Improving money through competition….

Interesting piece by Norbert Michel, Director, Center for Data Analysis.

He says most forms of money have been discovered by the private sector only to be monopolised by State later. The State’s record in monetary matters has been mostly poor barring a few period. Even in those periods there must have been unintended consequences which are rarely mentioned. Best way to restore monetary stability is to improve money through competition. This is also what supporters of free banking also argue:

Money is the means of payment for virtually all goods and services. Most innovations in the means for payment have originated in private markets, but they were later monopolized by the government, thus mitigating their benefits. Policymakers rarely think about improving money with the same competitive market forces that improve other goods and services. That competitive process is the best way to expose weaknesses and inefficiencies in existing products, thus improving people’s lives.

Congress should avoid policies that single out alternative forms of money and impede people from using their preferred medium of exchange. Although it cannot provide absolute protection, allowing competitive private markets to provide currency would present as powerful a check on the government’s ability to diminish the quality of money as possible.

He says Post World War-II there are two types of money in US:

The U.S. monetary system consists of two types of money:

1. Base money, often referred to as outside money, is the ultimate means of payment in the economy, and it comes from outside the private sector (i.e., the government).
2. Inside money, often called credit money, consists of claims to the underlying base money, and it comes from inside the private sector.

Private financial firms compete to provide various types of credit money, such as checkable deposits with bankcards, money market accounts, and travelers’ checks. These financial firms are heavily regulated, often to the detriment of their ability to operate, but few policymakers question whether they should actually provide money.

Even fewer policymakers question whether anyone other than the federal government should provide base money, despite its fundamental economic importance. Because the Federal Reserve is the monopoly provider of base money, the U.S. government ultimately determines the total amount—and type—of money that private firms can create.  This monopoly necessarily limits the extent to which competitive processes can strengthen money, and exposes the means of payment for all goods and services to the mistakes of a single government entity.

Precisely because people are so vulnerable to the abuse of money (including modern monetary policy errors), Congress should not interfere with citizens’ ability to opt out of official currency.The competitive process is, ultimately, the only way to discover what people view as the best means of payment.

There are interesting references here which are not part of monetary economics syllabus in most universities. In all other things we are taught competition matters but not in money where powers are to reside with central bank. There is wide history of free banking which was quite successful as well but we hardly look at the evidence.

There is a reason Friedman said: Most economists do not question central banks as it provides them glamorous job opportunities. It is not just quetioning central banks in op-eds but even in teaching…

 

What Remains of Milton Friedman’s Monetarism?

Robert Hetzel of Richmond Fed has a paper:

From the early 1960s until the early 1970s with the emergence of rational expectations, under the rubric of monetarism, Milton Friedman defined macroeconomic debate. Although the Keynesian consensus that he challenged has disappeared, the current academic literature makes little reference to monetarist ideas. What happened to them? The argument here is that those ideas remain relevant but require translation into terms expressible in modern macroeconomic models and in the monetary policies of central banks, neither of which contain any obvious references to money. Moreover, the Friedman and Schwartz methodology for identifying shocks retains relevance.

Lots of monetary history in the paper..

Evolution of banknotes in New Zealand (1967-2017)

In 1967 New Zealand moved to decimal currency system.

Matthew Wright of RBNZ tracks the changes in banknotes ever since:

Banknotes are always designed with imagery relevant to the society in which they will be circulating, symbolising the national identity of the issuing country. Reviewing the historical designs of New Zealand’s banknotes from this perspective reveals a more complex picture of the 1967 switch to decimalisation than the usual perception of a discontinuous change.

Despite the switch from imperial to decimal currency, there were clear social continuities in the imagery used for the pre-decimal Series 2 and first
decimal Series 3 notes. The real conceptual break came with the Series 5, 6 and 7 decimal notes introduced from 1992–93, which introduced new
iconography and themes common to all three series. While the Series 2 pre-decimal and Series 3 and 4 decimal series, by intent, reflected similar mid-20th century social values – underscoring the stable social character of the New Zealand society of their day, the decimal Series 5, 6 and 7 carried a different range of subjects which were selected through public consultation, formal public survey and independent expert analysis, for relevance to the society of the late 20th century and beyond.

Nice bit..

Stock market participation in the aftermath of Satyam accounting scandal

Interesting paper by Renuka Sane.

The paper compares Satyam stock holding investors with non-Satyam stock holding investors during the breakout of the scam. The results show that though Satyam investors cash out of the stock intensively but the impact is not long-lasting:

Political economy of caste based reservations..

Always a sensitive topic in India.

Ashwini Deshpande  and Rajesh Ramachandran  have a piece on the issue (full paper here):

Why are some immigrant groups more successful than others?

Prof Edward Glaesar’s new paper says the differences are largely due to number of immigrants and population of home country:

South Africa’s Public Proctor wants the central bank to have wider goals..

