Tuesday, May 21, 2019

News Notes on a Variety of Topics -- John Stossel Reviews "In Money We Trust" PBS Documentary

While we don't see anything on the near term horizon that might trigger major monetary system change, below are some links to some recent news articles on a variety of topics that might be of interest are related to things that could eventually impact monetary system or monetary policy change.

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This article appearing in Fortune asks if Federal Reserve policies have contributed to the income inequality that is fueling debate heading into the next election cycle. Here is a quote from the article:

"Income inequality in America has worsened in recent decades. Many on the left, buttressed by a not-insignificant number of those on the right, have argued for an increasingly progressive income tax code to tackle this problem.

But they’re focusing on the wrong solution—instead, the target ought to be the Federal Reserve."  . . . .  click here for the full article
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Recently, we featured a speech by Agustin Carstens (BIS) that provided an update on the status of central bank efforts to look at blockchain and central bank digital currencies. He stated that process is ongoing, but that most central banks are not moving forward with digital currencies or blockchain so far. This article in Bloomberg does mention some testing going on between Canada and Singapore related to blockchain (see joint statement here). This still appears to be early stage type testing, but is some movement that was recently in the news.
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In the latest BIS newsletter, Agustin Carstens is again featured talking about financial innovation as it may relate to financial inclusion. You can read that speech by clicking here.

"Financial inclusion is the gateway to increased prosperity. Central banks play a key role simply by fulfilling their price and financial stability objectives. At the same time, innovation and technology are needed too."  -- Agustin Carstens

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My added comments: In April and May we have tried to provide a variety of good educational material for anyone interested in the topics covered here. Please skim back over April and May if you have not seen all the articles. There is a lot of good information from a variety of credible sources. 

Related to that, John Stossel produced this article on Reason and the video below summarizing the PBS documentary "In Money We Trust" that we featured here in April.







Other news headlines to keep en eye on that could impact markets: 

- possible release of classified documents related to the investigation of President Trump
- ongoing trade war between the US and China with G20 meeting coming up in June
- US dispute with Iran seems to be ramping up
- any further nominations to the Federal Reserve (Judy Shelton and Derek Kan have been mentioned in recent news articles). In this new interview on CNBC Judy Shelton provides some insight on how she might try to impact thinking at the Fed if nominated and confirmed.

On the above list, the first three are more likely to possibly impact markets than the last one. It seems like no matter what happens, markets just plug along and show no indications that any kind of serious disruption to the existing order is even possible. But we still have to stay alert and monitor events that have the potential to rattle markets.  


Monday, May 20, 2019

BIS Monthly Newsletter

Below I have pasted in the monthly email newsletter from the Bank for International Settlements (BIS). One article featured this month is another recent speech by General Manager Agustin Carstens on financial innovation as it may relate to financial inclusion. (click here for text of speech)

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May 2019

Partners in financial inclusion 

Central banks and innovators are vital partners in the quest to further financial inclusion, says Agustín Carstens, delivering the C D Deshmukh Memorial Lecture at the Reserve Bank of India.

Exchange rates and global imbalances 

Hyun Song Shin explains why a stronger dollar can result in weaker lending, and be a drag on manufacturing and trade.

The euro: down but not out

Claudio Borio says the euro’s heft has increased in three significant but underappreciated respects.

New Consolidated Basel Framework

The Basel Committee’s global standards for bank regulation and supervision have been consolidated into a single consistent format.

Big tech and the changing structure of financial intermediation

New research uses detailed data from two big tech lenders to examine the forces behind big technology firms’ entry into finance and to test their information advantage.
More BIS publications 

Survey: BIS statistical tools
Do you use BIS statistics? Help us design the next generation of statistical tools by providing your feedback in a short online survey.

Statistics: Growth in US dollar credit slows
Growth in dollar credit to non-bank borrowers outside the US has slowed further, to a decade low, with the deceleration particularly marked in debt securities.

Working paper: Does informality facilitate inflation stability?
Many emerging markets have a large informal sector. Informality can mitigate inflationary pressures but reduces the effectiveness of monetary policy.

Sunday, May 12, 2019

Jim Rickards Discusses His New Book - "Aftermath"

Readers here know that I have followed Jim Rickards for many years because of his extensive understanding of the issues we cover here and because he has talked about the potential for major monetary system change. That is what this blog was created to watch for.


