featured / 11-2022 updates below
>repo, money markets, finance, debt, banks, debt, finance, monetary mechanics, state capital nexus
christoph-pfluger.ch 9-2022 Der Druck auf den roten Knopf am Tag des Alarms – Heute vor drei Jahren begann die heisse Phase des Great Reset: Am 16. September 2019 brach der für das spekulative Börsengeschäft entscheidende Repo-Markt zusammen.
Die US-Zentralbank verhinderte die finanzielle Kernschmelze mit elf Billionen Dollar, einem Mehrfachen der Kosten der «Finanzkrise». Und niemand sprach darüber. Ein paar Wochen später wurde die Pandemie geübt und vier Monate später ausgelöst.
Wie wichtig dieses Ereignis war und ob es als Vorbote der kurz darauf beginnenden Pandemie verstanden werden kann, darüber kann immer noch debattiert werden. Vor allem, nachdem jetzt bekannt geworden ist, wieviel die Fed zur Rettung aufwendete – 11,23 Billionen Dollar bis Juli 2020 – und an wen die Gelder flossen: JPMorgan Chase, Goldman Sachs und Citigroup, die hauptsächlichen Verursacher und Nutzniesser der «Finanzkrise» von 2008/09. …
… 2019 lagen die Repo-Zinsen stabil bei 2 bis 2,5 Prozent. Doch Mitte September geschah Erstaunliches: Die Nachfrage nach Liquidität explodierte und die Zinsen vervierfachten sich innert kürzester Zeit auf knapp acht Prozent. Ein Crash drohte. Die US-Zentralbank intervenierte mit erheblichen Beträgen und rettete die Finanzmärkte so vor einem Domino-Effekt des Misstrauens und der Pleiten.
Wieviel Geld bei diesen Interventionen fliesst und an wen, das muss die Fed erst nach zwei Jahren bekannt geben. So will es der Dodd-Frank-Act von 2010, der nach der Finanzkrise für mehr Transparenz und Anlegerschutz auf den US-Wertpapiermärkten erlassen wurde.
Ende 2021 war es dann so weit: Die Fed gab bekannt, dass allein im letzten Quartal 2019 4,5 Billionen Dollar in den Repo-Markt flossen (Download der Daten hier). Die wichtigsten Empfänger waren JPMorgan Chase, Goldman Sachs und Citigroup.
Interessant ist nicht nur, dass diese Banken zu den Eigentümern der Fed gehören, sondern dass die Mainstream-Presse erneut kein Wort über die Ungeheuerlichkeit verlor.
Pikant: Die Fed ist auch die Kontrollbehörde der Banken, denen sie aus der Patsche half. Buchprüfer der Fed, die zu genau hinschauen, haben einen unsicheren Job, schreiben Pam und Russ Marten von wallstreetonparade.com in «There’s a News Blackout on the Fed’s Naming of the Banks» und hier: «Wall Street Banks Have an Alibi for their $11.23 Trillion in Emergency Repo Loans»
Inzwischen hat sich gezeigt, dass die Fed zwischen September 2019 und Juli 2020 nicht weniger als 11,23 Billionen Dollar in längerfristigen Not-Krediten an die im Repo-Markt engagierten Banken sprechen musste…”… den ganzen Artikel hier lesen
telegraph.co.uk 24-11-2022 Tax lenders over bond-buying losses, says Bank of England – Chief economist Huw Pill dismisses calls to stop paying interest on reserves held by commercial bodies – by By Szu Ping Chan
…”…Huw Pill dismissed calls for the central bank to stop paying interest on reserves held by commercial lenders, which could save the Treasury more than £100bn. “If governments want to tax banks or they want to subsidise banks, they should do that transparently. They shouldn’t do it through the central bank balance sheet hoping that nobody notices,” he added. The Government’s own economic adviser warned that the policy would be a “disaster”. Gertjan Vlieghe said it would amount to a “default” if it stopped payments. Threadneedle Street’s near- £900bn quantitative easing programme saw an equivalent amount of reserves created at the central bank, which earns interest at Bank Rate. “If you want to tax the banks, fine. Just put a tax on them rather than saying: ‘I owe you a lot of money. And as we know, when you owe money you pay interest on it. I’m just not going to pay you. That’s a default in my book.”…”…
medium.com/mpi 2022 The Descent into Monetary Austerity: Announcing the new Monetary Policy Institute Blog – By Louis-Philippe Rochon
With inflation nearing double digits in many countries, central banks have once again taken center stage. Their typical (and, one might say, completely predictable, response) has been to raise interest rates in the name of dampening inflationary pressures and expectations. In doing so, central banks are trying to achieve two simultaneous goals:
(A) Bringing inflation back down to a ~2% target,
(B) Engineering a ‘soft landing’, i.e. ensuring that rate hikes don’t do too much damage to the overall economy and, more specifically, to the labour market.
But even within this short description, there is so much to discuss around this seemingly simple (or simplistic) approach to monetary policy and inflation. The Monetary Policy Institute blog aims to explore the ‘art of central banking’ and peel back the many layers of monetary policy, from its objectives and purpose, to its implementation and transmission mechanism.
Some questions and topics we seek to explore:
- How efficient is monetary policy in achieving an inflation target?
- Is monetary policy Class-biased? Gender-biased? Carbon-biased?
- Is monetary policy the best policy tool to fight inflation?
- Should inflation be the only goal of monetary policy? Or should it even be a direct concern of the monetary authorities?
- Is fine-tuning the best way of approaching monetary policy?
- Is a soft landing ever really possible?
- Does monetary policy have important income and wealth distributive effects?
- Does monetary policy have important income and wealth distributive effects?
- Is monetary policy suitable when inflation is caused by supply issues? ….
theconversation.com 25-10-2022 The UK is facing an economic crisis – here’s why it needs to find a global solution – by Muhammad Ali Nasir
…”…In the long term, the UK’s major problems are stagnating growth and lack of productivity. And if the new government addresses current problems by raising taxes and cutting spending – alongside higher interest rates from the Bank of England – there will be more economic pain.
Many countries are suffering similar issues to the UK, contributing to a weak global economic outlook in general right now. After a prolonged period of historically ultra-low interest rates, increases – so-called normalisation of monetary policy – were expected in most countries. But a sharp surge in inflation due to Russia’s invasion of Ukraine and pandemic-era supply chain issues have caused most central banks to scramble to tighten monetary policy even further by increasing rates more rapidly.
Recent rate changes by central banks
These rate hikes and policy tightening strategies by central banks could create significant financial and fiscal instability. Already, the US Federal Reserve’s unwinding of its balance sheet from a peak of US$8.97 trillion (£7.9 trillion) in April 2022, for example, caused the dollar to appreciate by more than 13% in the last six months. This has created challenges for emerging market currencies, as well as major currencies – the yen, pound sterling and the euro – which have all depreciated considerably against the US dollar.
This has added to inflationary pressures, particularly in the Eurozone and UK, but it also affects sovereign bond yields, challenging economic stability in these countries. Since August, the cost of borrowing has more than doubled for many.
The rising cost of government borrowing
But to address rising inflation, even more central banks will want to shrink their balance sheets by selling bonds. The total size of the asset purchase programmes of the main four central banks alone is about US$26.7 trillion. With a weak global economy and these other financial fragilities, this is going to be a painful exercise for the global economy.
