Topic: Finance, Banking & Monetary Policy

Fed Officials Endorse Monetary Commission!

According to a report I have before me, straight from the U.S. Senate, prominent Federal Reserve officials, including the presidents of the Federal Reserve Banks of New York and Philadelphia, have publicly endorsed legislation that would establish a bipartisan Monetary Commission authorized “to make a thorough study of the country’s entire banking and monetary set-up,” and to evaluate various alternative reforms, including a “return to the gold coin standard.” The proposed commission would be the first such undertaking since the Aldrich-Vreeland Act established the original National Monetary Commission in 1908.

Surprised? It gets better. The same Senate document includes a letter from the Fed’s Chairman, addressed to the Senate Banking Committee, indicating that the Board of Governors itself welcomes the proposed commission. Such a commission, the letter says, “would be desirable and could be expected to form the basis for conservative legislation in this field.”

Can it be? Have Fed officials had a sudden change of heart? Have they really decided to welcome the proposed “Centennial Monetary Commission” with open arms? Is it time to break out the Dom Pérignon, or have I just been daydreaming?

Monetary Rules: Solving the Knowledge Problem

In its “Free Exchange” column, the Economist recently took up the issue of monetary rules. Provocatively titled “Rule It Out,” the column announced that “setting interest rates according to a fixed formula is a bad idea.”

Reading the column one quickly learns the author doesn’t understand what constitutes a rule, and what the argument for a rule is. The column moves from a general consideration of monetary rules to considering specifically the Taylor Rule. I leave it to Professor Taylor to defend his rule, which he did on his blog. I, however, consider the general case for monetary rules.

The Kansas City Fed’s Top Secret Jackson Hole Conference

Each year, since 1978, the Federal Reserve Bank of Kansas City hosts central bankers from around the globe at Jackson Hole, Wyoming, to assess monetary policy.  The conference is closed to the public and the Kansas City Fed does not make its program available to the public until the day of the event.  Here’s what one can find when going to their website:

“The 2015 Economic Symposium, “Inflation Dynamics and Monetary Policy,” will take place Aug. 27-29, 2015. (The program will be available at 6 p.m., MT, Aug. 27, 2015).”

This information is treated as if it’s “top secret.”

But it’s not a top secret that the Federal Reserve lacks transparency, is not bound by any monetary rule, has more power than ever before (as a result of the unconventional monetary policies pursued since the 2008 financial crisis), and opposes a congressional audit—even though the Constitution gives Congress the power to regulate the value of money. 

Luckily, the American Principles Project will be holding a parallel conference near the Fed’s site in Jackson Hole to evaluate the Fed’s performance after more than 100 years and offer alternatives to a regime of pure discretionary government fiat money.

The topic of the APP conference—“Is Central Banking the Problem or the Solution?”—will give participants the opportunity to offer advice on how to improve the monetary regime, not just monetary policy. (On the same topic, see the Spring/Summer 2015 issue of the Cato Journal: “Alternatives to Central Banking: Toward Free-Market Money”)

Mark Calabria, director of Cato’s Financial Regulation Studies, within Cato’s newly established Center for Monetary and Financial Alternatives, will be speaking at the APP conference on Friday, August 28. His topic is “Regulatory Failure at the Fed.” Tune in.

A Bitcoin Constitutional Amendment

Some influential developers of the software that runs Bitcoin have proposed an important amendment to the functioning of the leading cryptocurrency. It’s a development as important to Bitcoin as a constitutional amendment aimed at the Fed would be to the dollar.

The debate has been characterized in some headlines as “existential,” and one write-up called it a “constitutional crisis.” Both are probably overstating the situation. But it’s worthwhile to dig in and see what we should make of the debate. Doing so can tell us how things might go for lots of things in the world of cryptocurrency, including potential future proposals to alter Bitcoin’s embedded monetary policy.

