Typography

In places like the U.S. and Europe, it is actually difficult—if not impossible—for a government to have its central bank pay for government programs. All government spending must be financed by issuing bonds to the public or collecting taxes. Canada, my home country, is an interesting counter-example. The financial relationship between the Federal government and the Bank of Canada—our central bank—is fairly permeable. The government has the authority to ask the Bank of Canada to directly fund a portion of its spending. This avenue is rarely taken, however. Justin Trudeau, our current Prime Minister, currently uses bonds and taxes to fund almost all of the Federal government's spending. Just one small and unknown government program is directly funded by the Bank of Canada: the prudential liquidity management plan , an old Stephen Harper-era program. (I wrote about it here and here ). The goal of the prudential liquidity plan is to provide a cash cushion that the Federal government...

Ok, another Sweden post. I keep returning to Sweden because no country has gone further down the road to being cash-free. Since all of us seem to be following the same trajectory, we should probably be paying attention. Lucky for us, every two years the Riksbank—Sweden's central bank—-carries out a payments surve y and puts the data up on its website. One of the most interesting questions that is asked is "which of the following payments methods have you used in the last month?" I plotted out some of the data and tweeted the result: Sweden is at the forefront of digital payments. I made this chart with data from the Riksbank payments survey: https://t.co/WTZlFYOl2Y : 1. Debit cards are universal, beating out credit 2. Cash use is plunging but still high 3. Swish adoption is exploding 4. Not much bitcoin usage pic.twitter.com/fal0pfYdMz — JP Koning (@jp_koning) February 20, 2019 What follows are a few observations. Swish beats cash Only 61% of Swedes used cash in the las...

Ken Rogoff has famously called for a ban on high denomination banknotes in order to help combat tax evasion and hurt criminals. But rather than banning notes, why not implement a market-based approach such as a tax? Among other advantages, a tax leaves people with flexibility to determine the cheapest way to reduce their usage of the targeted commodity. This is how society is choosing to reduce green house gas emissions. So why not go the tax route for banknotes too? My recent post for the Sound Money Project on pricing financial anonymity delves into this idea. The anonymity provided by banknotes is both a "good" and a "bad". People have a legitimate demand for financial alone time ; a safe zone where neither their friends, family, government, nor any other third-party can watch what they are buying or selling. These days, cash is pretty much the only way to get this alone time. But cash's lack of a paper trail can be abused when it used to evade taxes. The r...

David Beckworth argues that the U.S. Federal Reserve should stop running a floor system and adopt a corridor system , say like the one that the Bank of Canada currently runs. In this post I'll argue that the Bank of Canada (and other central banks) should drop their corridors in favour of a floor—not the sort of messy floor that the Fed operates mind you, but a nice clean floor. Floors and corridors are two different ways that a central banker can provide central banking services. Central banking is confusing, so to illustrate the two systems and how I get to my preference for a floor, let's start way back at the beginning. Banks have historically banded together to form associations, or clearinghouses, a convenient place for bankers to make payments among each other over the course of the business day. To facilitate these payments, clearinghouses have often issued short-term deposits to their members. A deposit provides clearinghouse services. Keeping a small buffer stock o...

One of the world's most notorious cases of counterfeiting was the 1925 Portuguese banknote crisis, when Artur Virgilio Alves Reis managed to pass off 200,000 fake five-hundred escudo notes, worth around £56 million in 2016 terms. When the Bank of Portugal discovered the counterfeits in December 1925, it announced an aggressive demonetization of the five-hundred escudo note, giving citizens just twenty days to bring in old notes for redemption. By then, the damage had been done. Reis had managed to increase Portugal's supply of banknotes by 5.9%, spending the equivalent of 0.88% of Portugal's nominal GDP into circulation! (More here .) An aggressive note demonetization in the face of large-scale counterfeiting is a thoroughly justified response as it immediately puts a halt to the problem. In this context, it's worth revisiting the world's most recent attempt to combat counterfeiting with an aggressive demonetization — India PM Narendra Modi's forced recall of th...

Proponents of helicopter money have been getting a lot of press lately, but I don't really get what all the excitement is about. I live in Canada, and no nation is closer to implementing helicopter money than mine. But if I work through the basic steps involved in implementing Canadian helicopter money drops, I'm underwhelmed. As far as I can tell, deploying loonie-filled CH-147 Chinooks just doesn't do anything that other government tools don't already achieve. Helicopter money means using the nation's central bank to fund government spending. If a government wants to spend money, it typically auctions bills and bonds to the public and uses the money to fund programs, all the while paying interest on the debt it has issued. Cue the helicopter money advocates: why not have a central bank create money from scratch and gift it to the government for spending? This certainly seems to be a more stimulative approach than regular debt-funded government spending. The added ...

Canadians will all know what Canadian Tire Money is, but American and overseas readers might not. Canadian Tire, one of Canada's largest retailers, defies easy categorization, selling everything from tents to lawn furniture to hockey sticks to car tires. Since 1958, it has been issuing something called Canadian Tire Money (see picture above). These paper notes are printed in denominations of up to $2 and are redeemable at face value in kind at any Canadian Tire store. Because there's a store in almost every sizable Canadian town, and the average Canadian make a couple visits each year, Canadian Tire money has become ubiquitous—everyone has some stashed in their cupboard somewhere. Many Canadians are quite fond of the stuff—there's even a collectors club devoted to it. I confess I'm not a big fan: Canadian Tire money is form of monetary pollution, say like bitcoin dust or the one-cent coin. I just throw it away. It's the monetary oddities that teach us the most abo...

It's been a while since I blogged about Canadian monetary policy, but Luke Kawa's recent tweet on the topic of Canada's effective lower bound got me thinking. BoC has referred to 0.25% as its "effective lower bound" -- Shenfeld suggested that any lower, BoC thinks there'll be problems in money mkts — Luke Kawa (@LJKawa) August 4, 2015 Luke is referring here to CIBC chief economist Avery Shenfeld's recent missive on how the Bank of Canada might react if the Canadian economy's losing streak were to continue. According to Shenfeld, the Bank of Canada has one final quarter point cut left in its quiver—from 0.5% to 0.25%. Should the bleeding continue, Governor Stephen Poloz can then turn to forward guidance and only when that has been exhausted will quantitative easing become a possibility. Really? The Bank of Canada can't go below 0.25%? Has Shenfeld not been following what has been occurring outside Canada's borders over the last twelve months? ...

On a recent trip to Ottawa, I stopped by the Bank of Canada. The door was locked and the building empty. Odd, I thought, why would the Bank be closed in the middle of a business day? A security guard strolled up to me and told me that the entire staff packed up back in 2010 and left the country. He hadn't seen them since. Bemused I walked back to my hotel wondering how it was that with no one guiding monetary policy, the loonie hadn't run into either hyperinflation or a deflationary spiral. Exactly 175 months passed between February 1996, when the Bank of Canada began to target the overnight rate, and September 2010, the date of the Bank's last rate change. Some 63 of those months bore witness to an interest rate change by the Bank, or 36% of all months, so that on average, the Governor dutifully flipped the interest rate switch up or down about four times a year. Those were busy years. Since September 2010 the Governor's steady four-switches-a-year pace has come to a ...