Indeed, such tightening will increase the cost of government borrowing further, creating major issues, particularly for highly leveraged governments, and those still paying off pandemic-era support such as the UK and Eurozone.
The UK specifically, is also dealing with a shift in the global economic centre of gravity away from its economy. In less than two decades, the UK has shrunk in relative terms from being an economy larger than China to being about nine times smaller. And the pound no longer enjoys the same status as the US dollar, meaning financial markets will punish it severely if it steps out of line.
This means the new UK government faces a tricky task in reigniting global investor confidence in its economic stability, even with a new prime minister widely seen as a steady hand.”
ft.com 15-10-2022 UK debacle shows central bank ‘tough love’ is here to stay – by Katie Martin
finance.yahoo.com 9-2022 Could China’s Yuan replace the U.S. dollar as the world’s dominant currency? Here’s how the Asian nation’s trade supremacy is rapidly boosting its reserve status – by Vishesh Raisinghani
…”… The U.S. dollar displaced the pound just as America gained economic superiority over Britain. More than 75% of global transactions have been completed in U.S. dollars since 2008. The dollar also accounts for more than 60% of foreign debt issuance and 59% of global central bank reserves.
Although the dollar’s grip on all these markets and instruments has been gradually declining in recent years, no other currency comes close to these levels. The Chinese renminbi certainly isn’t a viable alternative, but geopolitical and macroeconomic trends support its rise to dominance.
China’s plan: This year, Chinese leaders made it clear that they wanted to boost the renminbi’s profile as a reserve currency. China’s economy and trade flows are large enough to support such a move. However, the country now needs to convince foreign central bankers to start holding the Chinese Yuan (the principal unit of the renminbi) in reserve.
In July, The People’s Bank of China announced a collaboration with five nations and the Bank for International Settlements to achieve this. China, along with Indonesia, Malaysia, Hong Kong, Singapore, and Chile would each contribute 15 billion yuan, about $2.2 billion, to the Renminbi Liquidity Arrangement.
Meanwhile, the Chinese Yuan has already become a de facto reserve currency in Russia. Russian leadership turned to China after facing sanctions from the West due to its invasion of Ukraine earlier this year. Now, 17% of Russia’s foreign reserves are denominated in yuan. The yuan is also the third most demanded currency on The Moscow Exchange.
As these partnerships become stronger, the yuan’s status as a reserve currency could be further entrenched.
The global impact : Economists including Barry Eichengreen of the University of California Berkeley and Camille Macaire of France’s central bank published a paper analyzing the yuan’s potential as a reserve currency. The researchers argue that replacing the dollar isn’t going to be easy or quick. However, they found evidence that yuan reserves were steadily increasing in countries that had tighter trade relations with China.
This growing influence could make the yuan an alternative to the U.S. dollar in a “multipolar” world. …”…
goodreads.com 2018 How Global Currencies Work: Past, Present, and Future – A powerful new understanding of global currency trends, including the rise of the Chinese yuan – by Barry Eichengreen, Arnaud Mehl, Livia Chitu
Offering a new history of global finance over the past two centuries, and marshaling extensive new data to test established theories of how global currencies work, Barry Eichengreen, Arnaud Mehl, and Livia Chiţu argue for a new view, in which several national monies can share international currency status, and their importance can change rapidly. They demonstrate how changes in technology and in the structure of international trade and finance have reshaped the landscape of international currencies so that several international financial standards can coexist. They show that multiple international and reserve currencies have in fact coexisted in the past—upending the traditional view of the British pound’s dominance prior to 1945 and the U.S. dollar’s dominance more recently.
Looking forward, the book tackles the implications of this new framework for major questions facing the future of the international monetary system, from whether the euro and the Chinese yuan might address their respective challenges and perhaps rival the dollar, to how increased currency competition might affect global financial stability.
finance.yahoo.com 8-2022 Central bankers head to U.S. mountains with a bad case of inflation reflux
William Schomberg and Balazs Koranyi
…”…”They are caught between a coming recession and sky-high inflation. Their first concern is to react to high inflation,” said Holger Schmieding, chief economist at Berenberg. “Once the recession is clearly there, the concern will shift.”
That shift, though, could well be asymmetric, with the Federal Reserve in particular signalling an unwillingness to quickly reverse gears.
Last year at this time, for instance, Fed Chair Jerome Powell asserted that the jump in inflation would likely be transitory. As that narrative unravelled, he became the driving force behind the fastest pace of U.S. monetary tightening in four decades….”…
economist.com 8-2022 Ben Bernanke and Edward Chancellor square off on monetary policy – Their duelling books reveal the clashes between central bankers and their critics
maroonmacro 25-6-2022 Issue #53: The Origins and Evolution of the Modern Monetary System – Part 9: “Securitization” – Repo as a Driver of Securitization
“Recall that there are a few fundamental innovations that have radically transformed our monetary and banking system in the post-WWII era:
“Liability Management (a.k.a. “wholesale finance”) – the expansion of banking strategy that transformed banks from passive acceptors of deposits to aggressive operators in the money market. This includes federal funds borrowing/lending, repo, commercial paper, money market funds, eurocurrency/eurodollar banking, and much more.
Securitization (a.k.a. “market-based finance”) – the disintermediation of traditional commercial bank lending in favor of bonds and the pooling of illiquid, untradable loans to form liquid, tradable securities. This includes the proliferation of mortgage-backed securities, high-yield bonds, increased IG corporate bond issuance vs. loans, and other asset-backed securitizations. This also coincided with the advent of the pension system, which indirectly funneled America’s future retirement savings into the financial market.
OTC Derivatives and Value-at-Risk (VaR) – combined with Basel risk-weightings, these innovations introduced increasingly esoteric and mathematical definitions of “money-ness,” resulting in the redefinition of money as “bank balance sheet capacity.” This also cemented the shift of bank business models towards fee-generating, off-balance sheet banking activity as opposed to maturity transformation based on net interest margin or balance sheet expanding arbitrage. …
These innovations in “liability management” introduced elasticity in a once dormant banking system, as well as lifted the post-Great Depression constraints on bank balance sheet capacity. …
In this and the following issues of Monetary Mechanics, I will cover the birth of “market-based finance,” a phenomenon that is primarily characterized by the disintermediation of traditional banks and banking techniques in favor of securitization. … In this issue of Monetary Mechanics, I will cover the changes in repo contracting conventions that occurred primarily during the 1980s, something that made the birth of “market-based finance” possible in the first place. …”…
bbc.co.uk/news 9-6-2022 Rishi Sunak accused of wasting billions servicing government debt – by Faisal Islam
…”… NIESR’s Prof Jagjit Chadha, told the Financial Times that Mr Sunak’s failure to act had left the country with “an enormous bill and heavy continuing exposure to interest rate risk”.
The Bank of England created £895bn of money through quantitative easing. Most of this was used to buy government bonds from pension funds and other investors. When those investors put the proceeds in commercial bank deposits at the Bank, it had to pay interest at its official interest rate.
