Escaping the zero lower bound: edge share.

Having already written on this subject, I post here today another take on the issue of the current conundrums about Monetary Policy. The quest between Inflation targeting – if the target should be raised above the 2% consensus – is again brought to the front line of discussion. This Blog longandvariable defends here a position of criticism (rightly so…) about the today’s feasibility of Electronic money and its potential of resolving the issue of zero lower bound in Monetary Economics. The last paragraph is worth a recall:

What Rogoff thinks would particularly ‘baffle’ central bankers’ constituents was that they had changed their minds about the benefits of price stability.  There’s something in this.  But it should not be the overriding concern.    And:  the profession has done a lot of changing of minds recently!  We would hardly decide against tightening prudential supervisory standards on the grounds that we would baffle everyone that we had changed our minds on it.  On the contrary, it would be perplexing if the authorities had not changed their minds in the light of the evidence about what constituted good policy.  So too with inflation.  For generations, the authorities wrestled with different metallic standards for monetary policy.  Finally, we ‘changed our minds’ about this being the right thing to do.  It was probably baffling at the beginning.  But slowly people got used to the meaninglessness of the ‘promise to pay the bearer on demand the sum of’ text.”

Escaping the zero lower bound: electronic money, or higher inflation?.

via Escaping the zero lower bound: electronic money, or higher inflation?.


Paper Currency and Electronic Currency

Today there is a refresher on the current struggles in Monetary Economics. And again Izabella Kaminska in Aphaville share with us views and links about the topic.

So it seems that Paper Currency and the traditional forms of Central Government Money have their days counted. It is like one of my friend’s recent literary project: Unbelieving Count ( ….from the Portuguese Contagem Descrente). Anyway, back to Economics…..

The relevant Academic Kenneth Rogoff is recently working on this subject with interesting papers and opinion. With passages like this:

” The idea of raising target inflation to reduce the likelihood of hitting the zero bound is indeed an alternative approach. Blanchard et al. point out that if central banks permanently raised their target inflation rates from 2% to 4%, it would leave them scope to make deeper cuts to real interest rates in severe downturns. Arguably, paying negative interest rates is a better approach if, as many believe, inflation becomes more unstable as the general level of inflation rises. Robert Hall (1983) argues forcefully that the central role of monetary policy should be to provide a stable unit of account, and in principle the ability to pay negative interest rates facilitates its ability to achieve this in today’s low inflation environment (Hall, 2002, 2012).”

Rogoff explain us that there are challenges to the full implementation of Electronic cash, as the nature of fiat money systems expose them to fraud and tax evasion on massive and difficult to monitor scales:

” ….. There is nothing, however, in standard theories of money that requires transactions to be anonymous from tax- or law-enforcement authorities. And yet there is a significant body of evidence that a large percentage of currency in most countries, generally well over 50%, is used precisely to hide transactions. I have summarized the international evidence in earlier research (Rogoff 1998, 2002). Other than the introduction of the euro, rather little has changed except that, if anything, anonymous currencies have continued to grow at a faster rate than nominal GDP.

A somewhat vindication of the virtues of the European single currency, which I endorse in many ways. Interesting in all of this is the puzzle of the demand for money in current monetary systems with money not back by real safe assets. Here Kaminska on the subject: ‘‘The problem this poses for the public purse is that even though the substitution of paper cash for electronic cash should not theoretically affect seigniorage revenue for the government — because phased-out paper currency demand would be replaced by demand for electronic central bank reserves — the non-anonymous nature of electronic money would likely lead to a large shrinkage in demand.”

But, caveat emptor:

In Rogoff’s opinion, Treasuries or other anonymous vehicles would have to absorb that loss instead.

The only caveat would be if the government managed to introduce a fully anonymous electronic money in its own right.

As he notes:

The government would continue to garner seigniorage revenues from the underground economy and the problem of the zero bound on nominal interest rates would be effectively eliminated. That said, it is far from clear that the government can credibly issue a fully anonymous electronic currency and even if it could, anonymous electronic fiat money has all the drawbacks of an anonymous paper currency in facilitating tax evasion and illegal activity.”

Fascinating subject, certainly. And a subject that should spark interest with anyone with ability to think through and who likes to hypothesise and suggest ways forward, which Izabella encourages in the rest of  entry:

”Rogoff also suggests that any attempt to introduce a fully anonymous state currency would probably transform the central bank into a universal bank — something we’ve suggested is already happening due to the Fed already expanding its balance sheet to money market funds.

