Archive for April 30th, 2019

History of the Swadesi soaps: Godrej No.1, No. 2 and Vatani…

April 30, 2019

Interesting piece by Himani Chanda in The Print.

She tells us how Godrej entered the field of soap making and used the swadesi appeal to sell their products:


As cash usage declines, Riksbank proposes a review of the concept of legal tender…

April 30, 2019

One unintended consequence of decline in physical and rise of digital cash is legal tender. For a long time now, only central bank money is seen as legal tender. Not anymore especially in Sweden where cash may not be accepted for payments in future.

Sweden’s Riksbank is proposing a relook at the concept of legal tender:

For 350 years, Swedish society has relied on the Riksbank to provide the general public with various forms of the country’s currency, the Swedish krona. In addition, cash issued by the Riksbank has been legal tender since the 1850s. Cash use has decreased rapidly in Sweden and a scenario within the not-too-distant future, in which cash is not generally accepted, cannot be ruled out. This would be tantamount to a cashless society. The general public no longer having access to any form of central bank money can make it more difficult for the Riksbank to promote a safe and efficient payment system in Sweden, not just in times of crisis and war but also in peacetime. The Riksbank has previously expressed concern over this development and has therefore analysed the scope for introducing a Central Bank Digital Currency (CBDC), an “e-krona”, to which the general public has access.

“We think that the concept of legal tender should be technically neutral so that it fulfils a function even in a digital future”, says Stefan Ingves. 

The Riksbank therefore proposes that a committee with all-round expertise be tasked with performing a review of the concept of legal tender, the state’s role with regard to means of payment in a digitalised economy and the role and responsibility of both the state and the private sector on the payment market. The committee should propose the legislative amendments needed so that Sweden continues to have a stable and efficient payment market. As time is of the essence regarding this issue, the time-frame for the assignment should not be too long

The predictive power of real M1 for real economic activity in the Euro area

April 30, 2019

ECB is of the few central banks which still looks at Money supply as an indicator of economic/price activity.

In this short research, Alberto Musso of ECB looks at power of real M1 on real economic activity in Euroarea. This graph shows real M1 follows the business cycle quite closely:

The leading and pro-cyclical properties of real M1 with respect to real GDP in the euro area remain a robust stylised fact. These properties, which can be found for the relationship between real narrow money and real economic activity in both levels and growth rates, have been documented in various publications for earlier time periods.[1] An illustration of such properties can be derived from a visual examination of monthly data from January 1970 to February 2019 for annual growth in real M1, which is defined as the nominal narrow money aggregate M1 deflated by the HICP. Specifically, it is notable that this growth rate went well into negative territory for prolonged periods just before (or in coincidence with) all historical euro area recessions, as dated by the CEPR Euro Area Business Cycle Dating Committee (see Chart A).

Chart A Real M1 annual growth and euro area recessions (annual percentage changes)

Real M1 growth is again moderating in 2019:

Turning to the current juncture, a formal econometric analysis based on probit models exploiting the predictive power of real M1 does not point to significant recessionary risks in the euro area for 2019 and early 2020. On the basis of data since 1970, the probability of a contraction in euro area real GDP derived from a probit model based on real M1 (lagged by 12 months) increased sharply before all previous euro area recessions (see Chart D), providing strong evidence of the usefulness of narrow money in predicting recessions in the euro area. Forecasts based on this model point to recession risks increasing slightly in 2019, from about 1% in January 2019 to between 5% and 7% in the second half of 2019 before falling to below 5% in February 2020, that is to say remaining very low (blue line). Controlling for the slope of the yield curve changes results only marginally (yellow line). Overall, the current level of real M1 growth is still comfortably above the zone that would be associated with risks of a recession in the near future.[4]

Chart D

Euro area recession probabilities based on probit models with lagged real M1



Switzerland monetary policy since 2008: From one crisis to another

April 30, 2019

A spirited speech by Thomas J. Jordan, Chairman of the Governing Board of Swiss National Bank. He defends the policy of the central bank since 2008 which has moved from one crisis to another:

Ladies and Gentlemen, the global financial and economic crisis broke out eleven years ago,  and was followed by a marked decline in economic output and inflation. At that time, the SNB had to switch to an expansionary monetary policy stance in order to fulfil its mandate. We initially responded with conventional measures, and quickly lowered interest rates to virtually zero.

The global financial crisis was swiftly followed by the sovereign debt crisis in the euro area. The attendant uncertainty on the financial markets bolstered demand for the Swiss franc as a safe haven, thus putting appreciation pressure on our currency. To counter these upward forces, we had no option but to resort to unconventional means. We intervened on the foreign exchange market, and in September 2011 introduced a minimum exchange rate against the

From mid-2014 onwards, the international monetary policy environment began to change. On the one hand there were increasingly clearer signs that the US was about to adopt a tightening stance, whereas in the euro area a loosening of monetary policy was becoming more and more
likely. The euro subsequently depreciated markedly against the major currencies. As a result, by the beginning of 2015 the minimum exchange rate was no longer sustainable. To retain control over our monetary policy, we therefore decided in January 2015 to change tack. 

In that exceptional situation, we had to weigh up the pros and cons of using alternative unconventional instruments. It became apparent that we would have to lower interest rates below zero given that various other central banks had already done so. This was the only way we could limit the appeal of the Swiss franc. When we discontinued the minimum exchange rate, we thus also imposed negative interest of –0.75% on banks’ sight deposits held at the

This then brought the level of interest rates in Switzerland back down below that in other countries. Coupled with our willingness to intervene in the foreign exchange market as necessary, the negative interest rate has taken the pressure off the Swiss franc and prevented a sharp drop in inflation.

Pros and cons of negative policy rates:

What would happen if we were to simply stop charging negative interest in the current environment?

Dispensing with the negative interest rate would have a substantial impact on the Swiss economy. Swiss short-term interest rates would again be higher than in other countries, which would clearly increase the attractiveness of Swiss franc investments. This is turn would cause the franc to appreciate, which would be detrimental to economic momentum in Switzerland and would see unemployment rise and inflation pushed into negative territory.

If we stopped charging negative interest, would that at least be beneficial for savers, pension funds, life insurers and banks? The marked weakening in the economy would cast a pall over the earnings prospects of Swiss companies, and Swiss equities would come under pressure.

Although short-term interest rates in Switzerland would no longer be negative, there would be little change in capital market interest rates owing to the deterioration in the economic outlook. All in all, the level of interest rates would thus remain low, and so too would the yields on long-term Swiss franc bonds. Ultimately, there would be scarcely any significant improvement for savers, pension funds, life insurers and banks.

The same goes for the real estate market. Although its momentum would be curbed somewhat if we were to cease charging negative interest, there would be little change in the low level of interest rates and the impact would therefore be limited. In the current situation, the risks to financial stability must be addressed with focused macroprudential measures. This will then curb demand for mortgages and real estate and strengthen banks’ resilience.

Ladies and Gentlemen, abandoning the negative interest rate in the current environment would weigh heavily on the Swiss economy. This would not help either savers or pensionfunds, nor would it be beneficial for financial stability. In other words, as things stand at present, removing the negative interest rate would not be in the interests of our country as a whole.

The critics of central banking will tell you that it is the very SNB interventions which have led to these problems at the first place.

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