Typography

Central bank digital currency, or CBDC, is a form of highly-liquid digital debt that most governments have, till now, held back from issuing. But there is a growing push to change this. Free market economists are generally not big fans of CBDC. They see it as government encroachment on the banking sector. In this post I'm going to push back on the free market consensus. (This post was inspired after reading posts by Tyler Cowen and Scott Sumner ). Look, we're always going to have a government. Right? And that government is going to have to raise funds somehow in order to keep the lights on. The question is, how? Should it issue 30-day Treasury bills? Fifty-year bonds? Perpetual debt? Paper currency? Why not issue currency-ish debt instruments in digital form? Let's start with a parable. Imagine a world in which the government has only ever issued 30-year bonds. But next month it wants to shift some of its borrowing from the 30-year bond range to the 10-year range. Governm...

David Andolfatto had a provocative and open-ended tweet a few days back: The difference between money and debt. pic.twitter.com/CSQuLzUJPU — David Andolfatto (@dandolfa) April 26, 2019 We see two coloured pieces of paper, both with an old dead President on it. They each have a face value of $500. Both are issued by a branch of the government, the $500 McKinley banknote (at right) by the Federal Reserve while the $500 Treasury bond (at left) by the Treasury. Both are bearer instrument: anyone can use them. So why do we bestow one of them the special term "money" while the other is "credit"? I mean, they seem to be pretty much the same, right? The word money is an awful word. It means so many different things to different people that any debate invoking the term is destined to go off-track within the first fifty characters. So I'm going to try and write this blog post without using the term money. Why are the two instruments that David has tweeted about fundament...

Narayana Kocherlakota, formerly the head of the Federal Reserve Bank of Minneapolis and now a prolific economics blogger, penned a recent article on the abolition of cash. Kocherlakota makes the point that if you don't like government meddling in the proper functioning of free markets, then you shouldn't be a big fan of central bank-issued banknotes. For markets to clear, it may be occasionally necessary for nominal interest rates to fall well below zero. Cash sets a lower limit to interest rates, thus preventing this rebalancing from happening. I pretty much agree with Kocherlakota's framing of the point. In fact, it's an angle I've taken before, both here and in A Libertarian Case for Abolishing Cash . Yes, my libertarian and other free-marketer readers, you didn't misread that. There is a decent case for removing banknotes that is entirely consistent with libertarian principles. If you think usury laws are distortionary because they impose a ceiling on int...

1934 Chinese silver dollar with Sun Yat-sen on the obverse side. The ship may be in freshwater. I have been hitting my head against the wall these last few weeks trying to understand Chinese monetary policy, a project that I've probably made harder than necessary by starting in the distant past, specifically with the nation's experience during the Great Depression. Taking a reading break, I was surprised to see that Paul Krugman' s recent post on the topic of freshwater macro had surprising parallels to my own admittedly esoteric readings on Chinese monetary history. Unlike most nations, China was on a silver standard during the Great Depression. The consensus view, at least up until it was challenged by the freshwater economists that people Krugman's post, had always been that the silver standard protected China from the first stage of the Great Depression, only to betray the nation by imposing on it a terrible internal devaluation as silver prices rose. This would ev...

Shibboleth , by Doris Scalcedo John Cochrane writes an interesting post that makes the case that removing or penalizing cash would not remove an economy's 0% lower bound. Briefly, the zero lower bound problem arises when a central bank tries to reduce the interest rate on central bank deposits below zero. Because cash always yields a superior 0% yield, everyone will race to convert their deposits into cash, thus preventing a negative interest rate from ever emerging. By removing cash, this escape route is plugged and a central bank can safely guide rates to -4 or -5%. Cochrane's point is that even if cash is removed, there are a number of alternative 0% yielding 'exits' to which people will flee, the effect being that rates will be inhibited from falling much below 0%. The examples he provides includes prepayment of taxes, bills, and mortgage payments, and the hoarding of gift cars or stored value cards like subway passes. In a follow-up post , he mentions a strategy o...

