The Denationalization of Money and Cryptocurrencies: Commonalities and Implications for the Global Economy

Gregory Parker of Walden University in this short paper:

The Denationalization of Money, a book by NobelPrize–winning economist F.A. Hayek, suggests abolishing the government’s monopoly over fiat currency. Hayek believed that a single national currency and the central bank have a history of generating massive inflation and; therefore, unregulated private currencies can counteract such a governmental monopoly over the national currency.

Cryptocurrencies (cryptocurrencies) are decentralized digital currencies built on blockchain technology that has the potential to reshape the global financial landscape and foster a more competitive and innovative monetary system.

In this article, I examine some commonalities and implications of Hayek’s theory on the role of money in the economy for the future of cryptocurrencies and the financial system. I also discuss the potential impact of the denationalization of money and cryptocurrencies on the global economic system.

Advertisement

Many Commonwealth countries are reconsidering whom to feature on their banknotes

In many Commonwealth countries, the British Monarchy features on the banknotes. Queen Elizabeth featured on many of the notes.However, post her demise, the question on whether to continue featuring monarchy on the notes was considered.

Smita Aggarwal in this IMF Finance and Development article discusses how different Commonwealth countries have different plans for their banknotes.

Who will guard the RBI?

My new piece in deccan herald.

25 Years of European Central Bank

The ECB was established on 1 June 1998, to launch the euro and safeguard its value.

The Central bank kickstarted celebrations to mark its 25th anniversary.

The distinction between Keynesians and Monetarists is obsolete

Coen Teulings in this voxeu article:

Last week Robert Lucas passed away. His work changed macroeconomics forever. The idea of rational expectations has permeated macroeconomic models of all walks, at the University of Chicago as well as MIT – the cradles of Monetarism and New Keynesianism, respectively. This column argues that the distinction between Keynesianism and Monetarism is obsolete for understanding the current macro debate since both schools rely on Walrasian economics. A more useful distinction is between Neoclassicals (embracing both Keynesians and Monetarists) and Neo-Austrians. This distinction allows for an alternative view of the role of public debt in the economy.

Commencement of the e-HK Dollar Pilot Programme

Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, in this speech:

Central bank digital currency, or CBDC, is one of the hottest topics in the central banking community today. Over a hundred central banks are studying it and a few dozens of them are working on various types of pilot trials.

The HKMA has been researching and piloting on CBDC since 2017. Apart from the exciting work that we are doing with our three partner central banks on the application of wholesale CBDC under Project mBridge, the HKMA has also been exploring the prospect of issuing retail CBDC, or e-HKD, in Hong Kong.

We conducted two rounds of market consultation in the past two years. Overall, the respondents are supportive of the e-HKD initiative and believe that e-HKD has the potential to make payments faster and more efficient while supporting the digital economy.

However, we are cognizant of the fact that e-HKD is not and should not be merely a technology project. Its implementation would entail far-reaching implications on a wide range of issues relating to areas such as legal, regulatory, policy, financial stability, privacy, cybersecurity, and interaction with existing payment methods.

We also understand that e-HKD would be a critical and complex financial infrastructure project that may take years to complete. Therefore, we announced in September last year that we would adopt a three-rail approach to pave the way for possible implementation of e-HKD:

• • Rail 1 aims to lay the technology and legal foundations for supporting the implementation of e-HKD.
  • Rail 2 focuses on application research and pilots, and it runs in parallel with Rail 1.
  • Rail 3 is concerned about launching e-HKD, which will depend on the actual progress made under Rail 1 and Rail 2, as well as the pace of relevant market development.

This comprehensive three-rail approach will ensure that Hong Kong continues to play a leading role in the global financial landscape by getting ourselves ready as best as we can in terms of implementing retail CBDC.

 

The Macroeconomic Consequences of Exchange Rate Depreciations

Masao Fukui, Emi Nakamura & Jón Steinsson in the new NBER paper:

We study the consequences of “regime-induced” exchange rate depreciations by comparing outcomes for peggers versus floaters to the US dollar in response to a dollar depreciation. Pegger currencies depreciate relative to floater currencies and these depreciations are strongly expansionary. The boom is not associated with an increase in net exports, or a fall in nominal interest rates in the pegger countries. This suggests that expenditure switching and domestic monetary policy are not the main drivers of the boom. We develop a financially driven exchange rate (FDX) model in which multiple shocks originating in the financial sector drive exchange rates and households and firms can borrow in foreign currencies. Following a depreciation, UIP deviations lower the costs of borrowing from abroad and stimulate the economy, as in the data. The model is consistent with (unconditional) exchange rate disconnect and the Mussa facts, even though exchange rates have large effects on the economy.

