Post-Pandemic Economic Risks

Professor William A. Barnett – Director of Advances in Monetary and Financial Measurement at CFS – evaluates present economic policy risks within the context of the ten-year period beginning in 1941.

The post-pandemic period could see a similar conflict between Treasury’s desire to minimize the cost of government debt finance and the Fed’s need to moderate inflation.

A primary harbinger of inflationary pressures would be a surge in liquid monetary assets held in the economy.

Unfortunately, there has been a steady decline in the quality and quantity of money market data available from the Fed – a void that has been partially filled by CFS.

To view the full article:
http://www.centerforfinancialstability.org/research/Post_Pandemic_Economic_Risks_050521.pdf

CFS Monetary Measures for March 2021

Today we release CFS monetary and financial measures for March 2021.  CFS Divisia M4, which is the broadest and most important measure of money, grew by 24.0% in March 2021 on a year-over-year basis versus 27.8% in February.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Mar21.pdf

For more information about the CFS Divisia indices and the data in Excel:
http://www.centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM <GO>
2) ECST T DIVMM4IY <GO>
3) ECST <GO> –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY <GO> –> From source list on left, select ‘Center for Financial Stability’

Inflation Fears Offers the Fed a Chance to Modernize with Money

Investors and the public are right to worry about inflation. Yet, measures to predict the impact of Fed policies on inflation, the economy, and financial stability are of deteriorating quality and being disregarded.

Market participants and especially officials must recognize that quantities of money matter now more than ever. Gyrations of the Fed’s balance sheet are at heights not witnessed in over 100 years.

Here, the Fed is moving in the opposite direction of its Congressional mandate (Section 2A) by increasing the money supply far in excess of long-run growth.

Since 2012, the Center for Financial Stability (CFS) has offered the public alternative monetary measures – pioneered by Professor William A. Barnett.

From this work, we now know that measuring activity in the financial system better predicts both inflation as well as financial instability risks.

We look forward to any comments you might have.

To view the full article:
http://www.centerforfinancialstability.org/research/Modernize_Money_042621.pdf

House Passes Bill to Establish CFTC-SEC Digital Assets Working Group

The U.S. House of Representatives passed a bill that would direct the CFTC and SEC to jointly create a digital assets working group.

The bill would require that the working group include at least one individual representing each of the following groups: (i) financial technology firms providing digital assets products or services; (ii) financial firms within the jurisdiction of the SEC or the CFTC; (iii) institutions or organizations conducting academic research or engaging in advocacy efforts concerning the use of digital assets; (iv) small businesses using financial technology; (v) organizations concerned with investor protection; and (vi) institutions and organizations advocating for investment in historically underserved businesses.

Additionally, the bill would require that, within a year of its enactment, the working group must submit a report to the SEC, the CFTC and “relevant committees” that includes, among other things, an analysis of:

  • the United States’ legal and regulatory framework concerning digital assets, including the effect of (i) the ambiguity of the framework on primary and secondary digital assets markets, and (ii) domestic legal and regulatory digital assets regimes on the “competitive position of the United States”;
  • recommendations regarding (i) the implementation, maintenance and enhancement of primary and secondary digital assets markets, including the improvement of “fairness, orderliness, integrity, efficiency, transparency, availability and efficacy” of those markets, and (ii) standards for custody, private key management, cybersecurity and business continuity as it pertains to digital asset intermediaries; and
  • best practices to (i) decrease the prevalence of digital assets fraud and manipulation in cash, leveraged and derivatives markets, (ii) enhance investor protections for participants in such markets and (iii) aid in compliance with the Bank Secrecy Act’s AML anti-terrorism financing provisions.

LOFCHIE COMMENT

Why is it necessary to have the SEC and CFTC conduct a joint study, with each naming the same number of members? Would it not make more sense to empower one agency (generally the SEC) and direct it to consult with other agencies, including the CFTC and, for example, FinCEN, if AML is a topic of concern?

Second, explicit directions as to the members of the joint study detract from the efficacy of the study. Do the legislators believe that because one financial firm – subject to the regulation of the SEC – is included in the study, that firm can speak on behalf of all the other regulated financial firms?

Third, the topics seem to be a grab bag of wholly unrelated issues: is there some link between digital custody and historically underserved businesses where the same committee members will bring value to both discussions? If so, it is not obvious. If Congress wants both issues (or any of these issues) studied, it should direct the SEC to conduct the studies, and let the SEC figure out how to do so.

Primary Sources

  1. H.R. 1602: The “Eliminate Barriers to Innovation Act of 2021”

Fed changes money; New CFS Divisia Monetary and Financial Measures

On February 23, 2021, the Federal Reserve Board implemented major changes to “streamline” the H.6 statistical releases.  The depth and timeliness of available monetary data diminished significantly.  For instance:

– The publication frequency of the release will change from weekly to monthly.
– Institutional money market funds will be discontinued this year.
– The release will contain only monthly average data – weekly average, seasonally adjusted data will no longer be provided.
– Monetary aggregates will no longer provide a breakdown of components by banks and thrifts.

A series of papers commenting more deeply on these changes as well as implications for financial markets and the economy will be forthcoming.

We apologize for any inconvenience related to the delayed distribution of CFS monetary and financial measures.  A recalibrated and fortified Advances in Monetary and Financial Measurement (AMFM) data set and release is available below.

A hearty thanks to Jeff van den Noort, Ryan Mattson, Liting Su, and especially Professor William A. Barnett – CFS Director of AMFM.

