Im a fan of crypto currencys, but they are simply not ready for primetime. In order to have a monatary system thay correcly works for a complex economy with many stages of production you need a way to grow and shrink the money supply.
Some people like to compair Bitcoin to gold and then the make the argument that gold worked well for a long time. That argument however is flawed because gold usually was used ontop of a banking and coinage/note system.
Take for example the old Scottish banking system during (17/18th century), they on avg had reserve ratio of 2%. That essentially means that the circolating money (feduciary media) is much higher then the gold stock. It also means the the broad response to changes in money demand (velocity).
As long as crypto currencies can not figure this out, the will not be able to run a full modern economy.
One way to do it, would be to use Bitcoin as a gold replacement, and then have 'banks' create Shaum-style E-Cash to people. Then these 'banks' could increase or decrease the supply based on the money demand. That is however far from optimal.
The tricky thing boils down the system being able to buy and sell assts in order to create or destroy money.
You should read Nobel prize winner F.A Hayek's critique of the gold standard when combined with fractional reserve banking. Specifically , his lecture given at the London School of Economics :"The Function and Mechanism of
International Flows of Money". It is available in the anthology "Prices and Production and Other Works" (https://mises.org/library/prices-and-production)
Briefly, the point that Hayek makes is that when money is multiplied on top of a gold base, eventually a country will run a paper currency deficit with another country and then the citizens of the other country will use the paper to redeem gold from the central bank of the paper issuing country. When this happens the reserves in the paper issuing country will tighten and the money multiplied on top of the gold will contract rapidly in supply causing a credit crash.
I am a huge Hayek fan actually, but I do not think you represent his views correctly. Hayek was actually in favor of what I propose, at least during 30s when he actively wrote about this.
The Austrian Theory of the Bushiness Cycle is only relevant if the expansion of currency is to much, to respond to the changes in money demand, not all expansion. This is different with somebody who is a 100%er like Rothbard.
Hayek actually favored nominal stabilization witch is essentially what Im advocating as well.
Can you explain why it is needed to grow and shrink the money supply ? I don't get that.
In my view, the only problem with gold was that it was not practical to use.
That's where bitcoin is better, you can divide a single unit into much much smaller unit (up to 10^-8 Bitcoin for instance) so everybody can use it.
Most central banks in the world do a lot of open market operations to keep the economy in check. It is how they affect inflation, interest and exchange rates.
Most cryptos are still commodity currency; the commodity is computation. Because we don't decide how many coins get "minted" our ability to affect the money supply is reduced. So we're castrating one of our major interventional instruments.
Practicality isn't the issue. During the Gold standard, the bars were kept in vaults and we traded in convertible paper notes. The mint could always print notes of smaller or larger denominations if needed, but couldn't print more than it had bars to convert to. And that is the problem.
> couldn't print more than it had bars to convert to. And that is the problem.
To be fair, one man's problem is another man's solution. "It can all be taken away" isn't a selling point to the currency's users, only to the issuer.
Monetary policy has always been a tool of governments, but that's been because the people haven't had any practical options other than another government's currency.
Having a flexible layer of fiat lets us have a shock absorber between the markets and the commodities we need to live. But too much of a decoupling and you run into more problems the other way.
It's hurt a lot of people when their government hyper-inflates the currency, or steals much of it back via bank controls, etc.
I don't see a well working monetary system as a 'interventional instrument'. Its a inherent property of the system, not a outside system doing an intervention. Only since the time of central banks was this considered a 'intervention', because in many ways the central bank is the outsider.
> During the Gold standard, the bars were kept in vaults and we traded in convertible paper notes. The mint could always print notes of smaller or larger denominations if needed, but couldn't print more than it had bars to convert to. And that is the problem.
Maybe I am reading you wrongly, but the a ability to print larger or smaller notes is totally not relevant. A bank or minting house would actually always print more nodes/coins then they had bars to convert to gold. That is why minting coins was profitable in the first place. With Bank notes this became much more sophisticated.