Last year, when the official rate was still 0.1%, NIESR said the government should have insured the cost of servicing this debt against the risk of rising interest rates. It said interest payments have “now become much more expensive” and it estimates the loss over the past year at around £11bn. “Such a lost opportunity is an unnecessary cost to the public finances at a very difficult time,” the think tank said. It suggested converting the debt into government bonds with longer to pay it back. …”
unherd.com 3-5-2022 Is this the beginning of the end for the US dollar? – China is threatening to dump dollar reserves to protect them from seizure – by Philip Pilkington
…”On Saturday The Financial Times reported that the Chinese central bank and finance ministry held an internal conference discussing how to protect against potential US seizures of foreign currency reserves. Around the same time, leading Communist Party intellectuals were discussing the possibility of dumping US dollar reserves to protect them from seizure. …”…
reuters.com 31-3-2022 IMF warns Russia sanctions threaten to chip away at dollar dominance – FT
March 31 (Reuters) – Financial sanctions imposed on Russia threaten to gradually dilute the dominance of the U.S. dollar and could result in a more fragmented international monetary system, Gita Gopinath, IMF’s First Deputy Managing Director, told The Financial Times. Russia has been hit with a plethora of sanctions from the United States and its allies for its late-February invasion of Ukraine. Russia has called the invasion a ‘special operation’ to disarm its neighbour.
“The dollar would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” Gopinath told the newspaper in an interview, adding that some countries are already renegotiating the currency in which they get paid for trade. She said that the war will also spur the adoption of digital finance, from cryptocurrencies to stablecoins and central bank digital currencies. … Gopinath told the FT that the greater use of other currencies in global trade would lead to further diversification of the reserve assets held by national central banks. …”…
maroonmacro.substack.com 8-2-2022 Monetary Mechanics#41 The Origins and Evolution of the Modern Monetary System – Part 6: “Liability Management” – Bank Holding Companies (BHCs) by Maroon Macro
Recall that there are a few fundamental innovations that have radically transformed our monetary and banking system in the post-WWII era:
-1- Liability Management (a.k.a. “wholesale finance”) – the expansion of banking strategy that transformed banks from passive acceptors of deposits to aggressive operators in the money market. This includes federal funds borrowing/lending, repo, commercial paper, money market funds, eurocurrency/eurodollar banking, and much more.
-2- Securitization (a.k.a. “market-based finance”) – the disintermediation of traditional commercial bank lending in favor of bonds and the pooling of illiquid, untradable loans to form liquid, tradable securities. This includes the proliferation of mortgage-backed securities, high-yield bonds, increased IG corporate bond issuance vs. loans, and other asset-backed securitizations. This also coincided with the advent of the pension system, which indirectly funneled America’s future retirement savings into the financial market.
-3- OTC Derivatives and Value-at-Risk (VaR) – combined with Basel risk-weightings, these innovations introduced increasingly esoteric and mathematical definitions of “money-ness,” resulting in the redefinition of money as “bank balance sheet capacity.” This also cemented the shift of bank business models towards fee-generating, off-balance sheet banking activity as opposed to maturity transformation based on net interest margin or balance sheet expanding arbitrage.
In the first issue of this installment, I covered “asset management” (the traditional model of banking, in the form of deposit-taking and lending), which we can build upon to begin to understand exactly how and why our modern financial system is so different from the textbook description of deposits, reserve requirements, and money multiplication. In the second issue of this installment, I covered the first part of “liability management” and the re-emergence of wholesale finance, focusing on the development of the domestic federal funds market. In the third issue of this installment, I covered the second part of “liability management” and the re-emergence of wholesale finance, focusing on the development of the international Eurocurrency/Eurodollar banking system. In the fourth issue of this installment, I continued covering the development of the international Eurocurrency/Eurodollar banking system, focusing on the entrance of US banks into the Eurocurrency/Eurodollar borrowing and lending market. In the fifth issue of this installment, I covered the third part of “liability management” and the re-emergence of wholesale finance, focusing on the development of large negotiable certificates of deposit (CDs).
If you have not had a chance to read Issue #8, Issue #11, Issue #16, Issue #28, and Issue #33 of Monetary Mechanics yet, I suggest you do before continuing below, as it contains important information, but here is a brief review for you if you need it: …”… read more at source: maroonmacro
reuters.com 17-1-2022 Bank of England to get more powers over clearing and settlement By Huw Jones
ft.com 22-1-2022 The Lords of Easy Money — where the Fed went wrong
nytimes.com 16-1-2022 A Fascinating Page-Turner Made From an Unlikely Subject: Federal Reserve Policy By Jennifer Szalai – book review – The Lords of Easy Money – How the Federal Reserve Broke the American Economy – By Christopher Leonard
There’s something undeniably gratifying about an elegantly crafted morality tale — and the business reporter Christopher Leonard has written a good one, even if you suspect that the full shape of it isn’t quite as smooth as he makes it out to be. “The Lords of Easy Money” is a fascinating and propulsive story about the Federal Reserve — yes, you read that right. Leonard, in the tradition of Michael Lewis, has taken an arcane subject, rife with the risk of incomprehensibility (or boredom), and built a riveting narrative in which the stakes couldn’t be any clearer.
The stakes, that is, as Leonard and his protagonist define them, which is the fulcrum on which this entire book turns. “The Lords of Easy Money” filters an argument about the Fed through the experience and worldview of a retired central banker named Thomas Hoenig, who joined the Kansas City Fed in 1973, first as a bank regulator, then ascended the ranks to earn a seat in 1991 at the Federal Open Market Committee, where real decisions about monetary policy get made.
For years, Hoenig — described by Leonard as a “rule-follower” — fit right in. With few exceptions, he voted yes to what Alan Greenspan, the chairman at the time, wanted to do, and then voted yes to what the next chairman, Ben Bernanke, wanted to do. Then came 2010, when Hoenig cast a string of lone dissenting votes on a committee of 12 where unanimity was prized.
What Hoenig adamantly objected to was the Fed’s decision to keep interest rates at zero and begin a new round of buying long-term government debt, a policy known as “quantitative easing,” which effectively injected trillions of new dollars into the banking system — the “easy money” of the book’s title. An inflation hawk (so troubled by the prospect of rising prices that he was keen to limit the Fed’s reach), Hoenig had been fine with such measures during the 2008 financial crisis, when markets were cratering; but he didn’t think that an unemployment rate of 9.6 percent amounted to the kind of emergency that called for turning extraordinary methods for expanding the money supply into a matter of course.
A large part of “The Lords of Easy Money” is given over to trying to rehabilitate Hoenig’s reputation, which took a hit when, year after year, the inflation he warned about failed to happen. But inflation did happen, Leonard repeatedly emphasizes, just not in the form that people thought it would take.
The last third of the book introduces us to one of the many: John Feltner, who in 2013 landed a unionized job at Rexnord, a manufacturer of heavy-industry equipment, just a few years before the company decided to move his Indianapolis plant to Mexico. Leonard has chosen Rexnord as an example advisedly. First, starting in the 1980s, a string of private equity firms saddled Rexnord with so much debt that the company’s reason for being became the servicing of that debt. Second, one of the private equity firms that acquired Rexnord in the early 2000s was the Carlyle Group, and one of the partners of the Carlyle Group at the time was Jerome Powell, currently the chair of the Federal Reserve. Powell was appointed as the chair in 2018 by then-President Donald Trump — the same Donald Trump whose populist rhetoric had gotten the vote of a frustrated Feltner two years before.
