On the 2% interest minimum, I presume you are talking about 2% real interest. I though it was thought to be three percent. Quite obviously people have money in savings accounts with negative interest rates or are in risk assets that, when adjusted for risk, probably will earn many of them just as low returns when the speculative bubble bursts.
The problem I see is that the Fed got pulled into talking on additional roles because Congress and the Exec branch refuse and refused to use its fiscal policy tools at all. Bernacke decided QE was to prevent a 30’s style collapse but he created a monster in that companies were now focused on earning returns through financial engineering not operations. It created an country addicted to low rates.
By reducing the Fed’s role, I don’t see who is going to be the guardian against inflation because politicians are wont to juice the economy so much that it busts. The core problem is that the Fed has too few tools, all which are clumsy and indirect. I fail to see how without some control over bank lending, we would not just lurch from boom to bust to boom. Bankers are human, and the AI they are going to use is based on human experience, so there is no chance of the price of money creating a equilibrium that would lead to a stable economy. What is worse, given the large amount of wealth and income inequality it’s quite clear the powerful will enact policies that protect their capital, not particularly caring about those who earn income.
Therefore, I think just taking monetary policy and setting to the side, will never occur because it is about power and control. The central banks mess up because they never could guess the magnitude of the impact of their action and they fail to understand the extent of the collateral damage. Extending QE after the first tranche was a huge mistake that has created an enormous bubble. It will burst and the FED will step up to try to save the world, which is of the reason they exist. It would be nice, if they weren’t both the cause and the solution.
Thanks for your response. There is a need to insulate a central bank cryptocurrency from monetary policy. What we have seen since 2008, is extreme monetary policy is destructive.
The story the fiscal branch refused to step in and use the tools at its disposal in 2008 is completely untrue. Recall they passed a $750 billion bill (TARP). The reason they didn't do more is Bernanke claimed the Fed didn't need more help.
The Fed aggressively sought out more roles after the acute phase of the Great Financial Crisis began. This was a defensive move. Anyone who read the Financial Crisis Inquiry Commission report would have seen the Fed was not fit for the responsibilities it had before the start of the Crisis. So of course, the result would have been to break-up the Fed. Central bank digital currencies give us a chance to finally accomplish this.
We agree to disagree. TARP barely got passed and the Obama stimulus was downsized because the Republicans were screaming double digit inflation and proposing austerity. The politics were very hot, and remember 2010 saw the advent of the TEA party Republicans. After the initial spending there was not a chance in hell that any fiscal measures would follow through.
The best one could argue was that the spending bill prevented the economy from getting worse and saved some jobs, but the money did not flow quickly or evenly. Instead of more QE, it would have been far better to have a stream of fiscal measures focused on fixing some of the structural problems in the US, like poor infrastructure and the need for ramped up education and training. But No, the 10’s were the decade of McConnell saying NO to everything but Trump’s tax cut and the Republican’s trying to abolish Obamacare.
The flaw in the picture is the Fed continually provided more liquidity, but that liquidity did not go into real investment or souped up R&D, rather it went straight into financial assets and luxury real estate. It would have been a great time to build affordable housing, but the “free” market would have none of that. My complaint with the Fed is that it should have recognized after the first round of QE, that they were going to create a financial asset bubble. Moreover, one did not need eyes in the back of ones head to see that use of leverage was skyrocketing, and the debt was not being used to back real investment, just financial engineering. Of course, the Fed wanted decent financial markets so the banks could sell shares to recapitalize but beyond that it has been a malevolent force.
