Typography

Say the San Francisco Fed decided to secede from the Federal Reserve System or the Bank of Greece started to print its own euro notes without the consent of the Eurosystem. What happens to a nation's currency when the central bank is split into parts? There is a possibility we might be seeing such a situation developing in Libya with the emergence of two different Libyan dinars. Libya's political scene is ridiculously complicated so I'll paint the picture in broad brush strokes. The Central Bank of Libya has several offices, the two relevant ones being the western one in Tripoli and the eastern one in Bayda. Prior to the Arab spring, each area was under the control of the Gaddafi government but both have since come under the control of competing regimes. Tripoli is run by the U.S.-backed Government of National Accord (GNA) while Bayda is under the control of the Tobruk-based House of Representatives. As I understand it, over the last few years of strife the two offices have...

The FT makes a hullabaloo out of Greece using special drawing rights (SDR) to pay the IMF earlier this week, referring to the step as "unusual." Zero Hedge predictably  grabs the baton and runs as far as it can go with the story. It's a good opportunity to revisit the SDR, a topic I last wrote about back in 2013. The FT claims that the payment of SDRs to the IMF is "the equivalent of taking out a low-interest loan from the fund to pay off another." Here the FT has committed cardinal error #1 when it comes to understanding how SDRs work—SDRs are not lent out by the IMF. I like to think of the SDR mechanism as comprised of 188 lines of credit issued to each of the IMF's 188 members. These lines of credit are denominated in SDR and apportioned according to each countries' relative economic size. Any line of credit needs a creditor. In the case of SDRs, who fills this role? Why, the 188 members of the IMF do. The SDR system is a mutual credit system, or...

Unfathomable Depths by Ibai Acevedo Denmark's Nationalbank and the Swiss National Bank are the world's most interesting central banks right now. As the two of them push their deposit rates to record low levels of -0.75%, they're testing the market's limit for bearing negative nominal interest rates. The ECB takes second prize as it has been maintaining a -0.2% deposit rate since September 2014. At some point, investors will flee deposits into 0%-yielding cash. This marks the effective lower bound to rates. Has mass paper storage begun? The last time I ran through the data was in my  monetary canaries post , which was inconclusive. Let's take a quick glance at the updated data. To gauge where we are relative to the effective lower bound, I'm most interested in the demand for large denomination notes, which bear the lowest costs of storage. Once a central bank reduces its deposit rate so deep into negative territory that the carrying cost of deposits exceeds the...

The upcoming Greek election has renewed interest in the idea of Grexit. This option is often presented to the Greek public as desirable given that it would restore an independent monetary policy to the nation. Beware, this is dangerous advice. The euro isn't a glove that you can take on and off, it's a Chinese finger trap; once in, it's tricky to get out. Even if Greece were to formally leave the euro, odds are that it would remain unofficially euroized, leaving it just as bereft of an independent monetary policy as before. The real trade off in a Grexit-or-not scenario is between formal membership in the euro with some say in monetary policy, no matter how small, or informal membership without any say whatsoever. The optimists, say someone like Hans-Werner Sinn , advise the Greeks to leave the euro and adopt a new currency. The value of this new drachma would immediately collapse. As long as prices in Greece are somewhat sticky, Greek goods & services will become incre...

Most people don't realize that the central banks of Belgium, Japan, Greece, Switzerland, and South Africa are all publicly-traded. In times past, central clearinghouses were typically privately-owned while the issuance of bank-notes was the domain of competing banks. The fact that a few central banks still retain traces of their former private nature is a good reminder that centralized banking isn't necessarily the domain of the public sector. The Swiss National Bank , for instance, was founded in 1907 to take upon itself the issuance of national bank notes, hitherto provided by private banks. According to Hübscher and Kuhn ( pdf ), efforts to establish a wholly government-owned central bank were defeated in an 1897 national referendum. Opponents of the plan drew up an alternative proposal for a privately owned bank the structure of which would, according to Bordo, "not allow for state socialism or the public control of credit policy." One fifth of the new bank's ...