Archive for September 6th, 2019

Future of cash in Switzerland is bright even as cashless payments become more important

September 6, 2019

SNB released a new CHF 100 note and its chief gave a speech.

He says cash and digital cash are complementary:

The digital transformation taking place in our economy is also affecting developments in the payments arena. As part of its statutory mandate, the SNB must not only ensure the supply and distribution of cash but also facilitate and secure the operation of cashless payment systems. A well-functioning payment system is critical for our economy.

Technological progress is also changing customers’ expectations and needs in terms of  cashless payments – for instance as regards speed and user-friendliness. In this area too, the SNB is a participant in innovation. Specifically, we are ensuring that Swiss Interbank Clearing (SIC) – our country’s powerful infrastructure for transacting cashless payments in Swiss francs – continues to work quickly and efficiently and thus remains as attractive as possible.

Promoting and ensuring both the supply of cash and the smooth functioning of cashless payments is no contradiction. The various payment methods satisfy the differing needs of our population. Our latest survey on payment methods, published in May 2018, showed that the public’s use of – and affinity for – cash remains high. It also confirmed that the Swiss population like to be given the choice between paying cashless or paying with notes and coins.

Banknote circulation in our country has increased steadily in recent years. Cash is used and valued for a variety of reasons, and not just out of habit or reluctance to adopt new technology. Cash can be used everywhere and is less dependent on technical infrastructure. Cashless payments are likely to become more important over time. I am nevertheless convinced that the future of cash, and thus of our new banknote series, is bright.



Reserve Bank of India’s flip-flops on floating rate benchmarks

September 6, 2019

Superb post from Prof JR Varma of IIMA.

He points how RBI in 2001 had asked banks to use external benchmarks before going to internal benchmarks in 2010. In 2019, we are back to external:

These flip-flops reflect the failure of the central bank on two dimensions:

    • The failure to create a vibrant term money market with liquid benchmark rates creates dissatisfaction with external benchmarks. In 2009, the RBI Working Group justified the shift to internal benchmarks as follows:

Banks are finding it difficult to use external benchmarks for pricing their loan products, as the available external market benchmarks (MIBOR, G-Sec) are mainly driven by liquidity conditions in the market, and do not reflect the cost of funds of the banks. … Besides, the yields on some of the instruments may not suggest any representative pricing yardsticks given that they have limited volumes compared to the overall size of the financial market.

    • The failure to create a sufficiently competitive banking system means that internal benchmarks do not work well because in the absence of strong market discipline, banks do not use fair and transparent pricing of floating rate loans. The RBI Study Group that recommended the shift back to external benchmarks described the problem as follows:

First, the experiences with the PLR, the BPLR, the base rate and the MCLR systems suggest that interest rate setting based on an internal benchmark is not transparent as banks find ways to work around. Second, the interest rate setting based on an internal benchmark such as MCLR is not in sync with the practices followed in the modern banking system.

In the next few years, India needs to work on creating both a better banking system and better financial markets. One of the pre-requisites for this is that regulators should step back from excessive micro-management. For example, the RBI Master Directions require the interest rate under external benchmark to be reset at least once in three months while elementary finance theory tells us that if the floating rate benchmark is a 6-Months Treasury Bill yield, it should reset only once in six months. Either banks will refrain from using the six month benchmark (eroding liquidity in that benchmark) or they will end up with a highly exotic and hard to value floating rate loan resetting every three months to a six month rate. Neither is a good outcome.


Federal funds rates based on the seven simple monetary policy rules

September 6, 2019

Cleveland Fed has put up a really good resource to forecast Fed Funds Rate across 7 mon pol rules.

Simple monetary policy rules typically provide a relationship between the central bank’s policy rate—which, for the United States, has been the federal funds rate target—and a relatively small number of indicators on real economic activity and inflation. Monetary policymakers often compare and contrast the federal funds rates implied by different simple monetary policy rules, use simple rules as an input in the decision-making process, and use simple rules to help communicate decisions to the public. (For one example, see here.)

Examining a variety of rules is helpful because there is no agreement in the research literature on a single “best” rule, and different rules can sometimes generate very different values for the federal funds rate, both for the present and for the future. Looking across multiple economic forecasts helps to capture some of the uncertainty surrounding the economic outlook and, by extension, monetary policy prospects.