The amount of notes in circulation was not directly determinate by the amount of gold, but rather by the flow of demands for gold (usually by other banks). As a bank you can get away with having 100x 1$ bills in circulation but you only had having 2$ worth of gold in your vault as long as the avg demand for gold per day is only 1$ worth. The other 98$ are invested in interest paying assets. Thus a bank always tries (tried) to maximize the amount of notes in circulation, but were always limited because other banks would demand gold if they got hold of your notes.
This system will thus lead to a situation where a increase in velocity (or decrease in demand) will automatically lower the amount of money in circulation because otherwise banks would not be able to hand out enough gold. This system effectively keeps nominal spending stable and that almost exactly what central banks are trying to do (its in fact better then inflation targeting if you look at most models).
There are different ways to explain it, I will use the simplest one. This formula essentially says that goods get exchanged for money in the monetary economy:
M(oney)*V(elocity)=P(price)y(output)
Lets say you destroy 50% of M overnight. This will have a huge effect on Py, because prices can not change that quickly, you will have a falling output.
Now its pretty easy to keep M constant (as long as politicians can not fund their pet projects with printing). The problem is that Velocity (another word for money demand) is not at all stable. So if something happens that for some reason effect money demand, it will have a effect on Py, that is price or output. In the short term, prices can not change, thus output suffers.
Every good monetary system has a way to balance this out. Note issuing private banks (before central banks) would automatically do this because when the noticed increasing demand, they would have to raise the gold reserve ratio. If the notice a decrease in demand, they could decrease the gold reserve ration and thus make more profit.
A modern day central bank will say that they target inflation. So they attempt to make P stable (predictable) and let the market (supply side) determine the output. If there is a huge crash in V the central bank should be able to see this and before it affects P or y to much, adjust it back. They are making it quite hard on themselves. Many people now call for targeting NGDP, that just means MV.
Bitcoin is fine as long all your doing is making payments, once you have multi layered complex economies that depend on the correct working of the prices system to aggregate information threw the system you will have constant problems. Price systems are the secret sauce that make markets actually work as well.
Look at this graph of weekly M2 data, and zoom into any short time period so that you can actually make out individual weeks: https://fred.stlouisfed.org/series/WM2NS
Note the seemingly odd monthly pattern that is apparent everywhere along the graph? That's because the economy has a distinct monthly rhythm of loans being used and repaid e.g. for monthly payroll payments etc.
You may think that this could be managed with a fixed money supply, but why should it? The days where money was an object are long gone (if they ever really existed). Money is instead a reflection of contractual relations in the economy. As those contractual relations change, so does the money supply.
None of these changes in the money supply have to do with the government or the central bank, by the way.[1] The whole fluctuation is due to commercial banks creating money when they issue loans, and destroying money when the loans are paid back. It's a system that works well.
A sibling comment mentions MV = PQ (or MV = PY), which is a good point, although they get all confused about the direction of causality (as is common). For example: when the price level increases, the loans taken out by economic actors become bigger, which increases M. Similarly, correlated growth of M and Q is usually really driven by a hidden variable: for example, an increased volume in consumer loans will drive up both Q and M at the same time. Similarly for an increase in investment.
Conversely, in a recession, a shrinkage of Q may go hand in hand with a decrease in V (economic actors keep their money for longer rather than spending it) or M (economic actors try to deleverage).
[1] They are related, actually, but only because the government is an economic actor. There is no special relation between government and broad money supply aggregates in today's monetary system.
You can never reason from a price change without knowing the reason for the price change. 'When he price level increase', how? why?
We know that money demand is non constant. That just has to do with the flow of money. We know that base money is constant unless the central bank act. Thus causation goes from changing V or central bank action to changes in price or output.
It's true that why the price levels change can make a difference. What I wrote was meant as examples of the type of relations that are there.
You're still wrong or at least extremely misleading in your characterization of how the money supply behaves.
First of all, base money is really almost entirely an implementation detail of interbank settlement and decoupled from the real economy.[1] Because of that, the focus on base money is wrong-headed and you should look at broad money instead.
Broad money grows and shrinks almost entirely due to commercial bank lending and loan repayment. The central bank has no influence on that.
It is technically correct that base money can only be changed by central bank actions, but that is a somewhat misleading statement, because the focus should be on what the chains of causality are.