A new model of a Czech Krona 5,000 banknote

As India withdraws its Rs 2000 note, Czech Republic has decided to replace the old CZK 5000 note with new CZK 5000 note:

This year, the Czech National Bank will issue a 5,000 CZK banknote dated 2023. The reason for putting the new model into circulation is the implementation of the necessary changes in the printing technology at the State Printing Office of Securities. The new 5,000 kroner will complement two existing models in circulation. These will remain in effect.

…

The Bank Board of the CNB decided to issue a new banknote model at its meeting on January 26, 2023. Differentiating the 5,000 kroner printed with the new technology from the original ones is necessary to monitor the circulation of banknotes by the central bank.

From the autumn of 2023, Czech banknotes of the following designs will be in circulation:

• • 100 CZK model 2018
  • 200 CZK model 2018
  • 500 CZK model 2009
  • 1,000 CZK model 2008
  • 2,000 CZK model 2007
  • 5,000 CZK model 1999, model 2009, model 2023.

The current exchange rate is 1 CZK = 3.75 INR.

Central Bank Corridor system: Need to Shift from abundant reserves to scarce reserves

Claudio Borio of BIS in this paper says central banks

Since the Great Financial Crisis, a growing number of central banks have adopted abundant reserves systems (“floors”) to set the interest rate. However, there are good grounds to return to scarce reserve systems (“corridors”).

First, the costs of floor systems take considerable time to appear, are likely to grow and tend to be less visible. They can be attributed to independent features of the environment which, in fact, are to a significant extent a consequence of the systems themselves.

Second, for much the same reasons, there is a risk of grossly overestimating the implementation difficulties of corridor systems, in particular the instability of the demand for reserves.

Third, there is no need to wait for the central bank balance sheet to shrink before moving in that direction: for a given size, the central bank can adjust the composition of its liabilities. Ultimately, the design of the implementation system should follow from a strategic view of the central bank’s balance sheet.

A useful guiding principle is that its size should be as small as possible, and its composition as riskless as possible, in a way that is compatible with the central bank fulfilling its mandate effectively. 

What happens when economists grow old? Does their creativity decline?

Daniel Hamermesh and Lea-Rachel Kosnik  in this voxeu article:

The arc of creative activity may rise quickly and then decline with age. This column asks whether this is true for economists and, if so, why. An analysis of all articles published in the ‘Top Five’ economics journals between 1969 and 2018 reveals that economists who had published less in the previous decade of their careers publish less in the current decade. Scholars were less likely to publish after retirement, but those who had published more top-level research in their third decade were less likely to be retired. Perhaps senior economists continue to produce and publish top-level research because it is fun and just might benefit society.

More than Words: Twitter Chatter and Financial Market Sentiment

Travis Adams, Andrea Ajello, Diego Silva and Francisco Vazquez-Grande in this Federal Reserve paper:

We build a new measure of credit and financial market sentiment using Natural Language Processing on Twitter data. We find that the Twitter Financial Sentiment Index (TFSI) correlates highly with corporate bond spreads and other price- and survey-based measures of financial conditions.

We document that overnight Twitter financial sentiment helps predict next day stock market returns.  Most notably, we show that the index contains information that helps forecast changes in the U.S. monetary policy stance: a deterioration in Twitter financial sentiment the day ahead of an FOMC statement release predicts the size of restrictive monetary policy shocks. Finally, we document that sentiment worsens in response to an unexpected tightening of monetary policy.

 

 

Impact of disinflation on income of workers and firms

Benoit Mojon, Gabriela Nodari and Stefano Siviero in this BIS Bulletin article:

• Insights into how the incomes of workers and firms absorb the disinflation burden in the euro area and the United States can be gained by decomposing changes in the GDP deflator into its underlying components.
• Nominal wage increases of 4–5% in the euro area and 3–4% in the United States this year and next year are compatible with bringing inflation within reach of 2% by end-2024, provided that import price growth slows and profit margins stabilise or slightly shrink.
• From a historical perspective, the 2023–24 disinflation path for prices and nominal wages is within the range of past disinflation episodes in both economies, although it remains uncertain how price and wage setters will react to the above-target inflation from 2021 onwards.