All of this usefully highlights how extreme financialization has transformed (or deformed) the economy and our politics, even if Powell’s connection to Rexnord ended long before Feltner worked there and his job was moved to Mexico. Powell, who last week signaled a willingness to raise interest rates if inflation persists, is depicted as someone so protean that it’s almost as if he’s the personification of the financial system writ large — an improvisational, politically astute operator to Hoenig’s principled but doomed Cassandra. Powell’s good standing among the Washington establishment comes across as suspect, though Leonard has no patience for anti-establishment conspiracy theories either, and he laments that criticisms of the Fed’s easy-money policies in the last decade have mainly been the purview of “right-wing cranks.” He takes a great deal of care making Hoenig’s hawkishness sound like good old common sense — as if it’s simply the inevitable conclusion drawn by a stalwart steward of “prudence and integrity.”
Which it very well may be, though Hoenig’s hard-line position glides through this book mostly uncontested, with only a scant sense of why it didn’t win over the other economists at the Fed. You wouldn’t know that there have been any serious developments in economic ideas since Hoenig was deeply influenced by the inflationary spiral of the 1970s. There is no mention at all of modern monetary theory, advocated most prominently by the economist Stephanie Kelton, which takes to heart a line from John Maynard Keynes: “Anything we can actually do, we can afford.” Even if Hoenig thinks it’s utter garbage, it would have been good to see exactly how, when pressed, he makes his case.
Nor does Leonard address what could have happened if Hoenig had gotten his way back in 2010. What the economic historian Adam Tooze calls the “deflationary misery” of the 1930s loomed understandably large in the Fed’s institutional memory, a terrible reminder of what could happen when the institution failed to counteract a collapsing banking system by buoying the money supply. Not to mention that in 2010 the Fed’s actions indicated that it had become a guarantor not just for the American economy but for the global financial system. Tooze’s recent books, “Crashed” and “Shutdown,” suggest that the relationships between the Fed, the U.S. economy and the global system have all been torqued to the point where an urge to stand athwart it all, yelling “stop,” is futile.
Leonard (or Hoenig) is right to recognize how precarious, and how dangerous, the current situation is. Leonard (or Hoenig) is right to call for some “long-term thinking,” too. Still, “The Lords of Easy Money” presents the complexity of the current system as if it were merely disguising some unshakable fundamentals; there’s a satisfying clarity to reading a book that puts the jumble of political and economic turmoil into such stark narrative terms, but there’s more to the story than that.
oltnews.com 22-1-2021 book -review – Easy Money Lords – Where the Fed Went Wrong – by Rana Foroohar
“It’s hard to spin the nuances of monetary policy into a personality-driven narrative. But Christopher Leonard managed to do just that with The lords of easy money. It follows Thomas Hoenig, the outspoken Kansas City banker who was, in 2010, the only dissenting vote on the Federal Open Market Committee to oppose the U.S. central bank’s quantitative easing program. . It turns the unassuming economist into the protagonist of a compelling tale of how the Federal Reserve has changed the entire nature of the American economy. …”…
bookmark reviews 1-2022 The Lords of Easy Money: How the Federal Reserve Broke the American Economy CHRISTOPHER LEONARD – WHAT THE REVIEWERS SAY
justmoney.org 2021 Independence from What? Stefan Eich
“The idea of central bank independence is today in crisis. The reason is not—as its own logic would have it—that prying politicians have managed to impose their wills after all. Instead, and more paradoxically, independent central banks have become victims of their own success. This moment of introspection is also an opportunity to reconceive the notion of independence by placing monetary policy on a more democratic footing while acknowledging the peculiar difficulties of governing contemporary money under global financial capitalism. Our goal, I want to suggest, should be to move beyond stale debates about the pros and cons of central bank independence as currently conceived in order to discuss more fundamental constitutional questions of how we can make central banks more democratic internally and at once more independent, by redefining independence as not against democracy but rather against the executive and financial markets. …”…
econlib.org 8/12/2021 Scott Sumner and Matt Yglesias monetary policy views align in quite a few areas. Yglesias on monetary policy – Matt Yglesias has a new post that explains his views on monetary policy. Overall, Yglesias’s views are to the left of mine. For instance, he favors the aggressive use of fiscal policy, whereas I am skeptical. But on monetary policy our views align in quite a few areas. By Scott Sumner
news.sky.com 2/12/2021 The world’s most powerful central banker gives the Bank of England cover to raise rates – if the Bank of England was reluctant to be the first major economy to raise interest rates, Fed chair Jay Powell has handed UK policymakers an open goal. by Ian King
…”… insistence on the spike in inflation being merely temporary has un-nerved investors on a regular basis this year. Tuesday evening, though, brought a sign that at least one key policymaker is beginning to look on inflation as more ingrained. Jay Powell, chairman of the Fed, told US Congress: “It’s probably a good time to retire that word.” … The world’s most important central banker insisted he still expected inflation to fall next year as supply and demand imbalances created by the pandemic and its aftermath continue to unwind. But he pointed out that higher energy costs, rising wages and increased rents could all keep inflation in early 2022 higher than might have been expected. He went on: “It now appears that factors pushing inflation upward will linger into next year.” His comments were accompanied by a signal the Fed may now start unwinding its asset purchases – Quantitative Easing in the jargon – more rapidly than previously indicated…”…
ft.com 27/11/2021 The poisoned chalice of the Fed chair job – Powell has to secure normalisation of monetary policy as inflation surges and stimulus packages increase demand – by John Plender
“Could this be the ultimate poisoned chalice in monetary history? Joe Biden’s decision this week to grant a second term to Jay Powell at the Federal Reserve looked judicious from the administration’s perspective but the challenges that the chair faces rate close to 10 on the Richter scale. It is not simply that inflation is racing away, with consumer prices up 6.2 per cent in the year to October while personal consumption expenditures, the Fed’s preferred measure of inflation, have risen 4.1 per cent over the same period, the highest level in three decades. Powell has to secure the post-pandemic normalisation of monetary policy when President Joe Biden’s stimulus packages are driving demand at a frenetic rate relative to supply and the economy is plagued by bottlenecks. Powell faces…”… ft long read here
taxresearch 23/11/2021 The Bank of England will never unwind quantitative easing by Richard Murphy
bbc.co.uk 9/11/2021 Bank of England takes next steps in digital money plan
theovershoot.co/ 3/11/2021 Kornai, Keynes, the Coronavirus, and Kant – Some thoughts on the implications of “soft budget constraints”, featuring Eastern bloc economics, China’s development model, and Perpetual Peace by Matthew C. Klein
…”It turns out that downturns are essentially optional, at least in the rich countries. Governments can prevent even the most severe disruptions to business activity from hitting household and corporate balance sheets simply by printing money. All we needed was a global pandemic to demonstrate the latent power of the modern state to eliminate the classical business cycle. The big question is: will we use this new knowledge to prevent future downturns? Or will we return to the pre-pandemic world where widespread business failures, job losses, and foreclosures are regularly recurring phenomena, like El Niño? It’s too early to tell where policymakers will land, but anyone thinking seriously about this question and the broader implications should consider the ideas of János Kornai, who died on October 18 at the age of 93. His thinking played a major role in China’s embrace of markets and competition in the 1980s—and also helps explain many of the limitations of China’s economic model since then.1 Kornai’s perspective is especially relevant for thinking through the potential risks and rewards of the policy mix that might be called “full Keynesianism”.
