Money and Monetary System Basics - Upcoming in April

This blog was created to watch for any signs of major monetary system change that could directly impact the daily lives of all of us. While the blog does feature a variety of diverse views from some leading experts around the world, the real objective of this blog has always been to try and reach an audience consisting of the average person like myself that does not have an in depth academic background on these issues.

When things are going normally, most of us don't have significant interest in the kind of issues we talk about here. We just take it for granted that the monetary system will function properly in a way that allows us to carry our daily business activities. However, every now and then, we get some kind of major crisis that forces us to become more motivated to learn about what is happening and why. We know something is not right and we need to better understand what it is.

Fortunately, since the last big crisis in 2008-2009, we have avoided the kind of major crisis that could force major monetary system change under duress. But that does not mean the underlying issues have gone away. Simmering below the surface are issues that are contributing to some of great political divide we see around us. Many times we don't realize that these issues related to money and monetary systems may directly underpin clashes that on the surface seem to be political battles.

There is a growing public perception that something is not right or not fair about how our system operates that is creating a massive "wealth gap". Many younger people are more inclined to challenge the present system and we see this discontent expressed in the political arena in proposals such as the "Green New Deal". This is also creating a new debate over old ideas such as whether we should head into the future as a more capitalist system or as a more socialist system. This Economic survey of Millennials indicates they are not confident about the future of our present system (in part due to living through the impact of the 2008 financial crisis) and therefore may be more open to ideas for change.

While it may seem like these are new ideas and new debates, in many ways they are not. They are new to those who are younger because they may be hearing them for the first time. 

All of this emphasizes why it is important for all of us (younger and older) to learn as much as can about these issues. Historically, when nations have made bad choices in regards to money and monetary systems, a great amount of perhaps unnecessary suffering has followed (including being contributing factors to world wars and severe civil unrest). 

Even today, as we look around us, the following questions are quite relevant:

- Is our current monetary system just and fair?

- What is happening in places like Venezuela? What are some root causes of the problems?

- Can we just create as much money as we need to insure general prosperity? If not, why not?

-If we can create money to bail out large financial institutions, why can't we create money to help out those at the lower end of the financial ladder?

-How does money and the monetary system impact the political process?

The premise here is that before you decide what your views are on these issues, a basic understanding of some of the fundamentals would be helpful. In April, we will devote some time to articles that will provide some basics on both money and monetary systems. The articles won't be for those with advanced economic backgrounds.

These articles are especially designed for younger readers that may not have had any in depth exposure to these very important basic concepts. They are not broadly taught now in the formal education process unless you are specializing in economics. They are non partisan in nature and concentrate more on basic fundamental concepts and the fascinating history of how our money and monetary system has evolved over time. Without at least some understanding of this history, it is very hard to understand the issues we face currently and will face into the future.

If you know anyone that might benefit from this type of information (especially younger readers who may be thinking about these issues for the first time), I hope you will direct them to these upcoming articles in April here on the blog (first one is tomorrow).

I asked Dr. Judy Shelton to preview one upcoming article and she offered this comment to use here:

"I hope this kind of information reaches many young people and causes them to reflect on the importance of trustworthy money."  -- Dr. Judy Shelton

Added note: First article on Money Basics is now posted here.

News Note: Dr. Warren Coats Receives Award for his Work in Capacity Building

Readers here know that we have featured some articles related to Dr. Warren Coats over the years. Dr. Coats had a long and distinguished career at the IMF and is widely recognized as an expert on both the SDR used at the IMF and also the fundamentals of building a functioning monetary system in nations where that has been needed for a variety of reasons. 

Recently, Dr. Coats received an award related to his efforts to help nations build functioning monetary systems and I wanted to congratulate him and pass the news along to readers here. Dr. Coats has spent a lot of time helping me in answering questions I have had from time to time and also in helping me learn about the issues I try to cover here. His help has been significant and very much appreciated here. Here is a link to Dr. Coats receiving the award and his acceptance speech.