Rogoff says that might not be so bad if there were rules and protocols in place to ensure the government could not abuse its unique information advantage in that regard.

Nevertheless, none of this spares the country from the risk that another country’s paper currency might end up becoming used more commonly in the economy instead.

Overall, Rogoff concludes further study of the costs and benefits of phasing out paper currency is necessary, especially since we may already live in the “twilight of the paper currency era anyway”.

In any case, a few points we’re left confused about:

1) First, Rogoff claims that if there were concerns about anonymous digital central bank cash, people would likely park money in Treasuries instead and that this would reduce seigniorage income.

Surely, this thinking doesn’t make sense? Wouldn’t the money redirected from zero-yielding cash, which is provided by the government on demand (especially so that it is always zero yielding), be redirected into yielding securities in such a way that it would have negative yielding effects? If that’s the case the negative rates provided to the government would be a form of seigniorage revenue, and could be exploited by greater borrowing at zero rates.

2) Second, doesn’t Rogoff neglect the seigniorage revenue that’s already being lost — irrespective of anonymity — due to the shortage of safe assets problem? The market also has a preference for creating private money substitutes — whether they’re bearer notes collateralised by art, collateralised commodities in no-man’s land stores or bitcoin — rather than taking on more free debt. After all, the former currently allocates the money much more questionably than structured public policy might do.

3) Why has no-one yet made the connection between anonymity — which is injected into the system by means of anonymous bearer currency which “neither buyer nor seller requires knowledge of its history” — and our inability to model or control systemic risk?

All thoughts appreciated.”

Good thinking and significant suggestions will certainly be appreciated.



A post on Bitcoin.

This is a Blog that tries to boldly navigate and understand the world of Investment, Economics and, by being bold to honour the subtitle of entrepreneurship.

Today I would like to post about the most recent innovation that is buzzing around for the past couple of years or so: Bitcoin. This is what is called the leading cryptocurrency. Yes there are plenty of them. Even Amazon announced recently that it is planning to enter this field by selling its own cryptocurrency. But Bitcoin stills remains as a recognized leader.

I must confess that I’ve done my research on the topic, thought about it and drawn the conclusions that could possibly be drawn by someone in  a relatively limited position of knowing just the very basics about the technical details. There are however always the possibility of improving the required knowledge of the subject, a blessing of the age of open-source software. And combine this with the fundamentals of Money and monetary systems and try to pin down the real possibilities of Bitcoin ever reach a level of accepted means of exchange, store of value and unit of account and be truly considered proper Money. For now that seems only a very distant reality.

Notwithstanding all of this it is worth, I suppose, to take a look at a long series of entries in the Financial Times’s Alpahville about this new phenomenon by Izabella Kaminska and others. It makes for quite interesting read, and it is instructive and well researched, as always is the case in publications of indisputable merit and reference.

Much was written here and there about cryptocurrencies. For example the argument that they emerge as a byproduct of the recent Financial Crisis, that thorn the confidence in a centralised Monetary Systems; there is some truth in that maybe…. Then there are those that point to the obscure nature of its original founder: a japanese named Satoshi Nakamoto, that nobody knows who really is, to a sign that something of a conspiratorial nature may driving the motivation for the cryptomania. I wouldn’t buy in all those arguments. But looking at the undoubted skill of the proponents of Bitcoin in matters of Computer Science and of payments systems, maybe something more fundamental is going on and this something is at core of our Banking systems, the technology surrounding it and paths of innovation that inevitably will succeed in the field. Of that I’ve got no much doubts, given the pace of an intensive innovation sector. In the Banking sector just reminding ourselves of the current trend in Innovations like Big Data, the efforts to integrate the systems of Settlement and Clearing of securities or, in the more mundane Retail Banking with the strong trend of integration of  Telecommunications applications with the services of Banking, should make us humbly believe that the possibility of disruptive technological shocks is very high.

We all can see then that this ground is a fertile one for Innovation, Entrepreneurship and opportunities. But it is also one of its own perils, which will need understanding and good management. The recent bankruptcy scandal of a Bitcoin Broker cast a spell of doubt on the phenomenon though. There were losses to the tune of $400 million or more.

As always will be in the World of serious Business, carefull consideration, due diligence and high ethical standards must be the norm. Even if the innovations are sound and potential positively disruptive.