What follows is my attempt to explain Kornai’s ideas and how they could apply to these big questions …”…
reuters.com 25/10/2021 Investors ‘play chicken’ with Bank of Canada as inflation soars By Fergal Smith
…”… “Worldwide, markets are playing chicken with central bankers, betting that policymakers will follow the Bank of England in capitulating to hotter-than-expected inflation rates,” said Karl Schamotta, chief market strategist at Cambridge Global Payment. …”…
theguardian.com 10/2021 Bitcoin could trigger financial meltdown, warns Bank of England deputy – Sir Jon Cunliffe likens danger to 2008 crash and calls for tough regulation of cryptocurrencies
voxeu.org/ 10/2021 The current bail-in design does not resolve the too-big-to-fail problem
J. Doyne Farmer, Charles Goodhart, Alissa Kleinnijenhuis
Since the Great Financial Crisis, bail-in has been introduced as an approach to address too-big-to-fail and contagion risk problems. This column uses a multi-layered network model of the European financial system to study the implication of bail-in design on financial stability. It shows that early implementation of a bail-in and stronger bank recapitalisation lead to lower contagion losses. However, current bail-in design seems to be in the region of instability and the political economy of incentives makes reforms unlikely in the near future.
reuters.com 20/9/2021 Analysis: Why the Fed might welcome a bond market tantrum By Stefano Rebaudo
U.S. 10-year yields stuck at 1.3% despite growth rebound – Analysts say Fed might prefer a return to 1.6%-1.8% – Persistently low yields limit Fed’s policy arsenal
…”A bond market tantrum that drives up yields can be a fearsome prospect for central banks but the U.S. Federal Reserve might just welcome a sell-off that lifts Treasury yields towards levels that better reflect the robust state of the economy. “…
marketwatch.com/ 15/9/2021 When the Fed finally steps back, can the U.S. stock and bond markets stand on their own legs? by Joy Wiltermuth – “I think concerns around tapering are a little overplayed,” says U.S. Bank’s co-head of the credit fixed income
…”Financial markets have staged a dramatic turnaround in the roughly 18 months since global central banks sent in the cavalry, with U.S. stocks climbing to dizzying heights and corporations raking in record profit. The big question heading into this fall is whether markets can stand on their own legs once the Federal Reserve starts to pull back its pandemic firepower. For its part, the European Central Bank this week announced plans to recall some of its pandemic monetary support for financial markets, raising expectations for the Fed to soon follow in its footsteps. “…
nytimes.com 8-2021 Some Say Low Interest Rates Cause Inequality. What if It’s the Reverse? – With an increasing share of the world’s wealth in the hands of its top earners, a savings glut is pushing asset prices up and interest rates down – by Neil Irwin
thehill.com/ 6/2020 Fiscal-monetary ‘stimulus’ is depressive byRichard M. Salsman
… “Believers in “stimulus” also claim that government spending entails a magical “multiplier” effect on aggregate output, unlike most private sector spending. They tout a government’s greater “propensity to consume.” But consuming is the opposite of producing. Welfare states certainly consume and redistribute wealth. They divide it up. But math teaches that nothing – wealth included – can be multiplied by division. The so-called “multipliers” imagined by today’s economists are, in fact, divisors. Many studies have verified the principle. ….”…
thehill.com 6/2021 If our choice is fiscal vs. monetary stimulus, choose monetary BY Scott Sumner
…”Many observers lump together fiscal and monetary policy when thinking about “stimulus,” but they are actually quite different. With fiscal stimulus, the federal government redirects existing money from one sector of the economy to another. Money already in circulation is acquired through taxes, or more likely borrowing, and then redirected to various beneficiaries. …If there were no alternative, then fiscal stimulus would certainly be worth the risk. But there is a much less costly alternative: Aggressive monetary stimulus. The Fed should follow Ben Bernanke’s advice and consider switching to a “level targeting” approach, which would speed economic recovery by promising to bring the economy back to the previous trend line for the price level (or nominal GDP) once the crisis is over. This should be combined with a “whatever it takes” approach to asset purchases — a willingness to buy as many assets as necessary to hit theFed’s inflation target.”…
voxeu.org/ 12 July 2021 Monetary policy and the exchange rate under fiscal distress: Evidence from Brazil
Enrique Alberola, Carlos Cantú, Paolo Cavallino, Nikola Mirkov
Textbook models predict that a monetary policy tightening should lift the exchange rate. Yet the empirical evidence for emerging market economies fails to support this prediction. This column uses data from Brazil to show that the exchange rate’s response to monetary policy shocks changes with the fiscal regime. A contractionary monetary surprise leads to an appreciation in normal times. By contrast, a depreciation results when fiscal fundamentals are deteriorating and markets worry about debt sustainability.
aier.org 9/72021 The Monetary Genius of Arthur Laffer by John Tamny
“In his classic 1992 book about the Ronald Reagan 1980s (and so much more), The Seven Fat Years, Robert Bartley described the great Arthur Laffer describing the universality of credit. It goes like this:
“Laffer would draw a tiny black box in the corner of a sheet of paper. ‘This is M-1,’ currency and checking deposits. A bigger box was M-2, including savings deposits. Still bigger ones included money-market funds, then various credit lines. Finally, the whole page was filled with a box called ‘unutilized trade credit’ – that is, whatever you can charge on the credit cards in your pocket. Do you really think, he asked, this little box controls all of the others? The money supply, he insisted, was ‘demand determined.’”
Bartley’s description of Laffer properly explaining money discredits just about all monetary beliefs in modern times.” …
bloomberg.com 6/2021 BOE Models Big Shift Toward Digital Currency Bank Reserves By Lizzy Burden
U.K. central bank releases discussion paper on future of money – Governor Andrew Bailey says digital currency poses many issuesU.K. central bank releases discussion paper on future of money – Governor Andrew Bailey says digital currency poses many issues – A big portion of consumer deposits at retail banks could shift to digital currencies if governments start offering them, the Bank of England indicated in a discussion paper about the issue.
source: blogs.imf.org/ 3/2021
…” In sum, the evidence so far indicates negative interest rate policies have succeeded in easing financial conditions without raising significant financial stability concerns. Thus, central banks that adopted negative rates may be able to cut them further. And those non-adopting central banks should not rule out adding a similar policy to their toolkit—even if they may be unlikely to use it.
Ultimately, given the low level of the neutral real interest rate, many central banks may be forced to consider negative interest rate policies sooner or later.
IMF blog entry is based on work by Luis Brandao-Marques, Marco Casiraghi, Gaston Gelos, Gunes Kamber, and Roland Meeks.
BoE PDF 2020 It’s time to talk about money Speech given by Jon Cunliffe
thetimes.co.uk. 30/3/2021 We’re being gaslit by our economic masters over the magic money tree by Philip Aldrick
Charles Goodhart, a founding member of the Bank of England’s rate-setting monetary policy committee, is everything you would expect of an academic economist. Measured, restrained, contextualised. Which is why his comments to the House of Lords economic affairs committee this month were so alarming.