I believe that fiscal policy is better, because it does have to be argued out in the political arena. It is inefficient, often because certain groups play the game better. But very clearly the checks sent out during the Covid recession were more effective than the QE pumped In economy. It is about getting money into the hands of people and letting them make decisions. QE, put money into the hands of the wealthy, had no multiplier effect, and fueled the financial and housing markets higher. Granted, sending out checks (increased income support above Unemployment benefits) was not even mentioned in fighting the recession. Frankly, I think Obama was in over his head, he was conservative so he was sold a line of goods by Bernacke and Larry Summers. When bold action was needed, he couldn’t punch his way out of a paper bag. So much of the rot wasn’t evident to people like myself who live in “bubble world” and plenty in that bubble thought, as Hillary Clinton did, everything was great. It was amazing she did not lose by more, honestly - she, like Obama, was so out of touch - saying $250k was a good middle income salary. That and the deplorable comment just almost pushed me over the edge, tho I voted for her holding my nose given the alternative. Clear signs of what QE and fiscal policy preferrred to ignore were the sign and tenacity of the opioid epidemic and the huge sucking sound of jobs leaving the country. My feeling is that lower prices for imported goods is great unless you don’t have a job and even those prices are too high. We live in a country where there is massive food insecurity and with global warming is only going to get worse. Displaced population are going to continue to move north, raising political havoc. Our coastline are going to be submerged. More rounds of QE are not going to do anything about any of these.
The lack of political will and leadership is the heart of the problem, the political class has been bought by the wealthy. I still think the Fed thought it was the only part of gov’t that could stave off disaster.
I agree with you that a slimmed down Fed is necessary, but not if those activities are going to be privatized. You know full well that politicians or flash mobs would never be able to avoid the temptations of just sending the economy into huge booms, resulting in busts that devastate the general population. That was the 1929’s story, plenty of the wealthy did fine throughout the period, hardly noticed there was a economic collapse at all. They sat back silently until they could get revenge through Reaganomics. And the good times have rolled.
I know I am biased as my econ courses in college focused on Keynesian economics, not much on monetary theory- where it did, it rejected Milton Friedman’s idea about the primacy of money supply and velocity of money. In business school, they tried to push supply side economics as the savior but I never bought that.
So we agree to disagree, but I still feel the Fed was given the assignment to save the world, and it’s thinking was very much influenced by Japan’s deflationary economy post their financial and real estate crash. So, the Fed just repeated a ton of their bad mistakes. But I argue if one county have had a coordinated mix of monetary and fiscal policies that did not distort economic decisions so much, we would be in a better place today.
I think what I am saying is that you read as if the Fed was the sole guilty party in this mess. I see they had plenty of help. I don’t see where the intellectual energy is going to come from to change what it has responsibility for not how it operates. No one is going to propose a rewriting of the 1914 Federal Reserve Act and Wall St. would fight like hell any increase in real oversight by any agency, current or new.
So we disagree why 2009 led to the huge mess we are in today. I think we are on the same page about the quite dismal outlook for unwinding the mess created. I have no insight as to what the other side should look like and the people who are going to decide on the new rules.
As for crypto, it has always been clear to me that the central banks were going to shut it down as it reduces the efficacy of one of their policy tools to impact the economy - setting money supply. I think letting the free market set monetary policy would be far worse that the failures of the central banks. Yes, privacy is the problem, but in China and the US, privacy is not yet a barn burning issue. Cutting down on money laundering, tax evasion. and other criminal activities is because they hide revenues from the tax authority. The devil is in the details. Perhaps the gov’t will rule that crypto cannot be exchanged for dollars, and then see the panic as holders try to convert crypto currencies into other assets. Where would be the buyers. I think what is being lost in the discussion is that the blockchain technology is a superior way for transactions to be executed.
Oh, so many interesting things to talk about. Rather than beat the past to death, take what we can learn from it and remember most people are far too confused and/or have their own agenda!
All three models assume it is architected, though in fact the market decides. So the banks may think that the indirect model keeps them alive, though protocols such as Compound are an order of magnitude higher in capital efficiency and with an order of magnitude lower running costs. So if you want a loan, you'll get a better rate in crypto than you will from those banks in the indirect model.
I think the analysis is incomplete anyway... Smart contracts can and will replace the banks or payment providers in all of the models above. It appears to assume a CBDC stablecoin... Though stablecoins don't make much sense in the first place.
More likely I think the technological revolution that programmable money provides; namely that the capital is kept in the protocol layer rather than the application layer as at present. Think twitter, facebook etc... Built on the internet and they add the bulk of the value. Dapps built on Ethereum on the other hand provide value to Ethereum.
