Topic: Finance, Banking & Monetary Policy

Bankers Advise Fed to Regulate Bitcoin

Four times a year members of the Federal Reserve Board are scheduled to meet with members of the banking industry, as represented by the Fed’s Federal Advisory Council.  This, of course, does not include all the many other occasions that the Fed meets with bankers.  These meetings allow the banking industry to express its views to the Fed on a wide range of issues.  Summarized records of those meetings are released to the public.  In the most recent meeting, bankers raised, among other topics, the issue of Bitcoin. 

While the bankers did not yet view Bitcoin as a viable competitor to their role in the payments system, the bankers did express that Bitcoin “regulation is advisable.”  Those soft-hearted bankers expressed a concern that without adquate consumer protections, users of Bitcoin would be vulnerable to fraud and theft.  Bankers also suggested, presumably out of a concern for national security, that Bitcoin be subject to the same anti-money-laundering procedures, including Know-Your-Consumer, that banks are subjected to.  Bankers explicitly suggested that Bitcoin be subjected to the suspicious activities reports (SARs) that banks must currently file. Personally, this all sounds like an attempt at “raising rivals’ costs” to me.

Interestingly banks also suggested that in “an economy hypothetically dominated by Bitcoin, its finite number (21 million) would prevent the application of traditional monetary policy tools to provide support…” In other words banks are concerned that a Bitcoin world would be one where bank bailouts and assistance were more difficult to achieve.  I guess one man’s bug is another man’s feature.

Bitcoin Charts, Finally

Bitcoin, the new digital currency, remains a mystery to many. There is no better way to lift the fog surrounding bitcoin than to let the data speak. And data speaks loudest through charts. Yes, topological analysis is often the best route to comprehension.

I have constructed – with my assistant, Mazin Al-Rayes – a series of charts that contain illuminating data about bitcoins and brief directions for use following each chart.

How to interpret: Currently there are 13.235 million bitcoins in circulation. The issuance of new bitcoins will halt when the total number of bitcoins “mined” (read: in circulation) reaches 21 million.

Prof. Krugman Snared By 364 Trap

In his New York Times column of September 15, 2014, How to Get It Wrong,Paul Krugman pleas for open-mindedness and reason. From whence did Prof. Krugman convert from his embrace of dogmatism?

Well, it’s clear that he has not converted. Indeed, the evidence resides about three quarters of the way through his column:

“The great majority of policy-oriented economists believe that increasing government spending in a depressed economy creates jobs, and that slashing it destroys jobs — but European leaders and U.S. Republicans decided to believe the handful of economists asserting the opposite. Neither theory nor history justifies panic over current levels of government debt, but politicians decided to panic anyway, citing unvetted (and, it turned out, flawed) research as justification.”

This passage brings back vivid memories of the 364. In 1981, Margaret Thatcher was prime minister and my friend and collaborator, the late Sir Alan Walters, was her economic guru. Britain’s fiscal deficit was relatively large, 5.6% of its gross domestic product, and the economy was in the middle of a nasty slump. To restart the economy, Thatcher instituted a fierce fiscal squeeze, coupled with an expansionary monetary policy. This was immediately condemned by 364 dyed-in-the-wool Keynesian economists - virtually all of the British establishment. In a letter to the Times, they wrote, “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”

Thatcher and Walters were vindicated quickly. No sooner had the 364 affixed their signatures than the economy turned around and boomed for the next five years. That result provoked disbelief among the Keynesians. After all, according to their dogma, the relationship between the direction of a fiscal impulse and economic activity is supposed to be positive, not negative.

The 364’s dogma was proven wrong. Thatcher and Walters were right.

Middle East and North Africa: A Fatal Attraction

Last week, President Obama addressed the nation to proclaim that the U.S. and an unspecified coalition were going to once again ramp up our military operations in Middle East and North Africa (MENA). This time, the target is the Islamic State, the group terrorizing Iraqi and Syrian citizens.

Just what is the economic condition of that troubled MENA region? This is a question that must be addressed by anyone who is looking over the horizon. After all, the state of an economy today will have a great influence on post-war prospects tomorrow.

My Misery Index allows us to obtain a clear picture of the current economic situation. The Index is the simple sum of the inflation rate, unemployment rate and bank lending rate, minus per capita GDP growth. I calculated a misery index for the countries in MENA where sufficient data were available.