I gave myself a quick whiff this week to determine if I pass the market monetarist smell test. This is by no means definitive, nor is this an officially administered MM® test. To be clear, my preferred policy end point is market choice in centralized banking. In other words, you, me, and my grandma should be able to start up a central bank. But that's a post for another day. First-best option aside, here's my reading of a few market monetarist ideas. Target the forecast **** 5 stars Big fan. Targeting the forecast would take away the ad hoccery and mystique that surrounds central banks. We want central bankers to be passive managers of yawn-inducing utilities, not all-stars who make front covers of magazines. First, have the central bank set a clear target x. This is the number that the central bank is mandated to hit in the course of manipulating its various levers, buttons, and pulleys. Modern central banks sorta set targets—they reserve the right to be flexible. Bu this isn...

You may know by now that the final revision of U.S. first quarter GDP revealed a shocking 2.9% decline while its mirror image, gross domestic income (GDI), was off by 2.6%. As Scott Sumner has pointed out twice now , the huge decline in GDI is almost entirely due to a fall in corporate profits. Whereas employee compensation, the largest contributor to GDI, rose from $8.97 to $9.04 trillion between the fourth quarter of 2013 and the first quarter of 2014, corporate profits fell from $2.17 to $1.96 trillion (see blue line in the above chart) This incredible $198 billion loss represents a 36% annualized rate of decline! A number of commentators have pointed out the difficulty in squaring this data bloodbath with reality. After all, Wall Street has not been announcing 36% quarter on quarter profit declines. Rather, earnings per share growth has been pretty decent so far this year. If earnings were off by so much, then why are equity markets at record highs? Why have there been no layof...

This is a guest post by Mike Sproul . Mike's last guest post is here . Scott Sumner and I have argued about the backing theory of money (aka the real bills doctrine) quite a bit over the years, starting in 2009 and continuing to the present. ( link 1 , link 2 , link 3 , link 4 , …) Scott rejects the backing theory, while I favor it. I think that printing more money is not inflationary as long as the money is adequately backed, while Scott thinks that printing more money causes inflation even if it is adequately backed. Our discussions in the comments section of his Money Illusion blog extend well over 50 pages, so I’m going to try to condense those 50+ pages into two key points that cover the main arguments that Scott and I have had over the backing theory. (That’s John Law on the right. He was an early proponent of the real bills doctrine, oversaw a 60% increase in French industry in the space of two years, and was the architect of the western world’s first major hyperinflation an...

What is this gas station using as a medium of account? Visa/Mastercard dollars or Federal Reserve dollars? In this post I'll argue that in many cases, a nation's medium-of-account doesn't consist of base money issued by its central bank, but credit card money created by Visa and Mastercard. This may have some interesting implications for monetary policy. Whoever issues, creates, or manages a nation's medium-of- account determines the general level of prices, and this makes it a monetary superpower. But before I get to that, let's revisit the meaning of the word medium-of-account. I've written a number of posts on the idea of medium-of-account because it has always seemed to me like an important concept, although admittedly it's taken me a while to zero-in on a satisfactory understanding of the term. What I like about medium-of-account is that along with the ideas of unit-of-account and moneyness , it allows us to pretty much remove "money" from th...

Florentine florin Last year Scott Sumner introduced the econ blogosphere to what he likes to call the medium-of-account function of money, or MOA, defined as the sign in which an economy's sticker prices and debts are expressed. Here and here are recent posts of his on the subject. I think Scott's posts on this subject have added a lot of depth to the interblog monetary debates. However, I've never been a big fan of Scott's terminology. As I've pointed out before , what Scott calls MOA, most modern economists would call the unit-of-account function of money. Older economists like Jevons and Keynes[1] referred to the unit-of-account as the money-of-account, and modern economic historians also prefer money-of-account. Terminological differences aside, in today's post I want to focus on what I'll call from here on in the unit-of-account function of money. Scott's UOA posts often emphasize the idea of separating the unit-of-account function from the me...