This short paper by John Williams of San Francisco Fed is doing rounds.
Williams says much of the developed world is stuck in a low r star or the neutral rate:
Daniela Gabor of University of the West of England has a nice paper on political economy of repo markets.
The summary of the paper is here. She explains how we move from one crisis to another in macro/monetary policy. Emergence of Repo was seen as an end to fiscal dominance. But it triggered a new problem of financial dominance:
This is a strong piece by Prof Pulapre Balaksrishnan who once worked at Indian central bank. Now he teaches at Ashoka University.
He says inflation targeting has hardly served the common man. It is more in the interest of the bond market which likes such frameworks. RBI has been captured by the same vested interests it has avoided all this while:
This blog had earlier argued that firstly having a monetary policy committee hardly changes anything in central banking. So we in India should not be much excited about the same. MPC is one of those several pre-crisis fads which like all fads has been found wanting. Eventually central banks do what the boss says and it remains at that. MPC just makes the whole process fancier with few priests trying to figure the mantra and then eventually agreeing to what the head priest says. We keep saying results matter but have failed to see that MPCs have hardly changed anything much other than becoming an additional place for recruitment for economists.
Second, as we will copy whatever happens elsewhere so MPC has to be floated. So what should be done? Well atleast try and make it more regional representative. Instead of just having MPC members with similar education backgrounds and based in US/Delhi/Mumbai, we should get members which represent different regions. This will atleast get diverse views from different parts of the country. Monetary conditions differ widely across and having regular research, feedback and action is essential. But it is all missing. We talk so much of Federalism but do we have any idea about what is happening at regional level/state level economies? Having all states on board is obviously difficult but experts from different regions can be surely done.
However, it is unlikely this will happen. Our obsession is only to talk about economics which no one understands especially when it comes to monetary economics. One person reacted to the post saying won’t this politicise matters. Well, isn’t it highly politicised already? We will only learn more about different regions which is far richer than the usual noise about growth-inflation trade-off.
Given this, came across this post in Brookings which goes even further. It says regional Feds are not ethnically and gender diverse!
David Stockman points to this amazing figures on rise in wealth of a few and inequality for others:
Came across this really interesting press release from Reserve Bank of New Zealand.
They used to have this media and financial analyst briefing just before the policy outcome release. Guess what it is called – Pre-announcement embargoed lock-ups!! Phew..
As one would expect, there was a leak in March policy leading to stoppage of the practice. The central bank then reviewed the process and decided to stick to its stand of no such meeting:
Interesting bit of info on bitcoins by Prof Lawrence White:
On July 25, Miami-Dade Florida circuit judge Teresa Pooler dismissed money-laundering charges against Michell Espinoza, a local bitcoin seller. The decision is a welcome pause on the road to financial serfdom. It is a small setback for authorities who want to fight crime (victimless or otherwise) by criminalizing and tracking the “laundering” of the proceeds, and who unreasonably want to do the tracking by eliminating citizens’ financial privacy, that is, by unrestricted tracking of their subjects’ financial accounts and activities. The US Treasury’s Financial Crimes Enforcement Network (FinCEN) is today the headquarters of such efforts.
He goes on to show how banking functions in US requiring one to submit all kinds of information to the state. Bitcoins helps escape all this:
When most of these rules were enacted, before 2009, there were basically only three convenient (non-barter) conduits for making a large-value payment. If Smith wanted to transfer $10,000 to Jones, he could do so in person using cash, which would typically involve a large withdrawal followed by a large deposit, triggering CTRs. He could make the transfer remotely using deposit transfer through the banking system, triggering CTRs or SARs if suspicious. Or he could use a service like Western Union or Moneygram, again potentially triggering SARs. For the time being, the authorities had the field pretty well covered.
Now come Bitcoin and other cryptocurrencies. Cash is of course still a face-to-face option. But today if Smith wants to transfer $10,000 remotely to Jones, he need not go to a bank or Western Union office. He can accomplish the task by (a) purchasing $10,000 in Bitcoin, (b) transferring the BTC online to Jones, and (c) letting Jones sell them for dollars (or not). The authorities would of course like to plug this “loophole.” But the internet, unlike the interbank clearing system, is not a limited-access conduit whose users can be commandeered to track and report on its traffic. No financial institution is involved in a peer-to-peer bitcoin transfer. Granted, Smith will have a hard time purchasing $10,000 worth of Bitcoins without using a bank deposit transfer to pay for them, which pings the authorities, but in principle he could quietly buy them in person with cash.