Jim has written a series of best selling books on these issues and in July 2019 will be releasing the latest one titled "Aftermath".  Jim kindly agreed to do a brief Q&A on the upcoming book which is just below. After that a brief summary will follow.




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Q: Should readers read your earlier books (Currency Wars, Death of Money, The New Case for Gold, and The Road to Ruin) before they read the new book "Aftermath"?

A: I'm grateful to all of the readers of my books, but there's no need to read them in any particular order. The books are a chronicle of the post-2009 period. There's a lot of economic and monetary history, but they track developments through Bernanke, Yellen and now Jay Powell. There's a cumulative element so reading Aftermath will incorporate many of the points touched upon in the earlier volumes, albeit in shorter form. Hopefully, someone reading Aftermath first will be encouraged to read the earlier books and complete the entire quartet.


Q: What were some main themes you wanted to cover in "Aftermath"?

A: Many of the trends identified in my earlier books have moved much closer to a critical threshold (point of collapse) and so deserved deeper analysis. These include passive investing, robo-investing, Chinese debt, gold accumulation by Russia and China and the role of crypto-currencies in a global monetary reset. Other new themes are the rise of Trump (not covered in the earlier books) and the exact dimensions of life in the aftermath of a new crisis. Currency Wars and The Death of Money warned that a crisis was coming. The Road to Ruin put you in the middle of a crisis and showed the official response function, (which I called "Ice Nine"). Aftermath takes you to the post-crisis environment as a way to show you what you can do now to survive it.

Q: For many years you have consistently forecast that we will some day another major crisis worse than the 2008-2009 crisis and that this could lead to major changes in the global monetary system. While working on "Aftermath", have you seen anything that would cause you to change that forecast?


A: No. All of the trends not only confirm a coming crisis, but suggest it may be worse than I expected. Reaction functions not only include closed banks and exchanges and frozen accounts, but also social unrest possibly requiring martial law. There are also serious infrastructure threats that could involve a collapsed power grid or internet. On top of that, cyber threats are real and cyber wars have already begun. We cover all of these developments in Aftermath.

Q: Do you plan any more books to follow "Aftermath" or will this one complete the series?


A: I expect to write more books, but there's nothing underway right now. After writing five books in eight years, I may just step back and develop new themes or topics. The international monetary quartet (Currency WarsThe Death of MoneyThe Road to Ruin and Aftermath) is done and stands on its own. I'm not sure how much more there is to say on the topic. It's all there in the books.


Q: Modern Monetary Theory is something new that has gotten a lot of attention lately. Do you discuss that theory in this new book? Do you think MMT will have a significant impact on our monetary future?

A: I have a full chapter on Modern Monetary Theory in Aftermath. It's called Free Money (Chapter 5). The best way to understand Modern Monetary Theory is to quote Gertrude Stein: "There's no there there."


Q: Is there anything else you would like readers to know about "Aftermath" or any other topic we discuss here from time to time?

A: Aftermath took longer to write than I expected when I started. That was partly due to other obligations and partly due to an injury I suffered in the summer of 2018 that required some time off for recovery. That said, I'm actually pleased with the publication date, July 23, 2019. That happens to be the exact 75th anniversary of Bretton Woods (July 23, 1944), which is appropriate because the book discusses the need for a new Bretton Woods. Also, it will come out in the middle of the 2020 election season. The book is not overtly political but it does discuss many subjects that will be a big part of the election debate including Modern Monetary Theory, debt and deficits, economic growth and the role of the Fed. Anyone interested in the presidential election cycle will be better informed if they read Aftermath.


Thank you for taking time from a busy schedule to offer these comments as we await the launch of "Aftermath" this coming July. It follows a line of best sellers and I have no doubt that will continue with "Aftermath".

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Summary: Jim Rickards has the ability to delve into complex topics in a way that most of us without an academic background in macro economics can easily understand. In the interview above Jim provides us with some interesting tidbits. His new book will include a full chapter on Modern Monetary Theory which is timely since that will surely be debated in the upcoming election cycle. Also, Jim just provided us with an update to his long standing forecast that changes that will impact our present monetary system are coming. Jim often says that forecasts can change over time as new data is received. In this case, he not only says his forecast for a new crisis leading to major change is still in play, he adds that the latest trends suggest to him that the crisis he predicts may be worse than he expected.

