Archive for the ‘Central Banks / Monetary Policy’ Category

Fed’s new Facebook page shows how badly public thinks of the the central bank…

September 6, 2016

Ryan McMaken of Mises points to this new Federal Reserve FB page. It was started on August 18 2016 amidst low fanfare.

There have been couple of posts trying to explain its objectives and functions to general public. What has followed those posts is some serious acerbic comments by one and all.

Read these couple of comments:


Monetary Policy Family reunion at Jackson Hole :-)

September 2, 2016

Prof Perry Mehrling just nails it with this post. He says how The Jackson Hole this year was just another of those reunion of monetary policy families. It is a very tightly held family which is really difficult to break into. They have been either managing or shaping monetary policy for almost all the countries in the world.

It was a reunion as only one paper actually was based on the theme of the conference. Rest were just usual rambles. It seems most had just assembled to say hi to each family member and get family updates :


There are serious limits to central banker’s machoism: Case from Bank of England history

September 1, 2016

Recently former Indian central bank chief spoke about how he was not the uber-confident alpha male liked by markets. He was obviously reflecting on the few such central bankers whose over the top statements continue to be given big likes by markets. The markets ironically love this central figure who with his loud statements and display of bravado like that of yesteryear (and even today) dictators.

The earlier dictators swung mood of the general public in their favor and today’s central bankers try and seing the mood of markets in their favor. Nothing else actually matters. What is actually just comical stuff is appreciated by one and all. But then as it is true with all dictators happens to central bankers as well. Seeing nothing much happening other than image management, people soon figure the folly of their beliefs and we have a crisis before things come back to normal.

This research by Prof Stefano Ugolini of University of Toulouse shows how Mario Draghi statement of “whatever it takes” was just that. He also draws lessons from Bank of England during Gold Standard phase before World War I. The Bank was expected to lead the world but faltered. This was minus all the bravado from BoE chief as we didn’t need central bankers then to show off. We had quite a few dictators doing the job:


How ECB monetary policy is leading to rise in demand for home safes in Germany..

August 31, 2016

Wow, this is some bit of development in Germany. Germans kept piling on savings in savings accounts till rates were zero. Now with negative rates, they say enough is enough. They are busy keeping cash in their homes and for this demand of homesafes are rising. I did not know Japan saw similar development just a while ago.


How US created Liberty Bond to finance World War I

August 31, 2016

Nice piece of economic history by Richard Sutch of Richmond Fed.


Whom do the Regional Fed boards serve?

August 30, 2016

It is interesting to see the rising debates over role of central banks in the society. The discussion is of course widely different from those going in India where asking such a question is akin to a crime.

Of all the discussions, it is those on Federal Reserve and its Regional arms that are by far the most. Federal Reserve established in 1913 amidst a lot of suspicions has come a full circle. It moved from a suspicious body to one of the most powerful bodies in the world and is now back on the suspicious block.

There are all kinds of issues being posed on Federal Reserve from policy impact to independence. Though, the one on its relevance in US economy is perhaps the most important. People have attacked Federal Reserve as an institution from all possible corners. Some say Fed only serves Wall street interests, others say it does not do enough for main street. Within Fed structure, the role of regional Feds is being questioned as their boards are elected by member banks.

This piece by Helen Fessenden and Gary Richardson gets to the Regional Fed debate from a wide historical lens:


Why gauging inflation is so hard: It is made up of several components..

August 26, 2016

Barry Ritholz tells us the obvious which alas is ignored. We treat inflation as one number which somehow could be controlled and managed by a central bank. However, inflation is made up of prices of several products and services. These prices in turn depend on the nature of industry of the product. If it is a monopoly, prices will remain sticky/unchanged and if more competitive, prices will change more often.

Inflation isn’t dead; it just might not be where you think it is.

To find significant price increases, you need only look in the right places. There are many goods and services with rising prices, as well as those without. Together, they tell a fascinating tale about the modern global economy. Understanding the forces driving prices higher — or not — is crucial to investors and policy makers alike.

Given that the Federal Reserve has been trying to generate inflation for much of the past decade, the significance of the distribution is both important and telling. Why some prices are rising at twice the median rate of general inflation is worth delving into. 

Look at the chart below: it show specific categories of goods and services versus the entire basket of goods and services that makes up the consumer price index.

Let’s look a little more deeply at each category.

There are multiple factors responsible for such diverse break-up. Text-books and medical care remain monopolies, food and beverages due to dollar depreciation, software/toys/wireless due to competition and so on.

In the end:

So what might we conclude from looking at the chart’s component parts? Maybe only that it’s a little easier to see why the Fed has been having a hard time getting inflation to rise. While some prices are indeed up, many powerful forces have driven other prices lower — and these are forces that the Fed can’t easily influence. Until there is a substantial and sustained increase in wages (or a huge drop in the dollar), inflation may very well remain below the Fed’s 2 percent target for a long time to come. 

Not a lesson just for just Fed but all other central banks as well..

Ramen noodles are replacing tobacco/cigarettes as preferred currency in prisons

August 26, 2016

Literature on various types of money points how tobacco/cigarettes are used as currency especially in war camps and prisons.

Cigarettes are now being replaced by Ramen noodles in prisons as the most precious commodity (HT: MR blog):


Lehman and Fed: Mystery deepens..

August 25, 2016

Prof. Laurence Ball’s paper has been making news. The US officials let Lehman go in really adverse  times. They have told us the i-bank could not be saved as it did not have any collateral. Though, few doubted this narrative.

In this shorter post, he explains that this narrative is wrong. Lehman could have been saved and it was just a political decision to let it go. They also underestimated the costs of the blowup:


Monetary policy in a low r-star world

August 19, 2016

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:


15 August is an important day for monetary economy scholars…

August 18, 2016

It was on 15 Aug 1971 that President Nixon closed the gold-dollar window.


Adding “realism and a degree of modesty” to monetary policy framework?

August 16, 2016

Reserve Bank of Australia chief Glenn Stevens in a speech says:


How Central banks moved from fiscal dominance to financial dominance..

August 16, 2016

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:


What played a bigger role in selecting the 12 Regional Feds? Economics or Politics?

August 12, 2016

Three posts in St Louis Fed Blog look at the question.

There was a Regional Bank Organisation Committee which tried to ensure the selection is as much on economics:


Does inflation targeting represent a vested interest capture by bond markets?

August 10, 2016

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:


Bollywood style robbery of RBI cash…

August 10, 2016

This was really interesting to read.

How a train was robbed which was carrying RBI cash from Salem to Chennai. Railways/Police etc are clueless on how this happened.


Lacking ethnic and gender diversity in Federal Reserve (what about India?)..

August 10, 2016

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!


The Warren Buffet economy: How Central Bank enabled financialization divided America

August 9, 2016

David Stockman points to this amazing figures on rise in wealth of a few and inequality for others:


Central bank communications with the media: becoming a prisoner of their own device..

August 3, 2016

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:


A surprise Bitcoin victory and not so surprise response from central banks on bitcoins..

August 3, 2016

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 postOrange 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…