

+ 100

+100

Total

+100

BALANCE SHEET 16: US BANK (USD MILLIONS)

Assets

Liabilities

Deposits of LC Exporter Deposits of LC Bank

-10 + 10

Total

It will be clear that the balance sheet of LC Bank (i.e. the local bank) changed: LC Bank bought a foreign deposit of USD 10 million (= forex) and paid LC Exporter by crediting his account; this amounts to an increase in the local deposits of the NBPS = an increase in M3. In terms of the balance sheet of the MBS we have changes as indicated in Balance Sheet 17. M3 increased by LCC 100 million and the BSSoC is an increase in NFA (the increased foreign deposit). The real cause is the transaction, a portfolio decision -the purchase of forex - by LC Bank.

BALANCE SHEET 17: MBS (LCC MILLIONS)

Assets

Liabilities

D. Foreign assets

E. Loans to government

F. Loans to NBPS

+100

A. Notes and coins of NBPS

B. Deposits

1. Government

2. NBPS

C. Foreign loans

+ 100

Total

+100

Total

+100

Had LC Exporter sold the forex into the forex market, the market would have cleared at a better exchange rate, say USD / LCC 9.99, than when the forex was withheld by LC Bank from the commercial supply / demand forces in the forex market.

Example: government issues bonds

Another example will be useful: the government issues LCC 1 000 million bonds and they are purchased by a number of the retirement funds (= members of the NBPS) (see Balance Sheets 18-21).

BALANCE SHEET 18: GOVERNMENT (LCC MILLIONS)

Assets

Liabilities

Deposits at CB

+1 000

Bonds

+ 1 000

+1 000

BALANCE SHEET 19: CENTRAL BANK (LCC MILLIONS)

Assets

Liabilities

Loans to banks @ KIR

+1 000

Government deposits

+ 1 000

BALANCE SHEET 20: RETIREMENT FUNDS (NBPS) (LCC MILLIONS)

Assets

Liabilities

Bonds

Deposits at banks

+1 000 -1 000

Total

0

Deposits of NBPS Loans from CB @ KIR

-1 000 + 1 000

Total

This action of government drains liquidity from the banks and they have no option but to borrow from the CB (discussed later). When the balance sheets of the banks and the CB are consolidated (see Balance Sheet 22) it will be seen that M3 has fallen by LCC 100 million and the BSSoC is a decline in NLG (a result of the increase in government deposits). The real cause is the issue of bonds. When government spends the money, which is the purpose of the debt issue, the situation will be restored (M3 will increase again).

It is important to understand that if the banks had purchased the bonds, M3 would have increased, as indicated in Balance Sheets 23-24.

BALANCE SHEET 22: MBS (LCC MILLIONS)

Liabilities

A. Notes and coins of NBPS

D. Foreign assets

B. Deposits

+ 1 000 -1 000

E. Loans to government

1. Government

2. NBPS

F. Loans to NBPS

Total

C. Foreign loans

Total

BALANCE SHEET 23: BANKS (LCC MILLIONS)

Assets

Bonds

+1 000

Deposits of NBPS

+ 1 000

+1 000

Total

BALANCE SHEET 24: MBS (LCC MILLIONS)

Assets

D. Foreign assets

E. Loans to government (bonds)

F. Loans to NBPS

+ 1 000

Liabilities

A. Notes and coins of NBPS

B. Deposits

1. Government

2. NBPS

C. Foreign loans

+1 000

Total

0

Total

 
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