The Millennial Economic Survey by the Economic Innovation Group

This blog started after the 2008 financial crisis in an effort to monitor events which might lead to monetary system changes. While no major changes have taken place thus far, the preconditions for change are simmering below the surface. This recent survey by the Economic Innovation Group points out that the upcoming Millennial generation views things quite differently from older generations. Below are a few excerpts from the survey. I added the underlines for additional emphasis.

---------------------------------------------------------------------------------------------------------------------


"Millennials are the future of the U.S. economy. But when it comes to their future, and the future of the country, they are a deeply pessimistic generation. EY and EIG conducted a new national public survey of 1,200 Millennials to gauger their views on a variety of issues related to the economy at all levels--personal, local, and national-- and the challenges they face almost seven years into the recovery from the Great Recession The results outlined below paint a complex picture of a generation convinced the economy is failing them, one that is willing to work hard to better their lot, and one that is very uncertain about what comes next." 


. . . . .

"Millennials will be the most educated generation in U.S. history, but they are not convinced that higher education will provide them the same leg-­up on the path to prosperity that it guaranteed earlier generations. Their ambivalence stems in part from the inexorable rise in the cost of college, which has changed its value proposition. Instead of opening doors, many Millennials feel that student debt has boxed them in. In fact, between 2004 and 2014, there was an 89 percent increase in the number of student borrowers, and the average balance per borrower grew by 77 percent."

. . . . .


"True to reputation, Millennials are skeptical of the establishment. While not as overtly iconoclastic as some of their parents might have been at similar ages, Millennials put very little confidence in established institutions—perhaps because established institutions have yet to deliver for them. The establishment aside, Millennials remain fiercely patriotic and supportive of a leading role for the United States in the world."

. . . . . 

"Millennials’ stunted launch into a recession-­plagued economy has clouded expectations about their future prosperity. Millennials hold out little hope that their standard of living will rise above their parents’. Blacks and Hispanics buck the trend somewhat, and men remain more optimistic than women. Nevertheless, Millennials are a generation slowly coming to terms with the reality that they may be the first in modern times to experience backsliding living standards."

. . . . . 

"How to win the coveted vote of a supposedly fickle and hard to decipher generation? Evidence suggests that economic uncertainty greatly influences Millennials’ political priorities. It comes as little surprise that Millennials want more public investment in education. More surprising is how large retirement already looms in the Millennial psyche: Social Security and Medicare are their second biggest priority for federal funding, suggesting that their economic anxiety runs deep and far into the future. Many Millennials want an investment and growth strategy to improve their lot. And true to reputation, their political preferences often don’t fall down conventional party lines."

Please click here and read the full survey

-----------------------------------------------------------------------------------------------------

My added comments: Some of the findings of this survey are in line with what is generally believed about Millennials. However, other findings are perhaps surprising. The survey describes Millennials as "fiercely patriotic" and says that the political views of Millennials are spread out across the political spectrum more evenly than some may have expected (about the same ratio as older generations with a bit more of them calling themselves independents).

The excerpts shown above indicate that there is simmering discontent with our present system. The survey says Millennials believe our established institutions and economic system have failed them. From an economic point of view, they were born into a system saddling each of them with an enormous debt burden well into the future. Their taxes will fund the programs relied upon by their parents such as Social Security and Medicare. On top of that, society told them that they must have a very expensive college education to make it in life. The increasing price of that education has resulted in the average millennial graduating with over $25,000 in student debt to pay off on top of funding the social programs mentioned above.

No wonder we see simmering discontent. Are we surprised when some start asking when they get some benefits from the system rather than just paying off all the debt? How will Millennials respond to new ideas directed towards them that all these debts they hear about don't really matter?

These issues are not going to just go away. The debate over what kind of financial system and monetary system we should have (and what is a fair system) is more likely to just continue to intensify as the millennial generation matures. 

The goal of this blog is to provide a source of free basic information related to these issues for anyone interested. Coming up in April on this blog will be some articles that are designed for Millennials looking to get some basic fundamental background information on money, monetary systems, and some history on how we got to where we are today. Regardless of where you fall on the political spectrum, an understanding of the fundamentals of money and monetary systems is of value as these issues are debated in the coming years. Please check back in April and take advantage of these articles if you are new to these issues and want to learn more.