“We are in a very weird world where we are actually undertaking helicopter money; we are following exactly the precepts of modern monetary theory, otherwise known as the magic money tree; and at the same time . . . claiming that we are not doing it. We are doing what we claim we are not doing,” he said.
voxeu.org 19/3/2021 Technological progress reduces the effectiveness of monetary policy by Robin Döttling, Lev Ratnovski
Technological progress increases the importance of corporate intangible assets such as research and development knowledge, organisational structure, and brand equity. Using US data covering 1990 to 2017, this column shows that the stock prices and investment of firms with more intangible assets respond less to monetary policy shocks. Similarly, intangible investment responds less to monetary policy compared to tangible investment. The key channel explaining these effects is a weaker credit channel of monetary policy, as firms with intangible assets use less debt.
inteconomics.org. 3/2021 It’s Worse than “Reverse” The Full Case Against Ultra Low and Negative Interest Rates William White*
It is becoming increasingly accepted that lowering interest rates might at some point prove contractionary (the “reversal interest rate”) if lower lending margins cut the supply of bank loans. This paper argues that there are many other reasons to question reliance on monetary policy to provide economic stimulus, particularly over successive financial cycles. By encouraging the issue of debt, often for unproductive purposes, monetary stimulus becomes increasingly ineffective over time. Moreover, it threatens financial stability in a variety of ways, it leads to real resource misallocations that lower potential growth, and it finally produces a policy “debt trap” that cannot be escaped without significant economic costs. Debt-deflation and high inflation are both plausible outcomes.
economist.com 03/2021 Central Banking The perils of asking central banks to do too much
Dealing with inequality and climate change is best left to politiciansThe parliamentary act that chartered the Bank of England in 1694 begins by describing the motivation of its authors, “to promote the publick Good and Benefit of our People”. Ideas about how best the bank can serve the publick have changed a bit over the centuries, from managing the market for government debt, to maintaining the value of sterling against gold, to, in recent decades, keeping inflation in the region of 2%.
ineteconomics.org 2020 A Money View of Keynes, Keynesians, and Post-Keynesians By Perry G. Mehrling
The central bank today is not just the government’s bank, but also a bankers’ bank, a truly hybrid institution
From time to time, someone asks me about the connection between the “money view”, which I profess in my online course “Economics of Money and Banking”, and so-called “Modern Money Theory,” which has been put forward as a heterodox post-Keynesian alternative to standard macroeconomic theory. More generally, one could ask about the connection between the money view and standard macroeconomic theory, or even the connection between the money view and Keynes himself. This paper addresses all three questions, in reverse order, by translating the classic 19th century analysis of “flux and reflux” into the money view language of balance sheet expansion and contraction, and then by reading Keynes (1937), Tobin (1963), and Wray (1998) successively through that common analytical lens.
americanaffairsjournal.org 11/2020 Savings Glut or Investment Dearth: Rethinking Monetary Policy – Stephanie Kelton’s “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy” reviewed by Andrew Smithers
In the past, as governments have “funded” deficits (rather than monetizing them), much of their debt took the form of long- and medium-dated bonds. Since the yield curve usually slopes upward, this was an expensive policy and one that must be seen as foolish if the funding brought no discernible benefit. Beginning with the introduction of “quantitative easing” in 2008, however, the United States has reversed direction by having the Federal Reserve buy long-dated government bonds. “To fund or not to fund” is thus an important and immediately relevant question, one which economists not only have no agreed answer to but seem reluctant to even ask.
Unasked questions are unanswered ones, and a virtue of Stephanie Kelton’s The Deficit Myth is that it forces attention on why governments ever go to the expense of issuing bonds in the first place. Her critique of the weaknesses of conventional economic policy should receive—and to some degree already has received—wide acceptance. Things become more complicated, however, when Kelton begins to propound solutions to the various problems that her critique has revealed. Dramatic changes in economic management, such as those Kelton proposes, must be based on relative risks, and the known risks in our current system will likely (and correctly) remain preferable to unknown ones. The Deficit Myth nonetheless raises important points about why our conventional economic policy approaches need to be improved and how this might be done.
papers.ssrn.com 2016 Evolving Views on Monetary Policy in the Thought of Hayek, Friedman, and Buchanan by Peter J. Boettke and Daniel J. Smith
Abstract ; Attempting to find the technically optimal monetary policy is futile if the Federal Reserve’s independence is undermined by political influences. F. A. Hayek, Milton Friedman, and James Buchanan each sought ways to improve the performance of the Federal Reserve. They each ended up rejecting the possibility that technical refinement or minor reforms might be sufficient. After properly accounting for the concerns of robust political economy, each concluded that a fundamental restructuring of our monetary system was necessary. Friedman turned to binding rules, Buchanan to constitutionalism, and Hayek to competing private currencies. We synthesize their contributions to make a case for applying the concepts of robust political economy to the Federal Reserve through the adoption of professional humility, creative thinking, and an emphasis on the politically possible, not the politically acceptable.
ideas.repec.org 2020 Covid-19: Has the Time Come for Mainstream Macroeconomics to Rehabilitate Money Printing? by Axelle Arquié, Jérôme Héricourt, Fabien Tripier
Abstract : The scale of public expenditure to be incurred in the Covid-19 health crisis is raising heated debates about the appropriate funding. Long rejected by mainstream macroeconomics due to its possible inflationary consequences, monetization is currently undergoing a surprising rehabilitation. Defined as the financing of public expenditure by money issuance -without the government ever reimbursing the central bank, monetization appears as an attractive solution in a context where the burden of public debt could become particularly problematic due both to the persistent threat of secular stagnation and the massive Covid-19 shock. This policy brief offers some theoretical insights into this debate opposing monetization and issuance of additional public debt. We first clarify what is happening to current debt and how its sustainability can be assessed, before examining how current mainstream macroeconomics can be used to rehabilitate monetization of public spending. In conclusion, we draw attention to the particular democratic challenges implied by such a policy in the Euro area context, in terms of balance of powers between European institutions.
economist.com 4/2020 Why the BoEis directly financing the deficit – The Bank is doing what it hates, but what needs to be done
Monetary financing is a modern term for one of the oldest taboos for central banks: printing money to fund government spending. Monetary financing, with its echoes of Zimbabwe and Weimar Germany, raises fears that investors will lose confidence in a central bank seen to be under the thumb of a finance ministry—hence Mr Bailey’s earlier caution. But modest use of the Ways and Means facility is not likely to lead to inflation, let alone hyperinflation.
