--
> Start with which "local" bank.
Probably best to go through that paragraph substituting "local" with "Australian", then generalise. I thought it looked pretty clear, but my mind has been warped.
>Who does the
> depositing?
Double entry book-keeping -- it always bends the bonce a bit. Every credit has a matching debit. Think about it this way:
I live in the UK. I decide I want a copy of "The Australian Rugby Annual 2000", imported from Australia. The publishers send over a copy, in return for my money order made out in Australian $. This is a "current account" transaction because it involves a transfer of goods or services.
In order for me to buy my A$ money order, the HSBC bank (my bankers) have to buy A$ from an Australian Bank (a "local" bank in this context, because it is local to the Australian currency). They exchange this for sterling. The Aussie bank has no wish for sterling, so it sells it to the central bank for A$
Now, let's pretend that this was the only transaction between Aussie and the UK this year. Since there has been no trade going the other way, the net claims of Australia on the UK have increased by the value of one book.
In order to get the accounts to balance, we create a "capital account" transaction equal and opposite to the current account transaction. This capital account transaction has its counterpart in the financial world in whatever the Australian central bank chooses to do with the sterling it ended up in receipt of. Typically, it will buy gilts. So, the Australian economy is effectively lending to the UK economy, because it has given one book to the UK, and in return all it has is an IOU. Even if it keeps pound notes in its cellar, this still holds, because pound notes are really just an IOU -- they can be exchanged for British goods and services.
So who's doing the depositing? Well, this is a needless bit of complexity introduced into the example. When banks "buy" and "sell" currencies, they typically do it by crediting and debiting the correspondent accounts they keep with each other. For some purposes, the actual a/c's are important, but if all you want to do is understand the current a/c balance, just think of them as buying and selling pound notes.
> Her explanation is just too abstract for a tyro.
>
Mine is almost certainly no better :-)
dd
===== "The banker must at all times affect a respectability that is more than human ... for this reason, he is typically the most romantic and least realistic of men"
John Maynard Keynes
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