Archive for the ‘Central Banks / Monetary Policy’ Category

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…

What came first – money or credit?

July 28, 2016

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…

How will digital currency shape the future of banking and monetary policy?

July 27, 2016

Marilyne Tolle of BoE discusses the several issues with respect to digital currency in Bank of England’s blog.

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:


Our disastrous monetary system: A new must-read book

July 25, 2016

I was just reading this interview of Nathan Bond, a budding entrepreneur. He wonders why Austrian School is not even mentioned in economics textbooks:


Why money multiplier remains low in US – the micrcoeconomics of banking..

July 20, 2016

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:


The Return of Ireland’s Housing Bubble

July 19, 2016

Oh no not again. Stefan Gerlach, Chief Economist at BSI Bank in Zurich says the bubble is back:

The country lacks a efficient housing rental market and these bubbles just keep coming back:


Gold standard in Daesh (Islamic State of Iraq and the Levant)

July 18, 2016

This news came somewhere in early July but forgot to blog about it:

Daesh have began recently the use of a gold dinar as their currency standard for commercial trade, denouncing the usage of paper currency printed by US’ ‘crusader Federal Reserve institution’.
According to Al-Masdar News, oil merchants in Deir Ez-Zor, Syria, were instructed to use the gold dinar if they were to conduct oil purchases from Daesh-held oil plants. The Daesh gold dinar is proclaimed to have a value that equals 190 US dollars.
Hmm… No other details are there on the mechanics of the currency regime. What is Daesh? It is Arabic name of dreaded organisation ISIS.
This blogpost argues how the idea shaped earlier in 2015:
From an historical perspective, the picture that Daesh paints about the gold standard is rosy and oversimplified. I must give them credit, however, for presenting a much better description of the prevailing balance of US dollars outside of US borders acting as the global reserve currency, and how these things are tied to rates of American borrowing that are unsustainable. Daesh is certainly not the only group making this argument- their hatred for the US Federal Reserve is most notably shared by libertarians in the USA, an interesting overlap the video never explicitly addresses. Daesh then offers its own solution- a return to real gold and silver coinage and not fiat notes- which it claims will bring down the American financial empire. Let’s look at the  history to understand the problems of gold coinage and see what Daesh offers, if anything, as solutions.
Interesting bit..

Ben Bernanke is one of the most dangerous persons walking the planet….

July 12, 2016

David Stockman has a hard hitting piece on central banking community with special brickbats for Ben Bernanke.


We should have constituted a Regional Monetary Policy Committee instead…

June 29, 2016

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.


Do the Experts Know Anything?

June 28, 2016

Justin Fox wonders why we value experts’ views so much given how wrong they have been all this while. The focus obviously is on economic experts:


How ECB has turned the central bank seignorage model upside down?

June 27, 2016

Of all the noise around central banks. this blog just likes the discussions around central bank balance sheets. Learning about central bank balance sheets is perhaps all there is to monetary policy. But again it is hardly emphasised enough.

Daniel Gros has a superb piece on how  negative rates have impacted ECB balance sheet. Things have turned upside down actually. Traditionally central banks issue liabilities at near zerocost and earn on its assets which is usually investment in government bonds. With negative rates, ECB earns on its liabilities and distributes its earnings across the Eurozone via the national central banks. ECB has become more like an investment bank which uses leverage to earn interest on its assets.


Why Fed (and other central banks) have a diversity problem?

June 24, 2016

Mark Calabaria has a superb post. He points how Federal Reserve staff comes mainly from economics programs of selected universities in US:


When appointment processes of Indian cricket coach and central bank chief gets mixed up..

June 24, 2016

The brilliant Manasi Phadke has another brilliant post.

BCCI. The hunt for the next Indian coach is on. A special panel will be interviewing potential candidates telephonically.

It is interview day, not only at the BCCI, but also at the RBI. The PMO has asked some economists to telephonically outline their plans to a special panel. As fate would have it, the lines overlap.

What follows is a laugh riot. How Manasi keeps coming with these gems. Kudos..

A common central bank and finocracy tool to make one obey their orders : Fear Mongering

June 21, 2016

We were told all hells will break lose on Indian markets last Saturday. But nothing of this sort happened. It does not require a lot of economics education to realise that most investors do not have any other place to dump their money but India. But fears have to be raised as that is how central banks and its team of finocrats make us believe.

Tho Bishop has a piece on how central banks have been using the tool of fear mongering to push things their way: (more…)

Saving democracies from central bankers and finocracies…

June 20, 2016

Adam Smith in his Wealth of Nations tome said this on monopolies (pg 450):

This monopoly has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.

In today’s world, Prof Smith could just be replacing monopoly with central bank and monopolist with central bankers. He would be shocked to see what has been going on in the world of central banking. He could not write on this organisation as it had hardly come into the kind of form we know today. Otherwise he would have warned about it earlier  as well.


If Pate’s Grammar School sets UK Monetary Policy…

June 15, 2016

Each year, the Bank of England organises the Target 2.0 competition for A-level economics students.  This year  Pate’s Grammar School won the competition.

In this guest post on Bank’s blog  ( the winning team explains what they would do if they were at the MPC:

We decided as a team to hold Bank Rate at 0.5% and to maintain asset purchases at £375bn. In our view it is not yet time to tighten monetary policy. Though we believe the output gap is small, we feel the economy is yet to reach escape velocity and the Wicksellian natural rate is likely to stay low in the years ahead. We are more optimistic on potential supply than other economists and we think oil prices will stay low.

Escape velocity? Oh no! A level students should be using more economic terms so to speak.

Read the whole thing. It just reads like any other MPC statement. Not sure how should one react reading this.  Perhaps, the MPC can be replaced with these young guys. Based on their kind of analysis, one wonders whether you need the kind of army employed by Bank of England.

How are financial innovations regulated in India?

May 31, 2016

Very nice speech by R Gandhi of Indian Central Bank. It is a pity that such speeches are barely covered in media. All we care for is newsbytes and news that hardly matters other than create hype.

The speech is given in the context of recent developments in P2P lending space where India has decided to regulate the space. After looking at various ideas around financial regulation (which makes for a great read as well), the speaker talks about Indian approach:


Italy – historical heritage and future prospects

May 31, 2016

Nice speech by  Mr Salvatore Rossi, Senior Deputy Governor of the Bank of Italy.

He gives a brief outline of evolution of Italy as a nation and its contribution to world economy:


Should Cryptocurrencies be included in the forex reserves of Central Banks?

May 30, 2016

Interesting paper by Profs. Winston Moore and Jeremy Stephen of University of the West Indies (Cave Hill). They try and figure whether it made sense for Central Bank of Barbados to hold cryptocurrencies like bitcoin in their forex reserves. What they are trying to figure is would addition of these currencies lead to any benefits like lower volatility etc?

They say the impact would not have been much:


Greece in a monetary union: Lessons from 100 years of exchange rate experience, 1841-1939

May 17, 2016

Greece’s troubles on economic front are hardly anything new. They are as old as it gets.

Matthias Morys sums up the experiences of 100 years since 1841-1939.