Hmm. Interesting bit.
In another post, Orange Peel Investments says how central banks are missing the point on bitcoins by trying to get into the space. The whole point of bitcoins is to keep the state away from such ideas. But trust central banks to do this as all monopolists are scared of losing their powers:
An article in the Wall Street Journal last week mentioned that Central governments could potentially try and incorporate blockchain as one of their methods for distributing currency. Citing the good things that have come with bitcoin, including decentralization and easy person to person transfers, Central Banks are apparently now considering using blockchain for quantitative easing. The Wall Street Journal stated,
When it comes to bitcoin and digital currencies, central banks might be considering the adage: “If you can’t beat them, join them.”
In a research paper published on Monday, economists at the Bank of England advocated that central banks issue their own kind of digital currency. Using the U.S. as a case study, they argued it could give a permanent boost to the economy of around 3%, as well as providing policy makers with more effective tools to tame financial booms and busts.
BOE economists John Barrdear and Michael Kumhof write that “reductions in real interest rates, distortionary taxes, and monetary transaction costs” would boost the economy.
Much like physical cash, digital currencies like bitcoin allow direct payment from one person to another, but they also have all the advantages of bank transfers, because large payments can be made instantaneously across the globe.
We think this idea is ridiculous and it goes to show how clueless central banks are.
Talk about missing the point. Bitcoin is a great idea and it is going to be around for a while simply because it is decentralized. The point is that its users don’t want Central Banks involved with it at all. They want a currency that they can move amongst themselves without being intervened by the government.
It’s funny. It is almost as if the Federal Reserve decided that they can’t physically print money fast enough and that making it digital would be an easier way to simply gush out cash to stimulate their respective economies quicker. The central banks are missing the point that digital currency is not there to be their tool to continue to ruin the economy.
It was created because it has a finite supply and doesn’t involve anyone (P2P) while at the same time having checks and balances that involve everyone (the blockchain). It’s the Wikipedia of currency. There is nowhere in that equation for the government to fit in. It was created for the purposes of transparency. Nobody that is interested in digital currency today is going to buy into the concept of a government issued digital currency because it is going to face the same issues as convectional currency.
This point is basically lost on most people. And guess what, we already have an article on Indian central bank issuing its own bharatcoin based on bitcoin technology. Just copy what others do…
One standard narrative on evolution of money is this. Earlier people would just barter to exchange their surplus with something they needed. Over a period of time, they realised this was complicated and through this evolved money which allowed people to quote all goods in the money. This eased lives considerably as one could now just buy and sell anything without any barter. This is called as Mengerian account of money based on Carl Menger’s work.
However, this thinking has been disputed by scholars recently. They say Barter was non-existent in most societies. Infact the credit instruments came much before money. These credit instruments circulated as IOUs enabling people to buy and sell. This is called as Innesian view based on A. Mitchell Innes.
Needless to say, there was a war of words between the two camps. Much of these war of words is fascinating as they get to core of so called monetary economics.
Michael V. Szpindor Watson of Mises Institute says there is no need to fight. One could merge the two views by looking at intertemporal barter:
Barter is ordinarily understood as spot transactions, where two people trade two different goods at some instant and not over time. The same occurs in an economy with a common medium of exchange, except that one of the goods (money) is usually used for transactions and purchases. Credit in an economy without a common medium of exchange is simply inter-temporal barter. It is no different than credit where a common medium of exchange exists, except the prevalence of what the credit is redeemable in.
Even when there is no common medium of exchange it is reasonable to expect that people will still want to transact over time and not always in the given moment. Within communities of trust or where there is a method of enforcing contracts we can expect that Casimir promises Anastasia a part of his future grain harvest for milk that her cow just produced. Anastasia has credited milk to Casimir for a claim on his future grain harvest — a credit market has been created where Anastasia and Casimir have engaged in inter-temporal barter.
Inter-temporal barter doesn’t have claims on a common medium, but to one of a variety of goods (and maybe even services). As Innes et al. suggest, tallies or other means of recording debts and credits could have been invented as primitive economies and populations grew. Such means of recording credits and debts would bring down the transaction costs of inter-temporal barter. Conceivably such instruments of recording credits and debts could have been negotiable and exchanged for other goods.