South African economy is slipping and in May 2017 the central bank head was quizzed by academicians of the region.  The role of Government and central bank is being seen with deep suspicion.

Thus, it was quite something to read the Public Proctor getting into act and asking the central bank to have wider goals:

How did Japan enter the world markets during the first age of globalisation..

Interesting research by Profs. Christopher Meissner, John Tang

Economists have long been interested in the dynamics of comparative advantage, but have only recently begun to use detailed product-level data in their analysis. This column examines the Japanese experience after the liberalisation of the 1850s. It suggests that trade costs, destination market demand conditions, and product specific factors played key roles in Japanese exports growth. Roughly 30% of growth in exports between 1880 and 1910 came from shipping new goods to new countries, selling new goods to extant trade partners, and introducing existing products to new countries.

Even during early 20th century, Japan was thinking of entering international markets via new products, new markets and so on. Fascinating..

What is it with Turkish Lira demonetised notes that interests currency exchangers in India?

Turkey demonetised a series of notes in 2010. The demonetised notes cannot be used for transactions but can be exchanged at central bank offices. The government has given a 10 year window (10 years!) to exchange the notes which is quite something.

This morning there was a news in Bangalore papers about busting of a gang which offered exchange for the Turkish demonetised notes:

It was a hoard of demonetised currency with a difference: not Indian rupees for clandestine exchange, but Turkish lira with a face value of ₹71 crore.

A group of four in Bengaluru, including a 40-year-old constable, tried to sell the demonetised lira to a businessman, police said. All four were arrested on Tuesday and 78 notes of 500,000 denomination recovered. The exchange rate is ₹18.27 to the lira. “Though the currency has been demonetised in Turkey, it is redeemable and legal tender. It can be exchanged till December 2019,” said City Police Commissioner Praveen Sood. The gang was busted while negotiating the sale for ₹27 lakh at a multiplex in Marathahalli.

While doing google search, I came across three more cases of similar operations being busted, all in Hyderabad. On May 16, 2016, Nov 16, 2016 and March 22, 2017  .

I have always been fascinated by these cash operations. There should be some linkages and reasons to see demonetised Turkish Lira first finding its way in India and then being exchanged…

Comparing Rainfall patterns and human settlement in tropical Africa and Asia

Interesting study by Kostadis Papaioannou and Ewout Frankema. If geography was given adequate focus while teaching economics, these issues should have been pretty well-known:

Our study adds support to the idea that the climatological challenges posed to agricultural development were larger in tropical Africa than in tropical Asia, and that this may be one of the keys to understanding why large parts of tropical Asia have historically been more densely populated than tropical Africa. In so far as higher degrees of climatological variability posed more severe constraints to the adoption of modern, productivity-enhancing farming technologies, this may also partially account for the diverging trajectories of agricultural development in the post-1960 era.

However, the implications of our findings go even further. The increasing frequency and intensity of weather shocks observed today, such as heat waves, droughts, floods, and hurricanes, adversely affect conditions of agricultural production and jeopardise efforts to achieve global food security. A rapidly expanding literature shows that climate-induced food shortages pose severe threats to societal cohesion by triggering civil conflict, raising property crime rates, and increasing migration (Miguel et al. 2004, Papaioannou 2017).

The effects of climate change are felt harder in Africa than elsewhere. Our study suggests that African farmers also have a longer experience in coping with climate shocks, even though more evidence is needed to explore whether this has been a structural historical condition, or one specific for the interwar era.

 

Summing up macro models..

Noah Smith has a presentation on macro models. Broadly, he says there are 3 types of models: for academia, for central banks and for financial industry.

I’d like to close the chapter of my life that involves complaining about macroeconomics. I’ve been out of that world long enough that it’s becoming a distant memory. And much more qualified critics are on the job. Furthermore, macroeconomists I talk to – especially young macroeconomists – mostly seem to have heard and internalized all of the critiques. That doesn’t mean I want to stop following developments in the macro field, but that my days as a certified “macro-basher” have come to an end.

So when the Norwegian Finance Ministry, Norges Bank and Statistics Norway asked me to give a talk about “What Has Happened in Macroeconomics (and what still needs to be done)”, I viewed it as an opportunity to sum up. Here are the slides from that talk.

Hmm.. Quote good.  Hope he writes a paper on this for more details.

 

Ibn Khaldun: The amazing Arab scholar who beat Adam Smith by half a millennium

Fascinating article by Daniel Olah who is with Hungary’s Ministry for National Economy, Forecasting and Modelling Unit.

He says we have ignored contribution of Ibn Khaldun’s contribution to economics. His ideas preceded those of Adam Smith by nearly half a millennium. Thus, Neoclassical economists have created a false narrative of the history of economics:

China’s evolving monetary policy rule: from inflation accommodating to anti inflation policy

Eric Girardin, Sandrine Lunven and Guonan Ma have this interesting paper.

