Typography

David Andolfatto and Larry White have been having an interesting debate on the public finance case for having a large (or small) Federal Reserve balance sheet. In this post I'll make the case that American taxpayers are better off having a large Fed balance sheet, perhaps not as big as it is now, but certainly larger than in 2008. To explain why, we're going to have to go into more detail on some central banky stuff. The chart below illustrates the growth of the Fed's balance sheet. Prior to the 2008 credit crisis, the Fed owned around $900 billion worth of assets (green line), these being funded on the liability side by $800 billion worth of banknotes (red line), a slender $10-15 billion layer of reserves (blue line), and a hodgepodge of other liabilities. The Fed now owns an impressive $4.5 trillion in assets. These are funded by around $1.5 trillion worth of banknotes and $2.3 trillion worth of reserves. So the lion's share of the increase in the Fed's assets i...

I last wrote about Fedwire data two years ago. Since then, Fedwire has entered into a (nominal) recession. Is this something we need to worry about? We should be interested in this data because  Fedwire is the U.S.'s most important financial utility. Operated by the Federal Reserve, Fedwire processes payments between the nation's commercial banks using central banks money, or reserves, as the settlement medium. It accounts for a significant chunk of U.S. spending, or aggregate demand. Below you'll see a chart of quarterly Fedwire transaction values using data back to 1992. It shows the total dollar volume sent over Fedwire each quarter: You can see that the flow of spending conducted over Fedwire has been declining since the third quarter of 2014; a six quarter decline. How rare is it to see this degree of stagnation? To check, I've plotted Fedwire yearly data going back to 1987: Assuming 2016 continues to trend lower (as it has in the first five months), then we are ...

Early map of Fedwire. Source: FRBNY The pace of Fedcoin sightings has been accelerating this year. If you're new to this blog, Fedcoin is a catch-all term I like to use for a central bank-issued cryptocurrency. Earlier this month the Federal Reserve itself hosted a conference called Finance in Flux: The Technological Transformation of the Financial Sector . The keynote presentation was given by Adam Ludwin, CEO of blockchain firm Chain Inc , who had some interesting things to say about a central bank digital currency. A criticism I have of blockchain advocacy in general and Fedcoin in particular is that evangelists tend to understand little of the history or qualities of the institutions that they are trying to overthrow. The result is that they invariably end up mis-estimating the benefits of replacing existing systems with new ones. For instance, Ludwin calls his presentation Why Central Banks Will Issue Digital Currency,  a title that must have got Janet Yellen scratching her...

Recent posts by Adrian Hope Baille and Sina Motamedi have got me thinking again about the idea of the Federal Reserve (or any other central bank for that matter) adopting bitcoin technology. Here's an older post of mine on the idea, although this post will take a different tack. The bitcoin ethos enshrines the idea of a world free from the totalitarian control of central banks. So in exploring the idea of Fed-run bitcoin-style ledger, I realize that I run the risk of being cast as Darth Vader (or even *yikes* the Emperor) by bitcoin true believers. So be it . While I do empathize with the bitcoin ideal—I support freedom in banking—I rank the importance of bitcoin-as-product above bitcoin-as-philosophy . And at the moment, bitcoin is not a great product. While bitcoin has many useful features, these are all overshadowed by the fact that its price is too damn volatile for it to be be taken seriously as an exchange medium. This volatility arises because bitcoin lacks a fundamenta...

Milton Friedman's alleged license plate, showing the equation of exchange The excruciatingly large revisions that U.S. first quarter GDP growth underwent from the BEA's advance estimate (+0.1%, April 30, 2014) to its preliminary estimate (-1.0%, May 29, 2014) and then its final estimate (-2.9%, June 25m, 2014) left me scratching my head. Isn't there a more timely and accurate measure of spending in an economy? One interesting set of data I like to follow is the Fedwire Fund Service's monthly , quarterly , and yearly statistics. Fedwire, a real time gross settlement interbank payment mechanism run by the Federal Reserve*, is probably the most important financial utility in the U.S., if not the world. Member banks initiate Fedwire payments on their own behalf or on behalf of their clients using the Fedwire common currency: Fed-issued reserves. Whenever you wire a payment to another bank in order to settle a purchase, you're using Fedwire. Since a large percentage o...

Paul Krugman has a recent post in which he casts bitcoin as a retrogression from our current fiat system. He's wrong about this. In the next few years, I put decent odds on the guardian of our fiat system, the Federal Reserve, adopting the very bitcoin technology that Krugman finds so dubious. Here is Krugman: One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned. Krugman has taken bitcoin's colourful jargon a bit too literally. It's best to think of "bitcoin" as a distributed ledger, or a record, and not as physical coin. And while Bitcoin miners do "mine", they're not performing a function that is analogous to gold mining. Rather, they're contributing to the tending and maintenance of the information that makes up the bitcoin ledger. The mining community listens for le...

I've written before about Iranian monetary sanctions .  We can disagree on motives and targets, but monetary sanctions are undeniably a very powerful instrument. They work because in severing Iran from the global payments network, the sanctions degrade the liquidity of Iranian wealth. I'm going to borrow this idea and see if I can apply it to central bank monetary policy. Can a central bank like the Federal Reserve conduct monetary policy by manipulating the *expected liquidity* of the liabilities it issues? Can the Fed hit its inflation targets by sanctioning its own deposits or, put differently, by freezing and/or unfreezing them? Let's say that the expected return from holding a Federal Reserve liability can be decomposed into 1. capital appreciation/depreciation (ie. inflation); 2. interest (either interest on reserves ["IOR"] or the federal funds rate), and 3."liquidity services". Traditionally, an inflation-targeting central bank manipulates the ...

Perry Mehrling wrote an interesting post called Why did the ECB LTROs help? He visits the comparison of the Federal Reserve Interdistrict Settlement Account and the ECB Target2 settlement mechanism . I have also found this comparison in a number of other publications, see the list at bottom. Here is the comment I left at the Money View blog. My reading of the Euro-system rules is that deficit national central banks (NCBs) never have to settle with surplus NCBs. These intra-system balances can grow ad infinitum. Thus, deficit NCBs don't have to worry about owning acceptable assets for settlement, since there is no ultimate day of reckoning. The result is that survival constraints for Eurosystem NCBs are far looser than the survival constraints faced by regional Federal Reserve banks, which must settle each year. In the old days this settlement was conducted by transfers of gold certificates amongst regional Federal Reserve banks. After 1975 the settlement medium was switched to secu...

Stephen Williamson talks about clearing and settlement systems, in particular Fedwire. I learn that the Fed offers daylight overdrafts on an uncollateralized basis, but believes itself to be covered by charging a fee and by putting caps on the the amount of credit they are willing to extend. George Selgin pops up again, because he wrote an excellent article called Wholesale payments: questioning the market-failure hypothesis . Available on demand if you email me.