Anyone who has read any of Jim's books I think would confirm that they cover a lot ground and that you will learn some fascinating history. I have no doubt that the same will be true for "Aftermath". Readers can find "Aftermath" here.


Added note 5-13-19: With the US-China trade dispute flaring back up, readers may find this recent article by Jim of interest. --  "The Trade War is Back"

Saturday, May 11, 2019

News Note: Dr. Judy Shelton Under Considertion to Fill One Vacant Position at the Fed

This news article from Bloomberg and distributed on Yahoo News states that Dr. Judy Shelton is currently under consideration to fill one of the vacant positions on the Federal Reserve Board of Governors. 


We have featured Dr. Shelton here on this blog including a brief interview concerning her thoughts on the potential for monetary system reform. 

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from the Bloomberg article as featured on Yahoo News:


"The White House is considering conservative economist Judy Shelton to fill one of the two vacancies on the Federal Reserve Board of Governors that President Donald Trump has struggled to fill.

Shelton has been contacted by the White House regarding the position, according to two people familiar with the matter who described the outreach on condition of anonymity."

Wednesday, May 1, 2019

Dr. Warren Coats Proposes Currency Board Rules for the Federal Reserve - Includes Q&A

Readers may recall that we have previously featured the Real SDR Proposal of Dr. Warren Coats here on the blog. Dr. Coats is retired from the IMF and is widely recognized as an expert on both monetary policy and the SDR used by the IMF.



Recently, Dr. Coats wrote a new article published on the Adam Smith Institute blog proposing that the US Federal Reserve should move towards the adoption of Currency Board rules in an effort to reform the present monetary system. Below are some excerpts from this new article. The concept of a Currency Board may be new to many readers so Dr. Coats kindly agreed to do a brief Q&A for readers here on some basics for how Currency Board rules would work. You can find that Q&A interview further below the excerpts quoted from his new article.





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"After years of discretionary management of monetary policy by the Federal Reserve, there is a strong case for re-fixing our fiat currency system to a hard anchor. Though the dollar was far more stable under the gold and gold exchange standard era than after it’s delinking from gold in 1971, those systems came with significant weaknesses that contributed to their ultimate abandonment. To avoid these, three key elements of the Fed’s operation should be modified. These are: 1. The monetary policy rules determining how currency fixed to a hard anchor is issued and redeemed; 2. The monetary anchor itself; and 3. What the currency is issued or redeemed for."

. . . . .

"A reformed monetary system should require the Fed to adhere strictly to currency board rules. Such rules oblige a central bank to buy and sell its currency at a set price in response to public demand. Under the Gold Standard, the price of the currency was set as an amount of gold (a gold anchor). For existing currency boards, the price is typically an amount of another currency or basket of currencies. The Fed would provide the amount of dollars demanded by the market by passively buying and selling them at the dollar’s officially fixed price for its anchor. All traditional open market operations by the Fed in the forms of active purchases and sales of T-bills or other assets or lending to banks would be forbidden."

. . . . .

"The United States could adopt the hard anchor currency board system described above on its own and others might follow by fixing their currencies to the dollar as in the past. The amendments to the historic gold standard system proposed above would significantly tighten the rules under which it would operate and strengthen the prospects of its survival."


(note: I added underlines above for additional emphasis)
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Followup Q&A Session with Dr. Coats:

I offered Dr. Coats the opportunity to expand a bit on his thoughts on Currency Board rules based on the questions listed below with the goal of providing some additional insight on how his proposal would work if implemented by the Federal Reserve.


Q: Where does a Currency Board get the money that it supplies based on market demand?      

A: "It creates it like any other central bank."


Q: Who does a Currency Board typically supply money to? 
  
A: "Currency Boards deal with the same customers as regular central banks—generally just depository institutions—banks, credit unions"


Q: What assets would a Currency Board normally accept in exchange for the money it provides?  

A: "It (a Currency Board) creates money like any other central bank, but it only issues it when purchased with the equivalent value of its anchor (The Bosnia currency is fixed to Euro and thus must be purchased with Euros)."


Q: Does a Currency Board ever loan money to either the Federal government or private banks and charge them interest?