unherd.com 04 /2020 Who will pay for this Covid catastrophe? Magic money trees do exist but their fruit is poisonous BY PETER FRANKLIN
However, there is a way out: monetisation. This means that central banks, like the Bank of England, will be the biggest buyers of the extra debt. They will simply create new money (by electronic means rather than physically printing banknotes) and use it to buy government bonds. Given that a central bank is owned by the state, the state effectively borrows money from itself and owes it to itself. So no sovereign debt crisis. … If the limits on what a government can borrow are much looser than what we’ve been previously led to believe then the political implications are profound. This is how Thomas Fazi puts it in his recent article for UnHerd: “All the pain, suffering and misery imposed on millions of people as a result of austerity was entirely a political choice. …
marcusnunes.substack.com/ Deep down, many economists are deadly afraid of the power of monetary policy Marcus Nunes 5/2/2021 “This past weekend I reread Doug Irwin´s marvelous article on Cassel and the Great Depression. In many ways it´s like “back to the future”. Just call Keynes Krugman (PK) and Cassel Sumner.” read here …
https://www.econlib.org/ When is fiscal stimulus appropriate? By Scott Sumner
Greg Mankiw recently presented a graph showing that the US is doing much more fiscal stimulus than other big economies during the Covid crisis, even as a share of GDP:
Those economists (like myself) who agree with Treasury Secretary Janet Yellen about the need to “go big” on a protection and stimulus package, but who have misgivings about the size of the Biden administration’s $1.9 trillion coronavirus relief plan, are getting criticized as overly concerned about overheating and inflation. A healthy debate has erupted. This blog post addresses three main issues in that debate and explains why I am concerned: first, the size of the output gap—i.e., the gap between actual and potential output in the economy; second, the size of the multipliers—i.e., the likely effects from the stimulus; and third, how much inflation an overheating economy may generate.
fxstreet 19/2/2021 Eren Sengezer BoE’s Gertjan Vlieghe : negative rates not counterproductive
“There has been no evidence that negative rates have been counterproductive to the aggregate aims of monetary policy,” Bank of England (BoE) policymaker Vlieghe said on Friday
- “Want to emphasise how far we still have to travel in this recovery.”
- “We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery.”
- “We are clearly not experiencing a V-shaped recovery.”
- “Economy appears to be able to operate at a higher level than in the first lockdown.”
- “It is mostly households in the top 40% of the income distribution that have experienced marked increases in savings.”
- “To what extent these savings will be spent once social restrictions and voluntary social distancing are eased is highly uncertain.”
- “The detailed inflation picture that has emerged from the pandemic in recent months is difficult to interpret.”
- “Should market functioning deteriorate again, of course, the MPC will not hesitate to accelerate the buying pace again.”
- “But absent such deterioration and with long term interest rates already very low, we need to look for tools other than qe to deliver further stimulus if required.”
- “I conclude from the large amount of evidence gathered from countries that already have negative rates, that negative rates are effective.”
elibrary.imf.org 2019 A Requiem for the Fiscal Theory of the Price Level Roger E.A. Farmer, Pawel Zabczyk , Gaston Gelos
Abstract : The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.
ineteconomics.org 2019 Kalecki, Minsky, and “Old Keynesianism” Vs. “New Keynesianism” on the Effect of Monetary Policy By Tracy Mott Mott walks us through answers many careful readers of Kalecki, Keynes, Steindl, and Minsky knew all along.
In a post co-authored with Anna Stansbury, Larry Summers repudiates economic orthodoxy in regard to whether interest rate cuts suffice to restore full employment and looks at a more “original” Keynesianism to find adequate responses to secular stagnation. Tracy Mott walks us through answers many careful readers of Kalecki, Keynes, Steindl, and Minsky knew all along. …
Cycles in investment spending come from the interactions among investment, retained earnings, national output, capacity, and debt. Hence, the room for interest rates to affect business investment is very slight. Consumption is largely determined by the level of real wage income, which should rise and fall with investment. Changes in interest rates similarly affect housing and consumer durables spending. As long as that channel works well, monetary policy can influence the economy, stopping an upswing or turning a downswing around after a time.
As Minsky pointed out, over time household debt can pile up as raising rates to slow down an inflationary economy won’t likely restrict the growth of debt enough to offset its growth when rates are lowered to stimulate borrowing to spend on housing and consumer durables (Mott, 2002). Then we will reach a time like 2007, when lowering rates won’t be able to accomplish enough because of too much outstanding debt.”
worldfinance.com 2016 Cashing in on blockchain technology – by Kim Darrah
The emergence of blockchain has breathed new life into the ideas of economists Adam Smith, David Ricardo and Milton Freidman, and could potentially trigger a revolution in central banking
The technology behind bitcoin, known as ‘blockchain’, has been touted as revolutionary, holding the potential to transform anything from the insurance industry to international aid. However, it is in the hands of central bankers that the technology could reach its true potential.
Central banks around the world are currently devoting their resources to research the concept of a central bank digital currency – a kind of ‘digital cash’. The reason for its potential power: it gets to the heart of the function of a central bank, and, indeed, the very nature of money. “Prospectively, it offers an entirely new way of exchanging and holding assets, including money. It’s an irony, therefore, that some of the economic questions it raises have actually been around for a long time, for as long as economics itself”, said Ben Broadbent, Deputy Governor of the Bank of England, in a speech earlier this year about the possibility of a central bank issued digital currency.
The nature of money
Of course, electronic money is nothing new– in fact, the majority of money in our system exists in electronic form. However, a key difference between electronic money and a possible digital currency is the latter would allow people to transfer money to one another without the need for a commercial bank. People could have a digital wallet, of kind, and move money in a secure way without commercial banks acting as the middleman – much like ordinary cash.
This is a crucial difference, because commercial bank money and currency are different types of capital. World Finance spoke to David Clarke from Positive Money, an organisation campaigning for monetary reform that supports the idea of a central bank issued digital currency. Clarke explained how commercial bank money differs from cash: “The money in your bank account is just an IOU from the bank, created from thin air when the bank issues a loan. It doesn’t correspond with any physical currency or commodity, and it’s technically the property of the bank.” A central bank issued digital currency, on the other hand, would be an extension of cash – a direct claim on the central bank. It would, by definition, be fully protected from default.
Not only is currency a different type of asset, it enters the economy in a different way. While central banks have control over the creation of physical currency, the amount of commercial bank money in the economy is determined by decisions made by the commercial banks. Banks inject fresh money into the economy each time they extend a new line of credit, and thus the quantity of commercial bank money in the economy depends on the willingness of banks to lend. Central banks, however, can only influence money supply indirectly, through monetary policy and regulation.
In a sense, a central bank currency in digital form already exists, as commercial banks can already hold accounts with ‘central bank reserves’. These reserves are the currency deposits that form the basis of a banks’ payments system. When a customer withdraws cash, commercial banks must be able to provide real currency on request, so they need to hold enough in reserve to meet the demand of withdrawals. Similarly, when someone makes a transfer, banks settle payments using reserves.
Individuals, however, have so far been excluded from the ability to hold such a digital currency, but this could change thanks to blockchain technology. If central banks issued a digital currency that was open to all, people could hold their money as digital currency rather than in a commercial bank – with potentially radical implications. For example, if everyone banked with the central bank, “in principle, it would… make for a safer banking system. Backed by liquid assets, rather than risky lending, deposits would become inherently more secure. They wouldn’t be vulnerable to ‘runs’ and we would no longer need to insure them”, said Broadbent.
Set for takeoff
Digital currency could pave the way for ‘helicopter money’ being used as a viable tool by central banks. According to Clarke: “The idea of helicopter money has got a considerable intellectual pedigree – the term was actually popularised by Milton Friedman, who imagined the central bank dropping dollar bills from the sky as a way of boosting spending. But technological innovation has given the idea new relevance.” The concept of helicopter money has most recently been brought into the spotlight after being aired by Ben Bernanke as a possible addition to central bankers’ tool kits.