We look at the federal funds rates coming from 7 simple rules.

    • Taylor (1993) rule
    • Core inflation in Taylor (1999) rule
    • Inertial rule
    • Alternative r* rule
    • Forward-looking rule
    • First-difference rule
    • Low weight on output gap rule

Forecasts for economic activity come from 3 sources.

    • Survey of Professional Forecasters
    • Congressional Budget Office
    • Cleveland Fed BVAR model

Really useful  for teaching as well..

Is China Fudging Its GDP Figures? Evidence from Trading Partner Data

September 6, 2019

John G. Fernald, Eric Hsu, and Mark M. Spiegel in this FRBSF paper:

We propose using imports, measured as reported exports of trading partners, as an alternative benchmark to gauge the accuracy of alternative Chinese indicators (including GDP) of fluctuations in economic activity. Externally-reported imports are likely to be relatively well measured, as well as free from domestic manipulation. Using principal components, we derive activity indices from a wide range of indicators and examine their fit to (trading-partner reported) imports. We choose a preferred index of eight non-GDP indicators (which we call the China Cyclical Activity Tracker, or C-CAT). Comparison with that index and others indicate that Chinese statistics have broadly become more reliable in measuring cyclical fluctuations over time. However, GDP adds little information relative to combinations of other indicators. Moreover, since 2013, Chinese GDP growth has shown little volatility around a gradually slowing trend. Other measures, including the C-CAT and imports, do not show this reduction in volatility. Since 2017, the C-CAT slowed from well above trend to close to trend. As of mid- 2019, it was giving the same cyclical signal as GDP.

Why imports?

The challenge in assessing the reliability of different economic indicators is that we need a benchmark that is highly correlated with true activity but is not, itself, subject to manipulation.

In this section, we document that a country’s imports fit that bill: Import growth moves closely with GDP growth for countries with relatively reliable statistical systems. Why would we expect imports to be one of the best measured components of the national accounts?

First, the number of importers (and import locations) is typically modest, which makes measurement more manageable. Second, countries have an incentive to measure imports accurately for tariff purposes. Third, data on imports are available from external sources, reported as trading partner’s bilateral exports to the country in question. 

In countries with less-advanced statistical systems, we would expect the relationship between imports and measured GDP to deteriorate simply because measured GDP becomes less accurate.

The reduced accuracy of measured GDP should then reduce its correlation with imports. In contrast, for the reasons noted above (including the external verification), there is little reason to think that the correlation between imports and true economic activity deteriorates.


Profile of Atif Mian

September 6, 2019

IMF’s Finance and Development Sep-2019 edition profiles Atif Mian who is increasingly worried over our addiction to debt:

Everyone knows someone who buys more than he or she can afford. This has been characterized mockingly as millennials spending beyond their means on avocado toast and expensive lattes, often borrowing to fund those wants. But in the modern era, dependence on credit isn’t a sign of profligacy, according to Atif Mian, a Princeton professor of economics, public policy, and finance. Rather, he argues, excessive borrowing is evidence of an economic system that has become distorted by widening income inequality.

“It’s almost as though the modern economy has become addicted to credit,” Mian says. “We need to understand how, and why, that happened.”

The 44-year-old Pakistani-American has done much to shed fresh light on our modern-day addiction to debt, and in the process, to proffer a new thesis for the greatest economic downturn in more than half a century. He and coauthor Amir Sufi, a University of Chicago finance professor, offer a novel take on the Great Recession in their 2014 book, House of Debt. The book helped land Mian on that year’s list of the world’s 25 most influential young economists, compiled by the IMF.

The authors parse vast amounts of data to show that a dramatic rise in household debt among borrowers least able to repay helped precipitate the greatest global financial crisis since the Great Depression. In their book, they argue that policymakers erred by focusing excessively on the banking system and in bailing out banks, not borrowers.

Sufi says their research has helped put household debt much more prominently on the radar of the IMF, the Federal Reserve, the Bank of England, and central banks of Australia, China, and Israel.