Note: 

I asked Dr. Judy Shelton to preview one of these articles and she offered me this comment to use here:

"I hope this kind of information reaches many young people and causes them to reflect on the importance of trustworthy money."  -- Dr. Judy Shelton

Note - Jim Rickards to Debate Modern Monetary Theory

In this recent article, Jim Rickards announces that he will engage in a debate over the Modern Monetary Theory proposal that is making some headway in some political circles. Below are a couple of excerpts from his article and then a few added comments.

---------------------------------------------------------------------------------------------------------------------

Jim starts out by noting that in the next election cycle there will be proposals made to introduce an array of new government programs and that the projected cost for the programs will potentially be in the tens of trillions of dollars.  After that he makes these comments:


"It used to be easy to knock these ideas down with a simple rebuttal that the U.S. couldn’t afford it. If we raised taxes, it would kill the economy. If we printed the money, it would cause inflation. Those types of objections are still heard from mainstream economists and policymakers, including Fed Chair Jay Powell.

But now the big spenders have a simple answer to the complaint that we can’t afford it. Their answer is, “Yes, we can!” That’s because of a new school of thought called Modern Monetary Theory, or MMT."

. . . .

"There are serious problems with MMT (not the ones Jay Powell and mainstream voices point to). But very few analysts can really see the flaws. I’ll be in an MMT debate with a leading proponent in a few weeks, where I will point out what I believe to be the biggest flaws with MMT. To my knowledge, no one else has raised them."

Please click here to read the full article

---------------------------------------------------------------------------------------------------
My added comments: I'll keep an eye on this upcoming debate and post it here if it contains information relevant to the potential for monetary system change. Jim makes a point in his article somewhat similar to one we made here recently. He notes that proponents of modern monetary theory say we can forget worrying about government spending and debt because:

"This theory says that the U.S. can spend as much as it wants and run the deficit as high as we want because the Fed can monetize any Treasury debt by printing money and holding the debt on its balance sheet until maturity, at which time it can be rolled over with new debt."

We talked a bit about this in this recent article. When something new and viewed as radically different from the present norm enters the marketplace of ideas, the natural reaction is to just dismiss as unrealistic and unlikely to actually be put into practice. In this recent article, we explained why we think that attitude is off base. It appears that a true majority of the US population is now unhappy with the present system to some degree and more open to change than ever. They don't agree on what that change should be, but so much momentum for change creates an unstable environment going forward and should not be dismissed out of hand as meaningless.

For this reason, this blog will introduce a couple of articles in April with the objective of attracting the interest of younger readers who may be wondering about all these ideas and issues being hotly debated. The point here (like Jim says in his article as well) is not to dive into a political agenda or try to tell readers what to think. That is never the objective here. 

Instead, the goal here is to try and provide an underlying data base of non political information so that readers can think about these issues and form their opinions armed with as much basic fundamental information as possible. With that goal in mind, we will publish two articles in April designed to try and meet that need. We especially hope younger readers will find these articles and take time to read and consider them.

This article by Jim Rickards is a good starting point to get readers thinking about these issues. The articles upcoming here in April will look at the fundamentals of money and provide a summary overview of the history of money and monetary systems. I asked Dr. Judy Shelton to preview one of these articles and she offered me this comment to use here:

"I hope this kind of information reaches many young people and causes them to reflect on the importance of trustworthy money."  -- Dr. Judy Shelton

If you are a younger reader wanting to learn more about basic monetary fundamentals, these articles will be for you. If you know of a younger person that you feel might benefit from this kind of information, please send them over in April to take a look. As we all head into a somewhat uncertain future, our view here is that the more fundamental knowledge  we have (including an understanding of how we got where we are today), the better off we will be as decision makers.

Added notes: For those who like to keep up with Jim Rickards latest take on things, here is a link to his most recent interview on current events.