Open mouth operations: Monetary policy by threats and argument

Prof Lars Jonung of Lund University, in this interesting paper discusses Swedish monetary policy in the 1980s:

After World War II and prior to the financial deregulation of the 1980s, monetary policy in Sweden as well as in other western European countries rested chiefly on a system of far-reaching non-market-oriented controls of credit flows and interest rates. How was monetary policy conducted in such an environment of financial repression, where the central bank was unable to rely on traditional monetary policy instruments working on “free” and “unregulated” money and capital markets? This study provides an answer from the Swedish experience. It is based on a unique set of confidential minutes from about 160 monthly meetings between the Riksbank and the commercial banks during the years 1956-73.

The examination of the minutes demonstrates that monetary policy was framed in a process involving threats and arguments in a small and closed club involving the central bank and the chief executives of the commercial banks. According to a joke assigned to Erik Lundberg, “open market operations were replaced by open mouth operations” – albeit the dialogue was kept within the club. When Swedish financial markets were deregulated in the 1980s, the standard tools of monetary policy rapidly replaced the meetings between the central bank and the commercial banks.

RBI must adopt well-defined and time-bound guidelines on replacing soiled notes

My piece in moneycontrol on RBI’s decision to withdraw the Rs 2000 note.

Nigeria’s CBDC eNaira: One Year After

Jookyung Ree of IMF in this paper reviews one year of Nigeria’s CBDC – eNaira:

This paper reflects on the first year of the eNaira—the first CBDC in Africa. Despite the laudable undisrupted operation for the first full year, the CBDC project has not yet moved beyond the initial wave of limited adoption. Network effects suggest the initial low adoption spell will require a coordinated policy drive to break it. The eNaira’s potential in financial inclusion requires a strategy to set the right relationship with mobile money, given the former’s potential to either complement or substitute the latter. Cost savings from integrating CBDC—as a bridge vehicle—in the remittance process may also be substantial.

International Financial Centre Activity: shifting momentum towards Paris

François Villeroy de Galhau, Governor of the Bank of France in this speech talks about how financial activty is moving from London to Paris:

This first Bloomberg forum in Paris is more broadly a very timely and welcome initiative, which echoes financial players’ growing interest for the French capital. Paris has indeed kept asserting itself as a major financial centre over the last few years, and stands out as unique in the network of European financial centres.

I can only invite you to read the excellent Bloomberg article published on 18 April, which perfectly captures this multifaceted trend.¹ Its title, Banks betting on Paris say there is life after London, should bring definitive reassurance to other banks, and encourage them to make the same winning bet. So should its content, for instance: “since early 2018, nine of the biggest international banks have increased the assets booked at their eurozone entities more than sixfold to almost €1.7 trillion”; “if any city can make claim to being the bloc’s new pre-eminent hub, it’s Paris”, “many executives who spoke to Bloomberg said they expect headcount to keep growing from local hiring [in Paris]”.

Indeed, Paris is the only financial center to offer such a wide range of financial activities, from global asset management to insurance and banking. Beyond the large number of subsidiaries established in or relocated to Paris since Brexit – at least thirty banks, twenty asset managers, several market platforms for instance –, we should also consider the activities performed through branches in Paris, especially trading rooms and desks, which are sometimes far more significant than the subsidiaries to which they are legally bound. Contrary to other cities, which have attracted one or two kinds of financial services, Paris is the only one to have benefited from relocations on all segments of the financial industry.

More importantly still, these moves were not one-off events: the momentum has lastingly shifted from London to continental Europe. We observe a steady shift, which shows no sign of losing steam. Combine this with the strength of some key sectors of our economy; the result is that Paris now stands as the first stock market capitalisation in Europe, ahead of London.² And as the Bloomberg article points out, despite some political unrest earlier this year, Paris is true to its motto: fluctuat nec mergitur, it is rocked by the waves but does not sink.

Has the Phillips Curve Become Steeper?

Anil Ari, Daniel Garcia-Macia, Shruti Mishra in this IMF paper look at the changes in Phillips Curve due to ongoing changes in economy:

This paper analyzes whether structural changes in the aftermath of the pandemic have steepened the Phillips curves in advanced economies, reversing the flattening observed in recent decades and reducing the sacrifice ratio associated with disinflation. Particularly, analysis of granular price quote data from the UK indicates that increased digitalization may have raised price flexibility, while de-globalization may have made inflation more responsive to domestic economic conditions again.

Using sectoral data from 24 advanced economies in Europe, higher digitalization and lower trade intensity are shown to be associated with steeper Phillips curves. Post-pandemic Phillips curve estimates indicate some steepening in the UK, Spain, Italy and the euro area as a whole, but at magnitudes that are too small to explain the entire surge in inflation in 2021–22, suggesting an important role for outward shifts in the Phillips curve.