A: "That depends on its law. Generally no. However, the Central Bank of Bosnia and Herzegovina may lend to banks (lender of last resort) to the extent that it has more than the 100% asset cover for its monetary liabilities (base money)."


Q: What impact (if any) would using Currency Board rules have on market interest rates?

A: "It would remove any central bank influence on market rates."


Q: What impact (if any) would using Currency Board rules have on US fiscal policy and/or budget deficits?

A: "Existing currency board central banks’ governments have lower public debt than most others because they cannot borrow from the central bank and thus are more disciplined."


Even though Currency Board rules are designed to bring discipline to the supply of money and provide a stable value to money over time, there are still many people who prefer to hedge against the potential abuse of any system by holding gold as a form of insurance. 

Q: If the US did adopt Currency Board rules, would you support the removal of capital gains taxes on gold and silver so that anyone who wanted to hedge themselves that way could do so without being subject to a tax penalty for holding some savings in gold or silver as a form of insurance in the event the money did lose value in relation to gold for whatever reason?


A: "People can and should be free to hedge (save) in any way they want—owning real estate, gold, GM or what ever. Gold should not be subsidized and should be treated like any other way of holding wealth. Actually I favor abolishing capital gains taxation whatever its source."


I would like to extend a thank you to Dr. Coats for taking time to respond to these questions for the benefit of readers here. Dr. Coats provided this additional comment related to the value of money:

"The value (price) of money, like everything else, is determined by its supply and demand. Fixing its price to gold, for which it can be redeemed, is a way of regulating its supply. Fixing it to anything else (such as SDR) with currency board rules does the same. Bitcoin’s supply is determined by a formula, but there is little real demand— just speculators."  -- Warren Coats



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My added comments: One thing that occurs to me is that if the US were to adopt this proposal by Dr. Coats and also do away with capital gains taxes as he said, this system might appeal to those who favor a return to an actual gold standard.

If followed as proposed by Dr. Coats, there would be rules inside the system to try and enforce monetary discipline and then people would also be free to hold any other form of savings (gold or whatever) as an insurance hedge without being penalized with capital gains taxes. This would make the individual free to assume any price volatility associated with their personal savings choices with no tax implications. Also, the government/central bank would have an additional incentive to maintain monetary discipline because people could easily choose to move savings to other forms of wealth if they believed that the monetary system rules were being abused.

Note: This article will be added to our permanent page of ideas for monetary system reform that can be found here.


Monday, April 29, 2019

Two Interesting Interviews Coming Up in May on the Blog

I am pleased to announce that in May we will have two brief but excellent interviews coming up on the blog. In early May, Dr. Warren Coats (retired from the IMF) provides some insight on his recent proposal regarding some changes he thinks the Federal Reserve should make. If adopted, his proposal would certainly be monetary system change like we watch for here. Dr. Coats also provided some interesting comments on how he views capital gains taxes. This article will introduce readers to what may be a new concept for many (Currency Boards). Dr. Coats has extensive experience with Currency Boards in his years at the IMF working to construct monetary systems.







Later in mid May, I will post a Q&A style interview with Jim Rickards about his new book "Aftermath" which is coming out in July 2019. In this interview Jim provides an overview of what he talks about in the new book. He also updates us on his prediction that we will see a new financial crisis leading to major monetary system change based on the latest trends he sees. Since that is the kind of change we watch for here, this is a welcome and timely update from Jim.




Friday, April 26, 2019

One Quarter into 2019 - Anything New to Report?

Readers here know that we have been reporting for some time that unless we see some kind of new major financial crisis, we don't expect to see any major monetary system reform in the near future. For this reason, we have somewhat moved into monitoring mode here and only try to produce a few articles a month when we see something that might be worthwhile for readers.


So, now that we are one quarter of the way into 2019, is there anything new to report?


Mostly no, but perhaps a few tidbits that might be of some interest based on a variety of input sources. Below are a few bullet point items.

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- the political environment (which can impact change) seems pretty status quo. The country remains very divided and there are no signs that is likely to change any time soon. So long as President Trump remains in office, we can expect that without some kind of major economic problem, he will most likely continue along the same path without any major changes to the monetary system. 