We've had a perfect experiment for that in the last few years due to quantitative easing. There, central banks tried to affect the real economy by being the initial cause of a change in the money supply. Well, they successfully raised the size of base money to totally unprecedented levels, but that had virtually no effect on the broader money levels, let alone on the real economy.
All other central bank actions that change the size of base money are actually done as a reaction to demand by commercial banks, which in turn is a consequence of commercial bank lending.
Because in any case, central banks haven't even usually targeted the size of the money supply as a matter of policy. The policy has been to target a level of interbank interest rate, and let the size of the base money supply go wherever it needed to in order to accommodate the interest rate.
And when central banks tried to target the money supply via quantitative easing, which was only tried when the interest rate was already effectively at 0, the evidence is that it had virtually no effect.
There is no causal chain in practice[2] that starts with the central bank deciding to change the size of the money supply and goes into changes in price or output.
[1] It's even decoupled from the major financial markets that people are usually interested in.
[2] Of course, in theory central banks could just go nuts and start targeting the money supply in crazy ways. But even in that case, they can't just decide to cut or grow the money supply arbitrarily (because they need to find a commercial bank counterparty for what they want to do). And further, due to the decoupling of base money and broader money, the causal chain would go mostly via the effect that the base money changes have on interest rates, which is a very different story from the one that you probably wanted to tell.
I agree that one usually looks at broad money, but this essentially all boils down to claims on base money.
It is my hole argument the bank system produces this money, and that a good montary system, including banks, optimally should pruce stability of nominal spending.
I think you are wrong about QE, if you look at NGDP you can see that the US went back to a stable growth after a while. Europe and others who did far less, never managed to do that and thus has a way worse recovery.
The Fed made a effort to make sure to prevent that money from getting out, paying interest on reserves, explicitly insuring everybody that they will not allow inflation over 2% and they did otherthings besides.
If you look at NGDP you see a big drop in 2008/2009 and then stady growth again. What they would have to do was go back to the pre crisis trendline, and they refused to do so explicitly.
The Fed targets price level, not interest rates, interest rates are just the policy rate of choice. A inflation target is just a perticular form of demand side target, NGDP is another, superior demand side target.
The liquidity trap idea is flawed because if you take the argument to its logical conclusion the Fed could buy all the worlds debt without it impacting the domestic price level.
If you look broader then the US you will see that the idea of the liquidity trap has essentially been demolished, multible countries easly expanded on zero rates. Switzerland did it for example.
The problem is not that there is a real effect, the prolem is that modern central banker only know how to deal with interest rates based models, and consider everything else 'unconventional'. Most of these things simply are not 'unconventional', the are traditional instruments that central banks have used for 100s of years.
I would also say that the interest rate is not the only transition mechanism, and not the one monetarists focus on.
Why do you believe that the difference between the developments in the US and Europe is explained by different central bank behavior, when there is also a huge difference in effective fiscal policy behavior that is consistent with the difference in outcome?
You're right though that central banks really target inflation. Inflation -> Interest rate -> Market transactions.
If you look broader then the US you will see that the idea of the liquidity trap has essentially been demolished, multible countries easly expanded on zero rates. Switzerland did it for example.
The talk about a liquidity trap doesn't actually say that growth is impossible at an interest rate of zero. What it does say is that if you're at an interest rate of zero without growth, the usual monetary theory policy prescription of "just decrease the interest rate" doesn't work. I wouldn't say that that's discredited just yet, even though some central banks have started to implement mildly negative interest rates.
The proof of the pudding would be if a country implemented significantly negative interest rates, but that would force commercial banks to charge negative interest rates on regular bank accounts, and nobody wants to go there (for good reason IMO - messing with institutions like that is not something you do lightly).
I would also say that the interest rate is not the only transition mechanism, and not the one monetarists focus on.
Can you explain that? So far, whenever I've talked to people about this issue, they usually don't come up with any alternative transmission mechanisms at all (i.e. it's all hand-waving and fuzziness/buzzwords), or ones that actually misunderstand what's going on (e.g. confusing open market operations, which are asset neutral, with "helicopter drops" that are basically fiscal policy in disguise).
Since this is a old thread now, I will not spend to much time.