More broadly though is a simple choice between Catholic style centralisation as pursued by China, or Protestant style decentralisation. The latter has always won and by a considerable margin, hence dreams of centralised control in a CBDC are a pipedream I think. Whilst businesses could and maybe should be forced to use one, no private citizen should allow their finances to be an open book. One could even argue it is the accountancy firms rather than the banks which are corrupt.
All that said the crypto industry isn't doing itself any favours. Either too naive or stupid to play the game, they don't lack resources they merely lack the nouse to use them in a political or wider social way. They act like a cottage industry, and are therefore treated as such.
Don't forget that a CBDC legitimises other crypto currencies. Or would bitcoin not be exchangeable for Britcoin? You can't really stop it. So the way I see it playing out... The banks are currenly trying to stop capital flowing into crypto, unsuccessfully of course. Too late they will realise the only way to attract deposits is to provide yield, and the only place they can get yield is the crypto markets by offering crypto savings accounts. Frankly the next big crash ( soon? ) might spell the beginning of the end anyway. Tax avoidance has already put the lid on the coffin.
And the wondrous politicians will realise they can get more tax from the little people who have access to highly efficient banking and lending than they do currently from the banks.
Well, it's either that or China, social credit and dystopian bastardry. Sorry bit longer than I expected.
Thanks for the reply. The days for non-central bank digital currencies are rapidly coming to an end. In the US, with the possible exception of Bitcoin, these currencies are about to be regulated as securities and the exchanges they trade on as securities exchanges. At the same time, the rollout of central bank digital currencies will be accompanied by a ban on financial institutions converting non-central bank digital currencies to a currency issued by a central bank. Effectively ending the future of these cryptocurrencies.
As for the underlying technology, there are a few very good uses. For example, tracking property ownership or shipping containers. So yes, I do see a role for smart contracts, but these contracts will ultimately reference a real object or currency issued by a central bank.
Finally, everyone is better off with a payment system that is not hostage to the banks. As I indicated, I expect a number of third party administrators for the central bank digital currencies. These administrators will compete for business. As a result, you are likely to see the adoption of much more efficient protocols.
On the 2% interest minimum, I presume you are talking about 2% real interest. I though it was thought to be three percent. Quite obviously people have money in savings accounts with negative interest rates or are in risk assets that, when adjusted for risk, probably will earn many of them just as low returns when the speculative bubble bursts.
The problem I see is that the Fed got pulled into talking on additional roles because Congress and the Exec branch refuse and refused to use its fiscal policy tools at all. Bernacke decided QE was to prevent a 30’s style collapse but he created a monster in that companies were now focused on earning returns through financial engineering not operations. It created an country addicted to low rates.
By reducing the Fed’s role, I don’t see who is going to be the guardian against inflation because politicians are wont to juice the economy so much that it busts. The core problem is that the Fed has too few tools, all which are clumsy and indirect. I fail to see how without some control over bank lending, we would not just lurch from boom to bust to boom. Bankers are human, and the AI they are going to use is based on human experience, so there is no chance of the price of money creating a equilibrium that would lead to a stable economy. What is worse, given the large amount of wealth and income inequality it’s quite clear the powerful will enact policies that protect their capital, not particularly caring about those who earn income.
Therefore, I think just taking monetary policy and setting to the side, will never occur because it is about power and control. The central banks mess up because they never could guess the magnitude of the impact of their action and they fail to understand the extent of the collateral damage. Extending QE after the first tranche was a huge mistake that has created an enormous bubble. It will burst and the FED will step up to try to save the world, which is of the reason they exist. It would be nice, if they weren’t both the cause and the solution.
Thanks for your response. There is a need to insulate a central bank cryptocurrency from monetary policy. What we have seen since 2008, is extreme monetary policy is destructive.
The story the fiscal branch refused to step in and use the tools at its disposal in 2008 is completely untrue. Recall they passed a $750 billion bill (TARP). The reason they didn't do more is Bernanke claimed the Fed didn't need more help.
The Fed aggressively sought out more roles after the acute phase of the Great Financial Crisis began. This was a defensive move. Anyone who read the Financial Crisis Inquiry Commission report would have seen the Fed was not fit for the responsibilities it had before the start of the Crisis. So of course, the result would have been to break-up the Fed. Central bank digital currencies give us a chance to finally accomplish this.