- Modern Monetary Theory has become a hot topic lately, but more in the political arena than in actual policy making circles thus far. Without a major shift in political power, it seems unlikely that MMT will gain much traction with actual policy makers. It does appear likely that MMT will become part of the political debate heading into the 2020 election cycle. We won't cover it much here unless it gains more political traction since we try to focus on what actually happens.

- Central banks continue to study and talk about the idea of introducing central bank digital currencies, but again we have not seen much change in that direction so far. (as noted in the recent update from Agustin Carstens from the BIS). The IMF and World Bank did announce a project to explore the potential of blockchain technology.

From time to time I do hear from a variety of experts who do discuss various ideas and proposals for monetary system change. I can report that there is lot of interesting discussion that does go on related to this. Some of the issues I have seen discussed include:

- what rules should the monetary system follow?
- what is the best anchor for a currency to provide long term price stability?
- has the Fed monetary policy since the 2008 crisis been the appropriate response?
- was the initial Fed emergency response appropriate, but then carried too far later on?
- is modern monetary theory (MMT) an upcoming force for monetary system change?
- is there any real threat to the role of the US dollar as the global reserve currency?
- are Russia and China working on building a system to bypass the US dollar and the SWIFT system?
- is there any will inside the Trump Administration to propose significant monetary system reform?

One of the main goals of this blog has been to try and document a variety of ideas and proposals related to some of the questions raised above. Readers can find that here on this permanent page of the blog.

Other note: In May 2019 there will be panel discussion held in Fort Worth,Texas which will address the question of whether a free society should have a central bank, and if so, what monetary policies should it follow to be most consistent with liberty? (see 8 am panel discussion on Monday May 20th). 

The participants in this panel discussion include Warren Coats, Scott Sumner, John B. Taylor, and Lawrence H. White (not me, the Lawrence White from George Mason University). The panel discussion is part of a multi day conference co sponsored by the SMU/Cox O'Neil Center for Global Markets and Freedom and the Texas Tech University Free Market Institute.

This is obviously a great panel and the topic looks interesting in terms of what we follow here. Eliminating the Federal Reserve or significant changes to the rules it must follow would constitute the kind of monetary system change we watch for.

So, if I can find a way to obtain the contents of the panel discussion (video or text of the papers presented), I will try to cover that here for readers. Meanwhile, in May we will have two interviews upcoming that should be of interest to readers. One with Warren Coats and one with Jim Rickards.

Wednesday, April 24, 2019

News Note: IMF & World Bank Announce Exploration of Blockchain Technology

While it appears that there is little mass movement towards central bank digitial currencies at this time, we do have some recent news articles related to an announcement by the IMF and The World Bank that they will explore blockchain technology in what Jim Rickards tells me is a "prototype" project that he has talked about in recent articles and interviews.



This appears to be an early stage project that will not focus on creating a monetary currency for now. Below are links to a couple of news articles on this project and some excerpts from each article.

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Cointelegraph.com 

"The International Monetary Fund (IMF) and the World Bank have jointly launched a private blockchain and a so-dubbed quasi-cryptocurrency, the Financial Times (FT) reports on April 12.

According to the newspaper, the asset called “Learning Coin” will be accessible only within the IMF and World Bank. The coin has no money value and thus is not a real cryptocurrency, the FT underlines."




Blockonomi.com

"A recent report by the Financial Times has revealed that the World Bank and the International Monetary Fund (IMF) have collaborated to launch a private blockchain network, which will enable “explorations and experimentations” into Distributed Ledger Technology (DLT).

In addition to that, both institutions have reportedly created a digital asset, dubbed the “Learning Coin,” based on their joint blockchain network.

The report claims that the Learning Coin was created as a tool to aid the institutions in their effort to better understand blockchain technology, including its function as an underlying technology for crypto assets."

                                                   Click here to read the full article in Blockonomi

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My added comments: Readers may ask if this news indicates that we should expect to see some kind of new global cryptocurrency from the IMF as a result of this project (an e-SDR for example). It's too early to know if anything like that might emerge from this project. This news makes it clear that the IMF does have interest in exploring blockchain technology and is obviously willing to commit time and resources to this project. For now, the project is not described as testing a new type of monetary currency, but rather testing blockchain technology in general as it may apply to a variety of potential uses.  