As the chart shows, many of the countries in MENA are, well, miserable. Indeed, a score of over twenty indicates that serious structural economic problems exist. To correct these problems, thereby reducing misery, major economic reforms (read: free-market reforms) must be implemented. But, even if the respective governments approve such changes, it is unclear whether they can be implemented. To put a bit of color on that conjecture, consider that only 13 of the 21 countries in MENA reported the four pieces of economic data that are required to calculate my Misery Index. The regional governments’ inability to produce reliable economic data is a canary in a coal mine. When it comes to MENA, most of the countries have been singing for a long time. The region is, by and large, miserable.

Argentina: Down The Tubes, Again

President Christina Fernández de Kirchner has turned up her left-wing rhetoric as the economy goes down the tubes. Indeed, GDP has contracted for the past two quarters; inflation is galloping at 56%, not the official 15.01%; and the country has defaulted on its debt, again. Never mind. The President claims Argentina’s financial system is “one of the most solid in the world.” She asserts that Argentina’s woes can be laid squarely at the feet of foreign “vulture funds” and greedy capitalists who have speculated against the peso. Yes, the peso has lost 42.6% of its value against the U.S. dollar on the black market since the first of the year, and for very legitimate reasons.

But, for realists like me, a fact check is always worth a peso. Recently, Bloomberg’s Charlie Devreux and Pablo Gonzales penned some most edifying reportage on one thing that’s booming in Argentina: criminality. Bandits have put cargos of grain headed for the port of Rosario in their crosshairs. And why not – grain is traded in greenbacks, not pesos.

Property’s worst enemy is theft: theft makes property insecure. And unless property is secure, it can’t be accumulated and it is wasted. The increasing incidence of heists on grain, Argentina’s most valuable export, indicates that property rights are becoming more insecure and that the economy only has one way to go: down the tubes.

Indonesia Reform, Please

The Indonesian stock market has just hit a record high on the hope that the incoming President, Joko Widodo, will push through economic reforms. But, what path should he follow? My advice to President Widodo is the same as that I gave President Suharto, when I was his advisor in 1998: follow Singapore and Lee Kuan Yew.

When Singapore gained independence in 1965, Lee Kuan Yew developed a set of sound principles, which proved to be highly successful. Indeed, their implementation propelled Singapore to the top of the world’s competitiveness rankings. I have dubbed these principles the “Singapore Strategy.” It contains the following five elements:

  • First and foremost, stabilize the currency. Singapore achieved stability with a currency board system – a simple, transparent, rule-driven monetary regime.
  • Second, don’t pass the begging bowl. Singapore refused to accept foreign aid of any kind.
  • Third, foster first-world, competitive, private enterprises. Singapore accomplished this via light taxation, light regulation, and completely open and free trade.
  • Fourth, emphasize personal security, public order, and the protection of private property.
  • The final key to Lee Kuan Yew’s “Singapore Strategy” is the means to accomplish the previous four goals: a small, transparent government that avoids complexity and red tape. And one that is directed by first-class civil servants who are paid first-class wages.

Savings and the Decline of Small Business Entry

A recent paper from the Brookings Institute raises an important observation that businesses are “becoming older,” that is, the age profile of American business is increasingly dominated by older firms.  One reason is that the entry rate of new businesses has been steadily declining for decades. 

While this decline has been witnessed across firm size, it has been most dramatic among small firms.  One potential contributor to the decline in new small businesses is the long run decline in the personal savings rate.  According to the Census Bureau’s Survey of Business Owners, the number one, by a long shot, source of capital for new businesses is the personal savings of the owner.  For firms with employees, about 72 percent relied upon personal/family savings for start-up capital.  The other dominate sources of capital, credit cards and home equity, were much less frequently used.  Recent legislative changes (2009 Card Act) and a volatile housing market have made those sources less reliable in recent years.

The chart below compares the trend in entry rates for new business establishments with less than five employees with the personal savings rate.  The correlation between the two is 0.62.  While both the decline in business entry and savings are likely driven by common macroeconomic factors, it seems plausible that if households have fewer saving, they are also less likely to be able to start a business.  My preferred response would be to eliminate policies, such as those in the tax code or current monetary policy, which penalize savings.  I suspect others might have different suggestions.