A Budget Being Spent in Public.

Imagine a shop that prints its own gift cards. It can make as many as it wants, whenever it wants, for essentially nothing. Nobody can stop it, and it never runs out of the ability to do it.

Now imagine that shop wants to buy its gift cards back off customers. Suddenly the situation is completely different. It cannot pay with gift cards, because that is the thing it is trying to collect. It has to pay with real money out of the till. And the till, unlike the printer, has a bottom.

That asymmetry is the idea in this week’s story and it applies to every country on earth. A country can push its own currency down forever, because it can create it. Although flooding the world with your own money brings its own problems, which is a story for another issue.

But to push a currency up, a country has to buy it back using their foreign exchange reserves. These reserves are the foreign currencies and assets a country holds so it can pay for imports and defend its own currency when things get difficult. Reserves are enormous but they are also finite which means everyone watching can see roughly how large they are. So, a currency defence is not a show of unlimited strength. It is a budget being spent in public.