The quote below from the first article linked above makes it clear that there is still much debate ongoing as to whether or not blockchain technology will bring about significant change inside the system any time soon:

"Meanwhile, a World Bank official expressed a more skeptical point of view. According to Aanchal Anand, a Land Administration Specialist in the bank’s Global Land and Geospatial Unit, there is too much hype over blockchain, which causes unrealistic expectations."  (see more World Bank comments here).

On the other hand, IMF Director Christine Lagarde has spoken more encouragingly about the potential for both blockchain and distributed ledgers. In this recent CNCB intervew, she said this:

“I think the role of the disruptors and anything that is using distributed ledger technology, whether you call it crypto, assets, currencies, or whatever ... that is clearly shaking the system,” she said.

My take on the above is that it is consistent with what we have reported here that there continue to be a variety of ongoing studies related to blockchain technology inside the present system at central banks. Now we see this also includes the IMF. However, at this time, it does not appear that the majority of these institutions has moved beyond initial studies into making a decision to actually deploy either central bank digital currencies or any kind of new potential global reserve cryptocurrency.  This is consistent with what Agustin Carstens stated in his recent speech on this topic that we covered here. So, this remains an area to monitor over time to see what actually happens.

The IMF did devote an entire panel discussion to Money and Payments in the Digital Age at the recent IMF spring meetings. Readers interested in viewing that discussion can do so just below (follow the link to view on Youtube).







Monday, April 22, 2019

Agustin Carstens (BIS) Update on Central Bank Digital Currencies

We have followed the news on central banks looking at the idea of central bank digital currencies here for some time. This would be the kind of changes we watch for if a movement began at central banks to move in the direction of offering central bank digital currencies directly to the general public.


We have been reporting here for a good while that we do not see any indications that such a move is in progress at central banks at this time. In this new speech, Agustin Carstens of the BIS updates us on this. It appears there is not much change at this time. In this text of his speech are some good charts and graphs on the topic that readers may find of interest. Below are a few excerpts from the speech.


Also, for any readers that have been looking at our articles on Money Basics (here and here), this speech may be of interest. It provides a look at where things stand in terms of "The Future of Money and Payments" which is the title of the speech. (I added the underlines below for emphasis)

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. . . . .

"Throughout history, technological innovations have continually reshaped the monetary system, either by changing the nature of money or the workings of the payment system. These times are no different. The hype around bitcoin and its cousins has died down somewhat. But innovation continues. What seems new this time is the sheer volume of innovations and the fact that both components of the monetary system are targeted at the same time. Historically, changes to payment systems have been infrequent. Changes to the nature of money have been even rarer. But now, attempts to create new forms of money or to engineer new ways to pay appear almost weekly.

This afternoon, I will share some thoughts on how technological innovation may affect the monetary system. I am particularly interested in the implications for central bank money and what socalled central bank digital currencies (CBDCs) would mean – not just for the system, but for all of us as citizens."

. . . . .

The monetary system: how did we get here?

"Let’s look back at how the monetary system evolved, taking money first. Throughout history, a wide range of items served as money, including stones, shells and cigarettes. In Ireland, coins – first imported by the Vikings – have been used for more than 1,000 years. In its 76 years, the Central Bank of Ireland has presided over three different currencies: the pre-decimal Irish pound with its 240 pennies to the pound, the decimal Irish pound, and the euro.

At its simplest, in economic terms, money is what money does. And what money does – in whatever form it takes – is to serve as a unit of account, a means of payment, and a store of value. A common measure of economic value, or a unit of account, makes our lives easier. Imagine how difficult it would be to compare the price of a pint of stout and a glass of whiskey without money. Go into a pub near here and the barkeeper might tell you a Guinness costs 6 euros and a Jameson Gold costs 12 euros. One is clearly dearer than the other. But what if the barter system were still in place? A Guinness might cost 25 apples and a whiskey 30 oranges. The relative value becomes unclear. Today, the common measure is usually “the currency”. If there are multiple units of accounts, one tends to prevail over time. As you may recall, shops in Ireland initially listed prices in both euros and Irish pounds. Still, two decades later, not many outside this building remember the official conversion rate of IEP 0.787564 to the euro."

The second attribute of money is to serve as a means of payment. I could pay for my pint with cash, with a credit or debit card and, increasingly, even with my mobile phone. But, as I mentioned earlier, there is an important distinction between the types of money being transferred. Cash is public money, issued by the central bank. The others represent private money. That is, liabilities of either a commercial bank, the phone company, or a big tech firm.