> Why do you believe that the difference between the developments in the US and Europe is explained by different central bank behavior, when there is also a huge difference in effective fiscal policy behavior that is consistent with the difference in outcome?
Because the US had both expansion and contraction in fiscal policy, and growth was not infected. New Keynesian predicted the 'fiscal cliff' in 2013 and monetarist said it would not have any effect.
You can also look at some of the smaller similar economies in Europe that are inside and outside of the Euro. Generally the fiscal policy is not that different, but the countries outside of the Euro generally do better if they had expansionary monetary policy.
I think we're getting into a region of subtlety where we'd have to actually look at data. I have no idea which countries you're referring to specifically, for example.
On the "hot-potato effect", I found this part of the linked article quite funny:
> Notice that so far these changes can be fully explained using the basic principles of microeconomics. There is no need to resort to “transmission mechanisms” such as interest rates. Just S&D.
Well, how does the author think that the "transmission mechanism" of interest rates is supposed to work? By the basic principles of microeconomics, supply and demand! The price of money is the interest rate.
And yes, so far as banks trade financial assets with each other in exchange for reserves, there can be an effect on asset prices. But asset prices are basically an inverse of the interest rate; in particular, when you look at the bond market, long term bond prices are an inverse of long-term interest rates.
Indeed, when you look at quantitative easing, it did have the effect of pushing the long-term interest rate even further down, which is equivalent to pushing asset prices up.
So yes, the transmission mechanism is the interest rate. The article pretends to disagree with that, but it really doesn't. Instead, it just explains it in more detail, but without being aware of the connection. Of course, there's nothing wrong with explaining things in more detail.
There are two points where I believe the article is wrong. The first is a minor point, namely where it says there can be a (direct) effect on output. Since reserves aren't used for transactions in the real economy, that's not possible.
The second is quite a bit more important. The article starts its analogy with a scenario where new gold deposits are discovered, i.e. the increase in gold is a purely exogenous event.
Base money increases are never purely exogenous events. Of course it might start with a central bank policy decision (although more often than not it starts with a commercial bank decision!), but even in that case, the central bank can only increase the level of base money if it finds a willing commercial bank as a counterparty to a trade. So the "hot-potato effect" is necessarily weaker than in the case of newly found gold deposits. The analogy with gold is not ideal and could be misleading your intuition.
> Im a fan of crypto currencys, but they are simply not ready for primetime. In order to have a monatary system thay correcly works for a complex economy with many stages of production you need a way to grow and shrink the money supply.
True but in this specific case we don't know yet if this is a permisionless blockchain, a sidechain, or something else (private blockchains are not blockchains in the original Bitcoin innovation sense). Every day the PR bullets invade the news without specific details.
What is Shaum-style E-Cash? Was this the old Digicash? Wasn't the idea similar to the old American Express Travelers Checks where the cash was tied to serial number?
I am curious how does this style allow banks to better control the money supply? Better than say a Federal Reserve requirement which is also an electronic ledger of sorts?
The difference is that with E-Cash you can have anything as a bases, you could issue E-Cash Doller or E-Cash Bitcoin.
> I am curious how does this style allow banks to better control the money supply? Better than say a Federal Reserve requirement which is also an electronic ledger of sorts?
Better compared to Bitcoin, not the system we already have.
Ecash+Bitcoin could be better then the current system because the Fed can actually change the base money, with Bitcoin that is not possible, but with Bitcoin+Ecash you would still have a fixed size base currency, while 'banks' could still increase and decrease the amount of E-Cash in circulation.
http://makerdao.com is one "central bank on blockchain" project, though the stable token it generates still doesn't have the properties you want in a national currency
An interesting system, but this still aims at keeping stability to something outside. That is not bad, and if it works it will act in some similar ways to what I would like to see.
There are a couple interesting experiments going one.
There is no fundamental reason. I have already pointed out that it is possible with Bitcoin + Ecash. Its however a extremely difficult thing to do it on a block chain.
Also, it does not 'just' need to be dynamic, it needs to be dynamic in the right ways at the right times and it still needs to be save, user friendly and so on.
As a huge proponent of Bitcoin and other decentralized currencies, I really don't understand this. The entire point of going through the rigamarole of using a blockchain is to attain a large degree of byzantine fault tolerance in an adversarial, trustless, and most importantly unprivileged environment. That is, there are no "master nodes" or any sort of centralized hacks like that.