Imagine that Anastasia has a promissory note (IOU) for a portion of Casimir’s grain harvest, but prefers apples now to a future claim on Casimir’s grain. Thaddeus prefers a future claim on grain than the apples hanging on his trees. So Anastasia offers Thaddeus the promissory note in exchange for apples. If not for the promissory note Anastasia, Casimir, and Thaddeus would have all had to meet to agree to such a transaction. Without inter-temporal barter in the form of a promissory note, Anastasia and Casimir would have never made the transaction and Anastasia wouldn’t have had the promissory note to use to barter for other goods.
The rejection of Menger based on the fact that credit existed before money is invalid. However, what Innes and Graeber argue is not entirely irrelevant. The story we tell to students and ourselves is oversimplified. We should rewrite our textbook accounts to include the possibility of credit preceding a common medium of exchange and call it inter-temporal barter.
All this is just so fascinating. These intertemporal IOUs in turn are nothing but forwards. Then one has to think how were these financial instruments priced and so on.
It is a pity that none of this is taught even at a PhD level. Monetary economics has just been reduced to thinking about targets and rules/discretion which are just around a few equations. One hardly gets a sense of how all these things have evolved. Atleast students should be made aware of these issues/discussions.
If one uses these ideas to figure monetary history of India, one does read about both barter and IOUs existing. What came first is a big puzzle to figure as well.
It is interesting to see how monetary wisdom is being challenged. One another debate was what comes first deposits or credit? So far, we were taught that deposits lead to creation of credit and then the whole thing multiplies to become money supply. Now they say all this is rubbish, Banks always create credit first and then comes deposits. This changes the entire thinking on money multiplier and so on.
Plenty to think and ponder upon than the usual question of how much the inflation target should be…
There is little doubt that these currencies as they gain ground could pull the carpet under the central banks monopolist chair. Central bankers who are habitual to tell the politicians and businesses about allowing disruptive innovations are going to get a bit on their game as well. More than anything else, it will be interesting whether central banks try and preserve their monopolies or let it go.
Tolle says digitial currencies will create problems for both banks and central banks. One key reason is the payment bit is going to get divorced from the deposits:
Julien Noizet of Spontaneous Finance has a piece on he topic.
The money multiplier has been really low in US for sometime now. Most imagined that with the Fed pumping so much money multiplier will jump significantly and we would have hyperinflation etc. But none of this happened. Why? In most such monetary thinking, we just ignore the functioning of the banking sector. Just like all sectors, banking too has its microeconomics and rigidities:
This news came somewhere in early July but forgot to blog about it:
I don’t know but on monetary policy front, we tend to pick either out of date ideas or rejected ones (not the same). The whole idea is to just copy some idea happening elsewhere without giving it much thought. It was fine if inflation targeting was adopted before 2008 but we have adopted it now when most inflation targeting countries are just following it superficially at best.
Even when we have adopted inflation targeting, we continue to target exchange rate markets. Exchange rates is one of the first things central banks give up on targeting inflation. Infact it was troubles with exchange rate monitoring which led central banks to look for alternatives which started with money supply and now interest rates. Read any central bank which (used to) practice IT and they tell you the same – we did away with exchange rate management.
But post adopting so called modern/ avant garde IT framework, our intervention in exchange rates have also increased. This can obviously be seen with rising foreign exchange reserves which are shown as signs of strength. If we were actually serious about inflation targeting, these numbers should have disappeared from media reporting.
Some might say well we are being pragmatic too and need to defend the exchange rate from global volatility. Well, this is actually the reason we did not adopt IT at the first place despite several committees telling us so. Now we have adopted IT but continue to look at all other things like the older days. On superficial matters, we actually are in line with the other IT central bankers!
Moving further, now we have just notified setting up a Monetary Policy Committee. The thinking is that it will take the onus from one person to a couple of persons.This literature too had become a vogue following Blinder’s works on the same. This blog too covered this strand of research.
However, the time is ripe to look at whether MPCs have actually delivered? We have seen that in central banks having MPCs things have hardly changed much. All we have is a few dissents here and there with the view of the head prevailing at all times. I am still not aware of any instance whether the outcome was against the interest of the head of the central bank. Yes it could lead to some debate and disagreements with the chief but does not mean much. This must be happening even without MPC as we see in current arrangement of TAC as well. One has serious doubts whether it has delivered other than getting too many cooks at the table to spoil the broth.