Last but not least, money must be a reliable store of value. This is a lesson I learned the hard way as a child. When I was eight years old, inflation was high in Mexico. I remember my father giving me a wad of cash for the school bus. At the end of the day, when I tried to take the bus home, the fare had gone up. I ended up walking all the way home. Such experiences taught me the dangers of monetary instability and its inverse, the value of price stability."

. . . . 

A future monetary system with CBDCs?

. . . . .

"Banks play an important role as provider of financial services to citizens and businesses. Imagine that the Central Bank of Ireland and the ECB were to offer deposit accounts to everyone and then issue debit cards and mobile phone apps for you to make payments with. In such a scenario, the central bank would be taking on the customer-facing business lines. Presumably, the central bank would need to recruit new staff to handle this line of business and to handle customer enquiries. Now, I can tell you that central bank staff are very good, and they would be capable of taking on customer-facing tasks. But that is not the main issue. 

Safety could be an important reason to deposit money in the central bank. In times of uncertainty, more customers would prefer to have deposit accounts at central banks, and fewer at commercial banks. A shift of funds from commercial banks to the central bank could be gradual at first. But the trickle could turn into a flood

If bank deposits shift to the central bank, lending would need to shift as well. So, in addition to the deposit business, the central bank would be taking on the lending business. The central bank would need to meet business owners, interview them about why they need a loan, and decide on how much each should receive. 

We can ask ourselves whether this is the kind of financial system that we would like to have as the ultimate set-up . . . ."

. . . . .

"There are historical instances of one-tier systems where the central bank did everything. In the socialist economies before the fall of the Berlin Wall, the central bank was also the commercial bank. But I do not think we can hold up that system as something that will serve customers better."

. . . . .

"We know from historical experience – especially in emerging market economies, but also advanced economies – that, during times of financial stress, money moves away from banks that are perceived as risky towards banks that are perceived as safer. So, money flows from privately owned banks to publicly owned ones, from domestically owned banks to foreign owned ones, and generally from weakly capitalised banks to strongly capitalised ones. In such scenarios, imagine that depositors also have the choice of putting their money in a digital currency of the central bank or in the central bank deposit account directly. It is not far-fetched to imagine that a premium would open up, where one euro of deposits in the commercial bank buys less than one euro’s worth of central bank digital currency."

. . . . .

Where do central banks stand?


"The Committee on Payments and Markets Infrastructures (CPMI) at the BIS last year surveyed central banks to take stock of current work and thinking on CBDCs. More than 60 central banks participated, representing countries covering 80% of the world population. Graph 2 summarises the results. Seventy per cent of central banks are working on CBDCs of some kind. Most are looking at both retail and wholesale varieties.

But only about half of these have moved on to the next stage of actively testing the idea (as Graph 3 shows). These central banks are examining the benefits, risks and challenges of potential issuance from a conceptual perspective. Only a couple have moved on to experimenting with the different possible technologies, in “proofs of concept” or even pilot projects.

If we go one step further and ask central banks whether they plan to issue a CBDC, the picture is quite telling. As you see in Graph 4, very few central banks think it is likely that they will issue a CBDC in the short to medium term, be it retail or wholesale. Having looked into the matter, central banks have decided not to jump in.

Obviously, this is consistent with what I argued earlier, namely that: (a) the introduction of CBDCs would have a major impact on the financial system; (b) there is not yet a noticeable and widespread fall in the demand for cash; and (c) central banks do not feel compelled to face a major change in the way they conduct monetary policy. Also, research and experimentation have so far failed to put forward a convincing case. In sum, central banks are not seeing today the value of venturing into uncharted territory."


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My added comments: The speech above supports what we have reported here for some time. While I see articles all the time talking about major changes coming from central banks and/or the IMF leading to a new digital currencies and the elimination of cash, the reality as stated in the speech above is that there is no indication at this time that changes like that are on the near term horizon. All kinds of ideas are studied, but central banks are very slow about " venturing into uncharted territory" as Mr. Carstens puts it in his speech.

Added note: With the news that Herman Cain will not be nominated to the Fed, we will keep an eye on this situation. Seeing some indications in the news about who might be a new nominee, but will wait to see what unfolds.