We agree to disagree. TARP barely got passed and the Obama stimulus was downsized because the Republicans were screaming double digit inflation and proposing austerity. The politics were very hot, and remember 2010 saw the advent of the TEA party Republicans. After the initial spending there was not a chance in hell that any fiscal measures would follow through.
The best one could argue was that the spending bill prevented the economy from getting worse and saved some jobs, but the money did not flow quickly or evenly. Instead of more QE, it would have been far better to have a stream of fiscal measures focused on fixing some of the structural problems in the US, like poor infrastructure and the need for ramped up education and training. But No, the 10’s were the decade of McConnell saying NO to everything but Trump’s tax cut and the Republican’s trying to abolish Obamacare.
The flaw in the picture is the Fed continually provided more liquidity, but that liquidity did not go into real investment or souped up R&D, rather it went straight into financial assets and luxury real estate. It would have been a great time to build affordable housing, but the “free” market would have none of that. My complaint with the Fed is that it should have recognized after the first round of QE, that they were going to create a financial asset bubble. Moreover, one did not need eyes in the back of ones head to see that use of leverage was skyrocketing, and the debt was not being used to back real investment, just financial engineering. Of course, the Fed wanted decent financial markets so the banks could sell shares to recapitalize but beyond that it has been a malevolent force.
I believe that fiscal policy is better, because it does have to be argued out in the political arena. It is inefficient, often because certain groups play the game better. But very clearly the checks sent out during the Covid recession were more effective than the QE pumped In economy. It is about getting money into the hands of people and letting them make decisions. QE, put money into the hands of the wealthy, had no multiplier effect, and fueled the financial and housing markets higher. Granted, sending out checks (increased income support above Unemployment benefits) was not even mentioned in fighting the recession. Frankly, I think Obama was in over his head, he was conservative so he was sold a line of goods by Bernacke and Larry Summers. When bold action was needed, he couldn’t punch his way out of a paper bag. So much of the rot wasn’t evident to people like myself who live in “bubble world” and plenty in that bubble thought, as Hillary Clinton did, everything was great. It was amazing she did not lose by more, honestly - she, like Obama, was so out of touch - saying $250k was a good middle income salary. That and the deplorable comment just almost pushed me over the edge, tho I voted for her holding my nose given the alternative. Clear signs of what QE and fiscal policy preferrred to ignore were the sign and tenacity of the opioid epidemic and the huge sucking sound of jobs leaving the country. My feeling is that lower prices for imported goods is great unless you don’t have a job and even those prices are too high. We live in a country where there is massive food insecurity and with global warming is only going to get worse. Displaced population are going to continue to move north, raising political havoc. Our coastline are going to be submerged. More rounds of QE are not going to do anything about any of these.
The lack of political will and leadership is the heart of the problem, the political class has been bought by the wealthy. I still think the Fed thought it was the only part of gov’t that could stave off disaster.
I agree with you that a slimmed down Fed is necessary, but not if those activities are going to be privatized. You know full well that politicians or flash mobs would never be able to avoid the temptations of just sending the economy into huge booms, resulting in busts that devastate the general population. That was the 1929’s story, plenty of the wealthy did fine throughout the period, hardly noticed there was a economic collapse at all. They sat back silently until they could get revenge through Reaganomics. And the good times have rolled.
I know I am biased as my econ courses in college focused on Keynesian economics, not much on monetary theory- where it did, it rejected Milton Friedman’s idea about the primacy of money supply and velocity of money. In business school, they tried to push supply side economics as the savior but I never bought that.
So we agree to disagree, but I still feel the Fed was given the assignment to save the world, and it’s thinking was very much influenced by Japan’s deflationary economy post their financial and real estate crash. So, the Fed just repeated a ton of their bad mistakes. But I argue if one county have had a coordinated mix of monetary and fiscal policies that did not distort economic decisions so much, we would be in a better place today.