In the five years since the book’s publication, Mian and Sufi have broadened the scope of their research, focusing on household debt and economic inequality. Their more recent work links the worsening of household debt since 1980 to the rise of the superrich. They connect increased income inequality to the concentration of vast amounts of wealth, which has flooded the economic system with easy credit that fuels consumption, rather than contributing to economic growth through real investment.


What Martin Luther and history of printing technology can teach us about bitcoin..

September 6, 2019

Max Gulker has a fascinating piece on why bitcoin supporters (maximalists) need to be patient. They need to learn from history of printing technology and how Martin Luther used printing to further his cause:

….somewhat counterintuitively, if blockchain and the concept of cryptocurrencies truly has world-changing potential, we should still have very little idea how to use it. Blockchain is a foundational technology, useful primarily for the applications (like Bitcoin) built to run on top of it. As the dot-com crash illustrated, the discovery process of just what apps people want can be a painful one. But history shows the road from foundational technology to world-changing applications can be much bumpier still.

In the 1440s Johannes Gutenberg developed a printing press capable of mass producing books, and though people knew it was going to be huge it took nearly a century to answer the questions of why and how. That process required not only market experimentation, but a catalyst in the form of one of history’s greatest social disruptions.

In his book Brand Luther, historian Andrew Pettegree gives a fascinating look at the role the Protestant Reformation, particularly its founder Martin Luther and his city of Wittenberg, played in the rise of books as we know them. These events coalesced right when they needed to, for the printing industry had just endured the bursting of a bubble.

After its initial rollout, printing presses became the must-have item for Europe’s wealthy nobility. Within decades (lightning speed by the standards of the era) there were over 200 printing presses scattered across Europe. But what then? To our modern sensibilities, virtually inseparable from books and the printed word, that question seems absurd.

One key missing piece was understanding the economics of the printed word. The wealthy owned plenty of books, but their creation for centuries had been a one-to-one transaction between collector and scribe. Neither the increasingly literate general public, nor the entrepreneurs behind the first printing presses, had any concept of buying a book, going home and reading it.

Like railroads and the internet centuries later, the bubble burst. Nobility supplying the capital lost interest and more than half of Europe’s presses shut down. And even among the survivors it was only twelve presses in major cities that did the vast majority of pre-Reformation printing.

Printing in these early years began to prosper not by disrupting the old order but by serving it. They printed books that were then ornately illustrated by hand, making the production of books as luxury items a bit more efficient. And of particular importance in these urban centers were far more mundane projects done for church and state, such as informational fliers, and quite ironically, indulgences.

A key part of Luther’s initially renegade theology was communicated with ordinary people in their own language. Pettegree shows how this catalyzed the publishing industry to take a major step toward what we know today. Luther became the first bestselling author, publishing books, pamphlets, and his translation of the Bible in German. 

Until that time it was customary not to list the book’s author on the cover or front page unless it was a revered figure from antiquity. But Luther, his theological associates, and the blooming Wittenberg publishing industry perceptively understood the concept of branding. In addition to Luther’s name right up front, they developed a specific look across multiple titles that would become familiar and stand out to people in an ordinary stall.

Same applies to bitcoin too:

Fast forward to today and we rightly expect change to happen faster than it did during the Renaissance. But we still need markets to teach us how to use novel technologies. Bitcoin maximalists who often tout free markets start sounding a lot like central planners when they posit that Bitcoin is and must be the only use of blockchain technology and the only money used across the globe. Given Bitcoin was the first application of blockchain technology, introduced alongside it, the maximalists do not have history on their side.

The other question Pettegree’s book leaves for technology watchers today is that of a catalyst. Many Bitcoin proponents, from the sensible to the maximalist, are libertarians who would like to see a similarly large sea change in society. But the fact is that in 2019, the vast majority of people don’t share these views, and have no problem with their government fiat money.

If, for whatever reason, public opinion shifts either gradually or seismically toward a libertarian outlook, cryptocurrencies might have a similar catalyst. But rather than Bitcoin, at least as we know it, a libertarian reformation of sorts would fuel innovation to create the private currency or currencies most useful for a future we can’t come close to predicting. Rather than protecting a preselected champion, we should all be competition and innovation maximalists.

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