In economic terms, helicopter money is a tax cut financed by a permanent increase in the money stock – an action that could be administered in order to combat deflation. It would technically be possible without a digital currency, but given a scenario where each person held a digital cash account, the central bank could easily dispense a newly created digital currency to every citizen. Each person’s account would simply be credited with fresh electronic money in a move akin to ‘helicopter drops’ spreading newly printed money.
Helicopter money is, of course, an unconventional monetary policy, and administering it would come with a host of complications (World Finance, however, has argued that it could be useful if administered in a disciplined and moderate form). It has similar economic underpinnings to quantitative easing, but Clarke argues it can avoid one of the key failings attributed to asset purchase programmes: “Compare it to how the government injects money into the economy through quantitative easing – one of the main effects of which is to inflate the wealth of those who own pre-existing assets.” It may sound drastic, but there was a time when quantitative easing was entirely off the cards, so helicopter money should certainly not be dismissed along the same lines. Moreover, with the emergence of blockchain technology, the discussion is gaining momentum.
A brand new tool
The nature of the change created by issuing a digital currency would depend on many factors. For example, if digital cash did not acquire interest, it is unlikely that many people would convert their deposits. However, in a scenario in which it did acquire interest, the macroeconomic effects could be huge.
The digital currency revolution could… eliminate commercial bank money altogether; leaving only paper cash and digital currency issued by the central bank
The Bank of England released a working paper earlier this year investigating the idea of introducing an interest-bearing, digital currency. The authors, John Barrdear and Michael Kumhof, note that there is “very little historical or empirical material that could help us to understand the costs and benefits of transitioning to such a regime, or to evaluate the different ways in which monetary policy could be conducted under it”. In short, it has never been done before.
To forecast such a scenario, the pair created a model based on the US economy, envisaging a world in which digital currency makes up 30 percent of the GDP, but ordinary commercial bank money continues to exist. Under such a set-up, the dynamics of the financial sector would see a dramatic change. Ordinary banks would have to compete with the central bank for deposits in order to maintain cash flow; offering relatively higher interest rates as a result. Their modelled scenario comes out with many notable implications, including the economy gaining a three percent boost to GDP. Perhaps most interestingly, the central bank would acquire an entirely new monetary tool.
Because the digital currency would be held directly by households and businesses, changes in interest rates would have a direct effect, meaning when central banks changed rates it would affect the real economy directly. This contrasts to policy rates as they are currently administered, which only work by indirectly influencing the banking system. The new tool would complement the policy rate, as both would exist simultaneously. Control over the digital currency could help central banks respond to deviations from target inflation. For instance, during an economic expansion they could increase the spread between the policy rate and the (lower) digital currency rate in order to hold back inflation.
Going all in
The digital currency revolution could go even further and eliminate commercial bank money altogether; leaving only paper cash and digital currency issued by the central bank. This could occur if there was a full shift in deposits from commercial banks to the central bank and electronic commercial bank money was no longer used to make payments. This would move the system towards what is known as ‘narrow banking’ – a concept that has a long intellectual history, and notably, was favoured by David Ricardo and Adam Smith. The concept gained ground during the Great Depression of the 1930s, when a group of economists at the University of Chicago proposed the ‘Chicago Plan’. The famous plan, supported by Irving Fisher, envisioned an end to the destructive boom and bust cycle. Under the plan, only the central bank would be able to issue new money, reducing the role of banks to pure intermediaries. The idea has experienced a resurgence following the global economic crisis of 2008, with economists exploring it as an opportunity to bring about an end to the financial instability that shook the global economy.
A paper by the International Monetary Fund published in 2012, named The Chicago Plan Revisited, lent further support to the concept, claiming: “The Chicago Plan would indeed represent a highly desirable policy.” The paper further explains how an economy would look under such a plan: “Credit, especially socially useful credit that supports real physical investment activity, would continue to exist. What would cease to exist however is the proliferation of credit created, at the almost exclusive initiative of private institutions, for the sole purpose of creating an adequate money supply that can easily be created debt-free.”
Positive money argues such a scenario – in which central banks have control over money supply – could have far-reaching benefits, and be achieved through the means of a central bank digital currency. That said, Clarke explained they do not advocate implementing digital cash all at once: “We think the starting point is for the Bank of England to introduce a certain amount of digital cash. It could offset this over time by reducing the amount of bank-created money by raising reserve ratios. Under the system we propose, decisions about how much money is created – and when it is created – will be a matter for the monetary policy committee.”
Never say never
The potential implications of a central bank digital currency are certainly radical. However, the concept is quickly gaining momentum, with research taking place in Germany, England and China. In Sweden, the central bank has initiated a debate over the issuance of a digital currency with the stated aim of making a decision within the next two years. Meanwhile, Switzerland is set to hold a referendum regarding a potential ban on commercial banks creating new money after a petition reached 100,000 signatures. Iceland has also issued similar proposals.
Furthermore, private banks themselves have taken an interest in harnessing blockchain technology, which has the potential to undermine the central bank’s role as a trusted third party through which transfers can be made. Moreover, a decline in the use of ordinary cash is rendering the power of central banks to issue cash progressively less relevant. As Clarke said: “It is a radical idea, but we are living through a time where the nature of money and the nature of cash is changing rapidly. In our lifetimes, we will probably see the demise of physical cash as we know it, and central banks will have to respond to that. We have to ask ourselves the question – are we prepared to completely give up control of our money and means of payment to the private sector?”
CasP 2014 central banking and the governance of the price architecture excerpt
The majority of pricing power, then, emanates from the private sphere: it is to be found in the boardrooms of powerful corporations and on the trading floors and computer systems of global financial markets. But state power also has an important role to play here.
This brings us back to questions of central banking and its importance. Central banks represent a key channel of state power within the price architecture, attempting to govern that architecture. To do this, they act through the conduit of financial markets, influencing a broad range of macroeconomic factors such as investment, consumption, savings, inflation, the exchange rate and the labour market.
The central weapon in the central bank’s arsenal is the interest rate. Through manipulating the interest rate the Bank of England attempts to influence the price of money within the economy by adjusting the cost to banks of borrowing reserves. Because the money supply is the vital fluid within the plumbing of the price architecture, controlling this input has a special systemic significance. Within contemporary central banking the primary objective is ‘price stability’. This means, in practice, not stability, but an accepted rate of steady and gradual price inflation that reflects stable economic growth.
How do these actions bear upon the broader price architecture of capitalism? Certainly, central banks do influence price movements and macroeconomic trends, although there is considerable debate over exactly how. Raise interest rates and the price of money increases; lower them and it decreases.
Yet it is important not to overstate the reach of the Bank’s policy decisions. Lending is still a discretional decision made by banks that depends on their willingness to lend and customers’ desire to borrow. In addition, the way in which interest rate shifts will be priced into the broader economy is obscure and almost impossible to identify. These considerations illuminate the impotence of central banks in shifting pricing patterns as a whole.
Public fixation on the Bank’s policy decisions ignores the extent to which private actors, wielding enormous power, shape the key dynamics of price movements. In a post-crisis era of unprecedented real wage decline and a cost of living crisis, surely it is time to reconsider more robust public interventions into the price architecture of our society than the fine-tuning of monetary policy offers. more here