US Senate Committee examining the failures of Silicon Valley Bank and Signature Bank

The US Senate Committee on Banking, Housing and Urban Affairs has been holding multiple hearings to examine the recent banking crisis in US.

• Full Committee Hearing: Holding Executives Accountable After Recent Bank Failures
• Full Committee Hearing: Examining the Failures of Silicon Valley Bank and Signature Bank
• Subcommittee Hearing: Strengthening Accountability at the Federal Reserve: Lessons and Opportunities for Reform
• Full Committee Hearing: Oversight of Financial Regulators: Financial Stability, Supervision, and Consumer Protection in the Wake of Recent Bank Failures

These are useful references to understand the US banking crisis from multiple perspectives.

Mr. Gregory W. Becker, Former CEO of Silicon Valley Bank discusses his stock options in SVB crisis:

My expiring SVB stock options and compensation have been the subject of much speculation over the past few weeks. A large portion of my compensation, as well as other SVB executives’ compensation, was in the form of stock that vested over time, as is typical in the banking industry. I believed very strongly in SVB and was heavily invested in SVB’s stock. As a result, I held nearly five times the amount of shares required by the Board, and I planned to hold the vast majority of my SVB stock until after I retired.

During my tenure as CEO, I regularly sold the underlying shares of my stock options before they expired through 10b5-1 plans. I believed that using 10b5-1 plans to sell my stock options was the most ethical means to manage this part of my compensation, and I required the rest of our executive team to do the same.

My stock option exercise and sale in February 2023 followed a similar pattern. Once the trading window opened after SVB announced its financial results for the fourth quarter and fiscal year of 2022, I entered into a 10b5-1 trading plan on January 26, 2023, to exercise and sell options granted in 2016 that were set to expire on May 2, 2023. SVB’s legal team approved that plan on the basis that I was not in possession of any material non-public information at that time, which I also believed. The trade executed on February 27 pursuant to pre-determined stock price and date triggers—I did nothing to accelerate that trade and only learned that it had executed after the fact.

Similar to my stock sales, SVB’s incentive compensation was determined in the normal course of business. Bonuses for 2022 performance were paid to all U.S. bank eligible employees and were part of SVB’s regular, annual incentive compensation program. The payment date was set by our Human Resources department in advance and to my knowledge underwent the normal approval process. There was nothing irregular or accelerated about these payments, and at the time the payments were made I was focused on ensuring the survival of SVB.

 

Libor is dead. The question remains if any lessons have been learnt from its crisis

Last week, the RBI issued a press release  which informed that banks/FIs were expected to have developed the systems and processes to manage the complete transition away from Libor from July 1, 2023.

My piece on what led to this decision and what future has in store post Libor.

Social media Rumor Mills and Bank Runs

Federel Reserve Governor Bowman in this speech on Bank runs higlights role of social media and variious communication mediums available today:

The speed and size of deposit withdrawals were a feature, not a cause, of the recent U.S. bank failures. We live in a world where a wide array of communication tools—text messaging, group chats, and social media postings—have enabled expedited, if not always more accurate, dissemination of information.

The spread of information has always played an important role in bank confidence and bank runs. When information is more readily and quickly accessible and shared among shareholders, creditors, customers, and depositors, bank management needs to be attuned to how it communicates, especially when remediating identified weaknesses.

The failure of SVB illustrates this dynamic. Uninsured depositors were connected by a closely linked network of business relationships and contacts, and strong ties with venture capital fund investors. The flow of information among these depositors—and the mechanisms that pushed them to act collectively—seem apparent in retrospect, but the closely linked relationships among this group exacerbated the risks involved in SVB’s public communication of its remediation strategy.

But while the risk of uninsured depositors acting collectively was a significant vulnerability, communications from management caused this group to begin to withdraw their deposits on a massive scale and in a coordinated fashion. We know that there were many supervisory issues at SVB over several years. At the time the bank failed, it had been selling securities to improve liquidity and raising capital to address some of these fundamental weaknesses in its funding and liquidity. Simply the act of announcing that the bank’s management was taking steps to remediate these issues created panic—highlighting the risks they were confronting—and the panic spread quickly.

Social media has also played a role in fueling stock price volatility, which can lead to other risks to a bank. In October of last year, rumors circulated about Credit Suisse’s stock price conflating stock price with capital and liquidity strength. Despite Credit Suisse management’s efforts to intervene and calm markets, its stock experienced significant volatility, resulting in an increase in the spreads on the firm’s credit default swaps and a decrease in the value of its bonds. Credit Suisse had been dealing with significant issues for an extended period of time, but this incident highlighted how quickly investor sentiment can change in the age of social media.