We look forward to any comments you might have.
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Today we release CFS monetary and financial measures for February and January 2021.  CFS Divisia M4, which is the broadest and most important measure of money, grew by 28.1% in February 2021 on a year-over-year basis versus 28.5% in January.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Feb21.pdf

March 2021 data will be released on May 03, 2021 at 9:00 AM ET.

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM <GO>
2) ECST T DIVMM4IY <GO>
3) ECST <GO> –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY <GO> –> From source list on left, select ‘Center for Financial Stability’

CRS Reviews Role of “Payment for Order Flow” in Debate over “Zero Commissions”

The Congressional Research Service (“CRS”) reviewed the role that “payment for order flow” (“PFOF”) plays in the “surge in retail investor securities trading at major discount broker-dealers.”

In its report, CRS described PFOF as a controversial rebate subsidizing the “non-existent commissions.” CRS stated that when broker-dealers do not pass the PFOF rebates onto clients, the economic incentives to send retail orders to rebating market-makers create potential conflicts of interest. CRS noted that this argument is why the United Kingdom has “effectively banned” PFOF.

Advocates for PFOF argue that investors benefit from the subsidized low or zero commission rates. Critics argue that PFOF raises conflicts-of-interest concerns over a brokers’ duty of best execution.

LOFCHIE COMMENT

While payment for order flow is a legitimate area for discussion, the more significant issue is why customers don’t use full-service brokers that provide them with some level of guidance. Congress and the SEC should consider whether over-regulation and the threat of enforcement actions are killing the business of full-service brokerage, leaving retail customers essentially on their own.

Unfortunately, asking the question as to whether regulation may be excessive or have unintended consequences is not a current priority. Rather, the tendency in response to any unusual event is to seek to adopt more regulations, as if more rules are always the panacea. Whether or not payment for order flow survives, the more significant reality is that retail investors are now effectively pushed to obtain their investment advice not from a regulated institution, but from a subreddit. See generally GameStop: Regulators Should Focus Less on “Solving the Problem”; More on “Improving the Situation.”

Charles Goodhart: lifetime achievement award

Congratulations to Professor Charles Goodhart for earning Central Banking’s lifetime achievement award.  Central Banking chronicles many of Charles’ monetary policy and financial stability achievements and work on:

– Monetary frameworks,
– Risk management,
– Hong Kong peg,
– Independence of RBNZ,
– FX research,
– “The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival” with Manoj Pradhan and
– Goodhart’s law.

CFS is grateful to Charles for serving as a senior distinguished Advisory Board member since inception, engaging in roundtable discussions, as well as actively guiding CFS Bretton Woods working conferences over the years.

To view the full article:
https://www.centralbanking.com/awards/7807336/lifetime-achievement-charles-goodhart

A Monetary History of China, free online

I recently found out that the English translation of Peng Xinwei’s monumental work A Monetary History of China is now available free online. The work covers Chinese monetary history from ancient times through the end of the monarchy in 1911. Peng Xinwei was a scholar turned banker who was one of the victims of Mao Zedong’s Cultural Revolution. The Chinese version of the book is from 1965. Edward Kaplan translated the book into English, an impressive feat of scholarship in its own right, and had it published in two volumes in 1994. I wrote a review of the book here.

There have of course been other notable books on Chinese monetary history since. Those that have caught my attention include Richard von Glahn’s Fountain of Fortune: Money and Monetary Policy in China, 1000-1700 and Jin Xu’s recently translated Empire of Silver: A New Monetary History of China. I have not seen a good history of the last century-plus of the Chinese monetary system, though there are books on subperiods and topics. For mainland Chinese scholars, the topic is fraught with difficulty, because under the first few decades of Communist rule, the monetary system was among the institutions that hindered China from experiencing the rapid and widespread economic growth enjoyed by Hong Kong, Singapore, and Taiwan.

Rhodes on Debt for Vaccines program

CFS Chairman of the Advisory Board William R. Rhodes and World Health Organization epidemiologist Cristina Valencia offer an intriguing idea to help ameliorate the COVID-19 pandemic in Latin America… debt for vaccine swaps.

Bill pioneered the use of debt for equity swaps throughout the Emerging world, as head of many advisory committees of international banks. The present idea builds on debt for nature swaps – integrating pharmaceutical companies.

We look forward to any comments you might have.

To view the full article:
https://wrrga.com/wp-content/uploads/2019/02/Breakingviews-Guest-view-Consider-a-debt-for-vaccines-program.pdf

Post BREXIT Risk Conference / Call for Papers

An important United Kingdom economics conference “Post BREXIT: Uncertainty, Risk Measurement and COVID-19 Challenges” is being held online on June 22-23.  Call for Papers information is below.

CFS Director of Advances in Monetary and Financial Measurement (AMFM) Professor William A. Barnett will be delivering a keynote lecture “Is the BREXIT Bifurcation Causing Chaos in the United Kingdom?”

Other keynotes include:

David Aikman: Professor of Finance and Director of the Qatar Centre for Global Banking and Finance, King’s Business School, King’s College.
Patrick Minford: Professor of Applied Macroeconomics at Cardiff University.
Professor Jagjit Chadha: Director of the National Institute of Economic and Social Research (NIESR).
Professor Costas Milas: Professor of Finance at the Management School, University of Liverpool.

The Call for Papers at the U. of Birmingham is at:
https://www.birmingham.ac.uk/schools/business/events/2021/post-brexit-uncertainty-risk-measurement-covid19-challenges.aspx

If you would like to submit a paper, the Call for Papers contains a link to another online page providing more details about the conference and instructions about deadlines and how to submit.  The conference will produce special issues of two journals (Economic Modeling, and European Journal of Finance).

The conference is open to the public with no registration fee.  The Call for Papers contains a link to the registration page.