If you're Senegal, presumably you want control over your national currency, so you're going to need some sort of centralized authority anyway. Since you've already done away with decentralization, why waste the time and effort on using a blockchain? There are any number of simpler architectures you can use when you have a central authority.
I don't think that is the WHOLE point. An anonymous currency based on private keys, even if centralized, allows you to use electronic money without banks, which means without permission.
But if they're having the centralised authority anyway, can't they just allow anonymous accounts to transact through a more traditional secure electronic payments system provided by that central clearing house, without the resource consumption overheads and limits on concurrent transactions associated with blockchains?
I can't see true anonymity being a goal of a system introduced by governments either, though I can see why they wouldn't want an electronic payments system to rely on financial intermediaries in an economy where many people don't use banks.
A public blockchain, even if it is just readable by citizens if far more difficult to manipulate.
> without the resource consumption overheads and limits on concurrent transactions associated with blockchains?
I'm not sure what this is about, do you have a source? Volume of transactions should be easily large enough to satisfy their currency - all that's needed is some hashing.
I'm a proponent of centralization in money. Not so much of useless intermediaries. But I up-voted the grandparent because his question makes total sense.
What is the point of this except, as another commentator say, to keep a registry of all the transactions?
When the Internet started we all though that it was the start of the age of freedom through anonymity, but instead is the age of "I'm only a click away of knowing everything about you".
It seems that blockchain technologies are going to follow the same pattern.
I can't help facepalm when I read news like this. The value proposition of blockchain technology, combined with proof-of-work, is distributed trustlessnes. Why would a national, centralized issuer need anything of this sort? All they need is a PostgreSQL database or, preferably, letting their citizens use whichever medium of exchange they prefer, rather than try to pretend that there isn't plenty of foreign currency that their people would probably prefer using.
I spent a semester abroad in Senegal during the financial crisis of 2008.
I wonder what the details are. The CFA is pegged to the Euro, so this could mark Senegalese monetary independence. A different sort of liberation than most in the blockchain space are going for, but a liberation nonetheless.
I wonder who is mining the blocks? Since this is launched by the government, are they the one doing all the mining? In that case, isn't the currency vulnerable to the 51% attack (i.e. the government could essentially "print" digital money as they wish)?
Decentralized currency isn't something anyone is taking seriously in the financial sector as its antithetical to their needs.
When banks talk about block chains they are talking about private ledgers that will handle concurrent banking, account consolidation and clearinghouse functionalities not about bitcoin.
A bank has to be able to control the currency and honestly it's not like bitcoin is decentralized its in the hands of large miners instead of banks but effectively it can be just as beurocratic.
>The other interesting point to observe is how both Tunisia and Senegal's digital currencies use the blockchain as part of their technology but don't use BitCoin as a currency.
That's a silly thing to say. Tunisia and Senegal already have Bitcoin. If they didn't declare some sort of national currency they would in effect be withdrawing from any sort of control over money in the countries entirely.
It will be interesting to see who may + how they will procuce new "coins". Blockchain is only better if it can deprive privat parties to deflate the value by "printing" more...
Also interesting how much anonymity users will have.
I'm seeing no news coverage of this that doesn't reprint this article or the original press release. Surely this would be big news in proper media, particularly given the buzzword status of "blockchain". What are they actually doing?
Some people like to compair Bitcoin to gold and then the make the argument that gold worked well for a long time. That argument however is flawed because gold usually was used ontop of a banking and coinage/note system.
Take for example the old Scottish banking system during (17/18th century), they on avg had reserve ratio of 2%. That essentially means that the circolating money (feduciary media) is much higher then the gold stock. It also means the the broad response to changes in money demand (velocity).
As long as crypto currencies can not figure this out, the will not be able to run a full modern economy.
One way to do it, would be to use Bitcoin as a gold replacement, and then have 'banks' create Shaum-style E-Cash to people. Then these 'banks' could increase or decrease the supply based on the money demand. That is however far from optimal.
The tricky thing boils down the system being able to buy and sell assts in order to create or destroy money.