This paper aims to enhance the understanding of China’s monetary policy rule since the mid-1990s, focusing on the role of inflation. It investigates the rule followed by the People’s Bank of China (PBoC) by considering both the structural economic transformation of China and its evolving monetary policy framework.

Our newly constructed monthly composite discrete monetary policy index (MPI), which combines price, quantity and administrative instruments, shows a change in style towards smoother but more contractionary policy moves from 2002 onwards. The estimation of a dynamic discrete-choice model à la Monokroussos (2011) implies that, from this point onwards, the conduct of monetary policy has been characterised by implicit inflation targeting.

While the PBoC’s behaviour up to 2001 was reminiscent of that in the inflation-accommodating G3 economies of the United States, euro area and Japan up to 1979, it has been characterized since 2002 by a policy rule similar to the post-1979 anti-inflation (forward-looking) policy of the G3. An accurate estimation of the monetary policy rule from 2002 needs to consider China as an open economy, as a result of its rapid liberalisation of trade and finance after its WTO accession. As such, the influence of US interest rates has become increasingly significant for Chinese monetary policy.

Hmm..

State Bank of Pakistan continues to include IOUs from India during Partition on its balance sheet!

The superb JP Koning looks at Indian monetary history during partition in his recent post. I had blogged a similar piece earlier as well.

During Partition, there were differences between India and Pakistan over distribution of assets and liabilities of RBI. The RBI was to give share of assets equivalent to notes which circulated in Pakistan. However, there were more notes than RBI imagined leading to differences. All the details are there in RBI history (1935-51).

What is even more interesting is that these assets continue to be recorded by Pakistan central bank (State Bank of Pakistan)! Being a history buff, I should have checked this.

Koning notes:

Reflection on professionalism, Hippocratic oath and the banking industry

Mr Muhammad bin Ibrahim, chief of the Central Bank of Malaysia asks bankers to be more trustworthy and ethical in their approach:

When we reflect about professionalism, the medical profession often comes to mind for its dedication, devotion, care and interest for society. Over 2,000 years ago, the Hippocratic Oath was first introduced to the world. Today, most medical school students profess some form of the oath upon graduation.

While written in antiquity, its principles are held sacred by doctors to this day. Its words have evolved with history. But its message remains the same: treat the sick to the best of one’s ability, preserve patient privacy, teach the secrets of medicine to the next generation, and much more.

What is interesting is not the oath itself, but the principles it expounds and the deep philosophical values that have firmly grounded the medical profession over the years. With it has also come an unwavering sense of identity, ethics and purpose for medical practitioners.

The numbers are equally telling. Polls such as Gallup and Ipsos have consistently ranked doctors among the most competent and ethical professionals worldwide. In 2016, 65% of people surveyed believed that medical doctors had either a high or very high level of honesty and ethical standards. The corresponding number for bankers was a mere 24%. A sad reflection of the state of affairs in the banking industry.

We trust doctors with the most intimate details of our health problems, complications and issues. We adhere to their instructions and advice, often assuredly and willingly. Few professions enjoy such stature, respect and trust. This is the epitome of professionalism.

Professionalism matters. Like the medical field, professionalism ought to form the cornerstone of the banking sector. It can be fostered. It should be practiced. And above all, it must be earned. As intermediaries in the economy and guardians of public funds, banking sector cannot hope to perform its role effectively if the respect and trust of the people is not earned.

As we commemorate this graduation today, there’s no better time to ask ourselves what it means to be a professional banker. Drawing from the medical profession and the Hippocratic Oath, let us ponder on the traits to guide our pursuit of developing high calibre and trustworthy bankers, and professionalising the banking industry. Three traits come to mind; Competence, Character and Calling.

From a banker to bankster..what a turnaround for banking industry…most countries are worried about conduct of the profession..

Has the Swiss Phillips curve flattened over the years?

Interesting article by Stefan Gerlach, Chief Economist of EFG Bank.

In many economies, inflation may have remained stubbornly low during the recovery because their Phillips curves have become flatter. This column uses an analysis of Swiss data since 1916 that support this argument. The most recent structural break in the Swiss Phillips curve occurred in 1994, when it became much flatter. Previous structural breaks suggest that this has been a change from an above-average to a below-average slope, not a collapse from the long-term normal level.

Despite Friedman rejecting Philips Curve, it remains on of the most important macro idea. Moreover, Friedman wrote about times when we had high inflation and positive rates. It is all so confusing now.

Overall, these findings suggest that the change of the slope of the Phillips curve between the 1970s and 1990s, as emphasised by Blanchard et al. (2015), was an abrupt fall from an above-average to a below-average slope, not a collapse from some historically ‘normal’ slope to almost zero. If so, the current flat Phillips curve may be merely a temporary phenomenon that will soon increase in slope.