3-25-19: Jim just released two new articles on MMT that talk about the points he plans to make in his upcoming debate. You can read those articles here and here. In these articles, Jim makes a key point about how that people having trust in the money used is the most important aspect of money. That fits right in with some of the information I will present here on the blog in April related to some basics on money and also the history of our money and monetary systems. In an effort to be fair and balanced, readers may wish to view this 30 minute video presentation in favor of Modern Monetary Theory (MMT) as well. If you watch this video and also read Jim's articles, you will be pretty well informed on the pro and con views on MMT. Probably more than most people for sure.

News Note: Financial Times - BIS Sounds Alarm on Corporate Debt

This news note features a recent article in the Financial Times. The article says that the Bank for International Settlements (BIS) has issued a warning regarding the increase in B rated corporate bonds. 

The article notes that the BIS says that under the wrong conditions, mutual funds and other market participants could be forced to "offload large amounts of bonds quickly". The article references the most recent BIS quarterly report. 

-----------------------------------------------------------------------------------------------------------------------

. . . .

"Ratings based investement mandates can lead to firesales" warned economists Sirio Aramonte and Egemen Eren in the BIS latest quarterly review." (see pages 12-13) . . . 

Please click here to read the full article in The Financial Times

Unintended Consequence of QE Policies?

Over the last ten years, we have witnessed history as central banks led by the US Fed launched massive easy money policies in an effort overcome the 2008-2009 financial crisis. We have covered all that here in depth and the debate continues as to whether this will prove to be good or bad policy over the long term.

 

This article attempts to explore what has perhaps turned into an unintended consequence of what we have seen happen during this process. Did the creation of massive amounts of liquidity by the Fed acting as lender of last resort create the impression in the general public that government spending and government debt don't matter anymore? This idea was discussed recently on CNBC by Rick Santelli and Jim Bianco (watch the video here).

-----------------------------------------------------------------------------------------------------------------------

There is no doubt that this whole ordeal has created an widespread impression that the emergency powers of the Fed and the US Government were brought into play in a way that saved some large financial institutions at the expense of the average citizen. We have already discussed how that is now playing out in the political arena in this recent article. 

It's hard to imagine that those who implemented these emergency bailout programs ever expected to see the day when large segments of the public might wonder why we cannot just print up any amount of money we need since that seemed to work for the big banks and it does not appear that we (or they) suffered any major consequences so far. 

Ideas that once seemed completely off the radar (like the Modern Monetary Theory discussed in the video linked above) are now taken quite seriously by a large segment of the voting population. 

Honestly, you can't blame people for raising these ideas and questions after what we have been through. It now seems perfectly reasonable to ask: If we can conjure up trillions of dollars to save large financial institutions and it appears no one involved in the poor decision making leading up to the crisis was ever punished; Why can't we print up trillions or even tens of trillions to provide all manner of benefits to the general public? (who got stuck with the taxpayer portion of the bill from the last crisis)

Again, I suspect that no one involved in trying to deal with the last crisis had in mind that this is how things would turn out. But it is a reminder for us all. There are always unforeseen consequences whenever major policy decisions like this are made. The best idea is to be transparent with the public, fully explain every decision made, work hard to justify how the public interest was served, and be willing to take some blame where appropriate if it is deserved. Of course, no one likes this alternative very much and it is no doubt very difficult to actually do in the heat of battle under crisis conditions. I do understand that.

But we also have to understand that if we are not going to take the harder path to try and gain the public trust by openly discussing the problems and issues (instead of using them as political weapons), we should not be shocked when a large segment of the public gives up on the system and starts looking for radical changes. It's fair for people to ask why some people are chosen as winners and others losers once we go down that path. The answer may be that it was the only path available to avoid a systemic collapse (see excellent added comment below from an expert I hear from).