The IMF’s Little Greek Secret

Landon Thomas, Jr. of The New York Times reports that the International Monetary Fund (IMF) might not pony up any cash for the third Greek bailout. To calculate the odds on whether the IMF will, or will not, contribute bailout funds requires knowledge of the IMF’s little Greek secret.

By late 2009, Greece was clearly in big trouble. The European Commission (EC) and the European Central Bank (ECB) did not trust the Greek government. So, the IMF was called in to negotiate loan conditions for new Greek financing. Dominique Strauss-Kahn (DSK) was the IMF’s managing director and was preparing to run for the French presidency as the Socialist candidate. DSK was more than willing to give his socialist brothers in Athens a helping hand. As a result, in 2010, Greece received a massive bailout.

Just how massive? Normally, the IMF is limited to lending up to six times a country’s IMF quota subscription to that country. However, if the IMF judges a country’s debt to be sustainable, then that country can qualify for “exceptional access,” and the IMF credit extended to such a country can exceed the 600% limit. Thanks to DSK and the IMF experts, the debt sustainability reports were rosy, until recently. The IMF extended credit to Greece, and did so generously.

The following table tells the tale. Greece holds the record for the highest IMF credit level relative to a country’s quota.

What about the little secret? Well, the IMF has been caught out. It’s massively overextended to Greece. And that explains the cat and mouse game over whether the IMF will, or will not, deliver a present at the third Greek bailout party.

Why China Is in Trouble

The course of an economy is determined by the course of that economy’s money supply (broadly determined). The relationship between money growth and nominal GDP growth is presented in the accompanying chart. It is persuasive. Indeed, money, not fiscal policy, dominates.

As I listen to all the ad hoc conjectures about the state of China’s economy and its near-term prospects, I am astounded to never hear anything said about the most important determinant of nominal economic growth: the money supply. The second chart tells the tale. The picture is not a pretty one. China’s money supply growth rate has been slowing down since early 2012. It now is growing at an annual rate of about 10%, which is well below the trend rate of money growth: 17.06%. China is in trouble. Slower money supply growth means that slower nominal GDP growth is already baked in the cake.

A Rush to Judge Gold

Of course I didn’t expect my recent post, listing “Ten Things Every Economist Should Know about the Gold Standard,” to stop economists from repeating the same old misinformation. So I’m not surprised to find two of them, from the New York Fed, repeating recently some of the very myths that I would have liked to lay to rest.

The subject of James Narron and Don Morgan’s August 7th Liberty Street Economics post is the California gold rush. After describing the discovery at Sutter’s mill and the “stampede” of prospectors anxious to get their hands on part of the “vast quantities of gold” whose existence that discovery had revealed, Narron and Morgan observe that the

large gold discovery functioned like a monetary easing by a central bank, with more gold chasing the same amount of goods and services. The increase in spending ultimately led to higher prices because nothing real had changed except the availability of a shiny yellow metal.

No economist worthy of the name would deny that, other things being equal, under a gold standard more gold means higher prices. But other things evidently weren’t equal in the U.S. in the late 1840s and early 1850s, for if they had been the path taken by the U.S. CPI between 1830 and 1880 would not have looked as it does in the chart shown below, which was also in my above-mentioned post:


*Graphing Various Historical Economic Series,” MeasuringWorth, 2015.

As you can see, the gold rush didn’t even cause a blip in the CPI, which was about as stable from 1840 to 1860 as it has ever been. Indeed, prices fell slightly, making for an annual inflation rate of minus .19 percent. For the shorter period of 1845 to 1860 the inflation rate is, admittedly, much higher: a whopping .63 percent. But even this higher rate is, according to the Fed’s current credo, was dangerously low. Were one to assume that a 2 percent inflation rate was as desirable 167 years ago as Fed officials claim it to be today, one would have to conclude that the gold rush, far from having made the U.S. money stock grow too rapidly, didn’t suffice to make it grow rapidly enough.