I think what I am saying is that you read as if the Fed was the sole guilty party in this mess. I see they had plenty of help. I don’t see where the intellectual energy is going to come from to change what it has responsibility for not how it operates. No one is going to propose a rewriting of the 1914 Federal Reserve Act and Wall St. would fight like hell any increase in real oversight by any agency, current or new.
So we disagree why 2009 led to the huge mess we are in today. I think we are on the same page about the quite dismal outlook for unwinding the mess created. I have no insight as to what the other side should look like and the people who are going to decide on the new rules.
As for crypto, it has always been clear to me that the central banks were going to shut it down as it reduces the efficacy of one of their policy tools to impact the economy - setting money supply. I think letting the free market set monetary policy would be far worse that the failures of the central banks. Yes, privacy is the problem, but in China and the US, privacy is not yet a barn burning issue. Cutting down on money laundering, tax evasion. and other criminal activities is because they hide revenues from the tax authority. The devil is in the details. Perhaps the gov’t will rule that crypto cannot be exchanged for dollars, and then see the panic as holders try to convert crypto currencies into other assets. Where would be the buyers. I think what is being lost in the discussion is that the blockchain technology is a superior way for transactions to be executed.
Oh, so many interesting things to talk about. Rather than beat the past to death, take what we can learn from it and remember most people are far too confused and/or have their own agenda!
All three models assume it is architected, though in fact the market decides. So the banks may think that the indirect model keeps them alive, though protocols such as Compound are an order of magnitude higher in capital efficiency and with an order of magnitude lower running costs. So if you want a loan, you'll get a better rate in crypto than you will from those banks in the indirect model.
I think the analysis is incomplete anyway... Smart contracts can and will replace the banks or payment providers in all of the models above. It appears to assume a CBDC stablecoin... Though stablecoins don't make much sense in the first place.
More likely I think the technological revolution that programmable money provides; namely that the capital is kept in the protocol layer rather than the application layer as at present. Think twitter, facebook etc... Built on the internet and they add the bulk of the value. Dapps built on Ethereum on the other hand provide value to Ethereum.
More broadly though is a simple choice between Catholic style centralisation as pursued by China, or Protestant style decentralisation. The latter has always won and by a considerable margin, hence dreams of centralised control in a CBDC are a pipedream I think. Whilst businesses could and maybe should be forced to use one, no private citizen should allow their finances to be an open book. One could even argue it is the accountancy firms rather than the banks which are corrupt.
All that said the crypto industry isn't doing itself any favours. Either too naive or stupid to play the game, they don't lack resources they merely lack the nouse to use them in a political or wider social way. They act like a cottage industry, and are therefore treated as such.
Don't forget that a CBDC legitimises other crypto currencies. Or would bitcoin not be exchangeable for Britcoin? You can't really stop it. So the way I see it playing out... The banks are currenly trying to stop capital flowing into crypto, unsuccessfully of course. Too late they will realise the only way to attract deposits is to provide yield, and the only place they can get yield is the crypto markets by offering crypto savings accounts. Frankly the next big crash ( soon? ) might spell the beginning of the end anyway. Tax avoidance has already put the lid on the coffin.
And the wondrous politicians will realise they can get more tax from the little people who have access to highly efficient banking and lending than they do currently from the banks.
Well, it's either that or China, social credit and dystopian bastardry. Sorry bit longer than I expected.
Thanks for the reply. The days for non-central bank digital currencies are rapidly coming to an end. In the US, with the possible exception of Bitcoin, these currencies are about to be regulated as securities and the exchanges they trade on as securities exchanges. At the same time, the rollout of central bank digital currencies will be accompanied by a ban on financial institutions converting non-central bank digital currencies to a currency issued by a central bank. Effectively ending the future of these cryptocurrencies.
As for the underlying technology, there are a few very good uses. For example, tracking property ownership or shipping containers. So yes, I do see a role for smart contracts, but these contracts will ultimately reference a real object or currency issued by a central bank.
Finally, everyone is better off with a payment system that is not hostage to the banks. As I indicated, I expect a number of third party administrators for the central bank digital currencies. These administrators will compete for business. As a result, you are likely to see the adoption of much more efficient protocols.