But that has never been very well explained or justified to the average person on the street who has no Fed to bail them out when times get tough. This blog continues to believe that public understanding of these issues is as important as anything else our leaders might be engaged in. Unfortunately, there does not appear to be much in interest in making that effort at this time with no immediate crisis on the horizon and yet another election cycle upcoming.
------------------------------------------------------------------------------------------------------------------------

Excellent comment from an expert who previewed this article for me:

"In discussing QE, it's good to distinguish between QE1 (a needed liquidity response to a panic) and QE2/QE3 (an experiment by Bernanke in portfolio channel effects). Lumping them together lets the QE crowd off the hook by claiming they needed to "save the system." That was over by late 2009. Give credit for QE1 and then ask for accountability on QE2 and QE3. That's a more rigorous approach."

Monthly BIS Newsletter Update

Below I have pasted in the monthly BIS newsletter that comes by email. In this issue there is an article on blockchain along with an update on the Basel Committee post financial crisis reforms.

-------------------------------------------------------------------------------------------------------------------

March 2019

Integrated inflation targeting  Pierre-Richard Agénor and Luiz Pereira on how to achieve both price and financial stability in inflation targeting emerging market economies.

Basel Committee meets  At its February meeting, the Basel Committee reviewed implementation of its post-crisis reforms, including margin requirements, and agreed to publish supervisory expectations related to banks’ exposures to crypto-assets. House prices in Q3 2018 Real residential property prices increased on average by 2% year-on-year, but with large differences across advanced and emerging market economies.

An examination of experience with the G-SIB framework The Basel Committee releases historical data and initial analysis of the global systemically important bank (G-SIB) indicators since the introduction of the G-SIB framework. Median growth rate of individual bank values for G-SIB indicators

Keynes Lecture 2018-2019 BIS Economic Adviser and Head of Research Hyun Song Shin uses global game theory to analyse decentralised payment systems built around blockchain technology.

More BIS publications  Interview: William Coen on the Institute of International Finance's FRT Podcast  Basel Committee Secretary General William Coen speaks about market risk, the year ahead and the upcoming consolidated framework for Basel standards. Working Paper: Central counterparty capitalisation and misaligned incentives Do for-profit central counterparties (CCPs) undermine financial stability? On average they hold less capital, or “skin-in-the-game” than user-owned CCPs. Working Paper: Safe assets: made, not just born Reserve managers need not worry about a lack of safe assets: the supply of US Treasuries is outgrowing demand.

Upcoming 5 March: Release of BIS Quarterly Review, March 2019. 12-13 March: FSI 20th anniversary conference, A cross-sectoral reflection on the past, and looking ahead to the future, Basel. 22 March: Agustín Carstens delivers the Whitaker Lecture at the Central Bank of Ireland, Dublin.

East Asia Forum - Waiting for the Global Renminbi

This new article appearing in the East Asia Forum is a good read. It talks about what has happened with the Chinese renminbi in terms of it becoming a global reserve currency since its inclusion in the SDR currency basket. Below are a couple of excerpts.

-------------------------------------------------------------------------------------------------------------------

" ‘Great powers’, says the Nobel-laureate economist Robert Mundell, ‘have great currencies’. So where is China’s?

In the years following the 2008 financial crisis, things seemed to be looking up for the renminbi. By the middle of 2015, almost 30 per cent of China’s trade was being settled in renminbi. Hong Kong banks were holding some 1 trillion RMB worth of yuan-denominated deposits and there was life in the dim sum bond market, with issuance running close to the equivalent of US$10 billion per month.

That year was also the year the International Monetary Fund (IMF) announced that the renminbi would become one of the currencies that underpin its own reserve asset, the special drawing right (SDR). Almost by definition, this step seemed to confer on the renminbi something like the status of a global reserve currency. So the renminbi seemed, to most observers, to be firmly on a path toward real international relevance.

Grounds for optimism have since proven to be decidedly fragile.  . . .

Please click here to read the full article in East Asia Forum

----------------------------------------------------------------------------------------------

Added news note: Even as the article featured above questions when the renminbi will gain strength as a global currency, President Trump is still calling for a weaker US dollar.  Rick Santelli (CNBC) and Dr. Judy Shelton discuss these recent comments by the President in this recent interview. Dr. Shelton offers her take on what the President was saying regarding the US dollar.