The analysis also raises questions for future work. First, how country-specific are the observed changes in the slope of the Swiss Phillips curve, and to what extent are they also present in data from other economies? It would be interesting to know if Phillips curves elsewhere were unusually steep in the 1970s.

Second, to what extent can we separate different hypotheses for changes in the slope of the Phillips curve? Consider the most recent period: the Phillips curve hay have indeed flattened, but we might have confused shifts in the level and the slope of the Phillips curve. This could happen if, for instance, we have underestimated the amount of slack in the economy.

Economics textbooks continue to ignore entrepreneurship….

Interesting paper by Dan Johansson and Arvid Malm.

Exorbitant privilege and the Triffin dilemma through forex swaps

The French said US has exorbitant privilege due to hegemony of US Dollar. Triffiin dilemma suggested that though US Dollar is a reserve currency, it implies that US will have to keep running trade deficits to keep supply of US dollar going to other countries. Thus the dilemma between looking at short term objectives and also playing a global role. Thus, both privilege and dilemma are connected in their own ways.

In this paper, Takeshi Kimura and Teppei Nagano say both these are present in forex swaps market as well:

While non-US entities pay dollar funding premiums in the FX swap market, the US earns profits on FX-hedged investments in non-US sovereign securities. This column argues that this new form of the ‘exorbitant privilege’ presents a modern version of the ‘Triffin dilemma’. If the distributional effect of US privilege becomes large enough to induce non-US entities to take excessive risk, the stability of the global financial system will come under threat. 

Hmm.. never really thought about it..

The power of US Dollar extends much beyond the reserve currency role..

Economics and the human instinct for storytelling

Robert Shiller has a nice essay on the topic:

I’m starting now, with my more recent work, to think that we have to look at the humanities as well. There is something difficult to formalize about human beings, but something that we nonetheless have to understand, and I think one way to do that is with an approach that I’m calling “narrative economics”: taking economics and adding the study of the narratives that people transmit. 

The human species, everywhere you go, is engaged in conversation. We are wired for it: the human brain is built around narratives. We call ourselves Homo sapiens, but that may be something of a misnomer—sapiens means wise. The evolutionary biologist Stephen Jay Gould said we should be called Homo narrator. Your mind is really built for narratives, and especially narratives about other humans. That is why advertisers tend to focus not on a product itself, but rather on somebody doing some human action related to the product.

Narratives are contagious: they spread from one person to another. Some narratives disappear quickly; others can last a long time. I think of a narrative as a gem, something that you heard somewhere, and you think, I’ll remember that next time I’m in a conversation. I’ll use that. I’ll say it. I’ll try to present it right because I want it to have the effect that it had on me. That is a narrative. Narrative can, in the parlance of the internet, go viral. 

Hmm…

Well, there was a bank named ‘Sarkari Dukan’ (Government shop in English) in State of Udaipur!

I was reading this book by Dr Harish Sharma (delighted to see a link on the net) which was actually his PhD thesis The thesis looks at evolution of banking focusing on Rajasthan State. It has many interesting aspects of Indian banking, which we sadly neither know nothing about nor we care.

He starts the book by quoting from this interesting text by William Robertson.

it is a cruel mortification, in searching for what is instructive in the history of past times, to find that the exploits of conquerors who have desolated the earth, and the freaks of tyrants who have rendered nations unhappy, are recorded with minute and often disgusting accuracy, while the discovery of useful arts and the progress of the most beneficial branches of commerce, are passed over in silence, and suffered to sink into oblivion.

He says this applies so well to India’s origins and progress of banking. Well not just banking but all aspects of business and commerce. We just have let everything sink into oblivion. He is talking about a much earlier period on which resources are  really difficult to figure. We have let history slip of periods on which there is atleast some “written information”.

There are some attempts to undo this damage by the Penguin series. But unless all this is taught and debated in colleges, we can hardly make much progress.

Coming back to the book. It has amazing insights into progress of banking in state of Rajasthan. It was obviously many kingdoms back then and how they financed their operations and soon. The region was also home to Marwaris and Jains who obviously had a knack for maths which was used brilliantly in financing and industry later on. We know about Marwaris not as much about Jains.

He mentions how after 1857 revolt, the state of frequent wars in the region declined. This was a time for making some economic progress and the local some of the local kingdoms did realise this. Finance was seen as a major impediment in this progress as there was uneven development in the region. This led ruling princes to establish banks/financial institutions to aid agriculture and foster industry. Of course, none had any experience in banking which showed in eventual outcomes as very few could survive.

State of Udaipur was the first to establish a bank in the region in 1842, before the 1857 revolt. It set up a bank called Udaipur state bank which was more popularly called as ‘Sarkari Dukan’ (means Government shop in English)!