Topic: Finance, Banking & Monetary Policy

Nigeria’s Floating (Read: Sinking) Naira

On Monday afternoon, the Central Bank of Nigeria (CBN) ended the Nigerian naira’s sixteen-month peg to the U.S. dollar, sending the naira into a freefall. The currency had been pegged at 197 naira per dollar, but as the chart below shows, it had been trading at over 320 naira per dollar for months on the black market (read: free market) and currently sits at 345 naira per dollar. At the time of writing, the naira was officially trading at 282.50 naira per dollar.

The official inflation rate for Nigeria in May was 15.6 percent. However, by using changes in the black market exchange rate data and applying the Purchasing Power Parity Theory, I calculate that the annual inflation rate implied by the free market is actually much higher – currently sitting at over 56 percent (see the accompanying chart).

A managed, floating exchange-rate regime is ill-suited for a country with weak institutions and little discipline, like Nigeria. More troubles lie ahead.

On the Road

If you haven’t heard much from me on these pages of late, it’s because I spent most of the last two weeks traveling back and forth, and so had little time for blogging.

I did, however, participate in some interesting events while I was away.  The first of these was “Futures Unbound,” the second installment so far of Cato’s annual Summit on Financial Regulation, held at the Drake Hotel in Chicago on June 6th.  I gave a talk there on the regulatory role of private clearinghouses.  I also had the pleasure, the night before, of taking part in a speakers’ dinner that was also attended by two distinguished (and very fun!) members of the CMFA’s Council of Academic Advisors, George Kaufman of Loyola University Chicago and Randy Wright of the University of Wisconsin.

After the Chicago event I headed straight to London, where I’d been invited to give the Institute of Economic Affairs’ annual Hayek Lecture.  Before the lecture Philip Booth, the Institute’s Editorial and Programme Director, interviewed me briefly on the necessity of central banks.  The main event took place that evening at Church House, a few blocks away from the IEA’s offices in Westminster; and I was pleased to find that in arranging for that commodious venue the Institute hadn’t overestimated the audience for my topic, which included many good friends from all over Europe.

Alas, much as I would have liked to linger with that crowd, I had to be whisked away, first for some dinner, and thence to a Heathrow hotel, where I could rest a little before catching an early flight to the States, where I took part in the second in what I hope will be a long-lived series of Liberty Fund conferences co-sponsored by them and Cato’s Center for Monetary and Financial Alternatives. This one, on “Liberty and Currency: The U.S. Asset Currency Reform Movement,” took place (appropriately enough) on Jekyll Island, under the direction of CMFA Adjunct Scholar (and occasional Alt-M contributor) Jeff Hummel,  with David Henderson serving as discussion leader.  The other distinguished participants included Rutgers’ Hugh Rockoff and U.C.S.D.’s Lawrence Broz.  Like every other Liberty Fund conference I’ve attended, this one was great fun.  Unfortunately, it’s unbuttoned proceedings were so in part (as is also always the case) because they were both confidential and unrecorded, so I’m unable to share any part of them with you.*

After Jekyll Island it was across the Atlantic again, this time to Zurich, where I took part in the ETH Risk Center’s conference on “Alternative Financial and Monetary Architectures.”  Others who spoke there included William R. White, another member of the CMFA’s Council of Academic Advisors, as well as “Limited Purpose Banking” champion (and write-in U.S. presidential candidate) Laurence Kotlikoff.  Although this event’s proceedings were also not recorded, the ideas I presented were a somewhat modified version of ones I presented at a Cato Monetary Conference a few years ago.

After the Zurich conference, I lingered for a day in Zurich, where I was able, by sheer luck, to dine with Cato Senior Fellow Jerry O’Driscoll, who happened to be on his way to an event in Lichtenstein. That dinner was a splendid and relaxing conclusion to a sometimes taxing itinerary — and the next-best thing to being back home again, with my very best friend.

Penelope compressed

*Those interested in taking part in future Liberty Fund-CMFA events are encouraged to write to me expressing their interest.  Please note, however, that these events are generally open only to academics and other holders of graduate degrees.

[Cross-posted from]

That Saudi Sinking Feeling

The rate of growth in a country’s money supply, broadly measured, will determine the rate of growth in its nominal GDP. For Saudi Arabia, the following table presents a snapshot of the relationship between the growth in the money supply (M3) and nominal GDP.


The chart below shows the course of M3. Following the oil price plunge of September 2014, the growth in M3 has slowed. The rate of nominal GDP growth will follow.

Why is the money supply growth rate declining? Since the plunge in oil prices, the Saudis’ current account has dipped into negative territory. This has to be financed, and the Saudis have used their stash of foreign reserves to do the financing.

Special Favors for IEX Will Not Fix Bad Regulation

It isn’t often that an SEC decision involves the star of a best seller, a “magic shoe box,” and fundamental questions about the meaning of words like “immediate” and “fair.”  The SEC made such a decision on Friday. 

Last fall, the trading system IEX applied for designation as a stock exchange.  IEX, and its CEO Brad Katsuyama, rose to fame several years ago with the publication of Michael Lewis’s popular book Flash Boys.  Lewis, ever the artful storyteller, cast Katsuyama as the likeable underdog, exposing and undermining high-frequency traders (HFTs) through the development of IEX.  IEX, an alternative trading system, or in the more colorful industry jargon, a “dark pool,” has allowed investors to trade away from market scrutiny and the HFTs that populate “lit” exchanges.  But there are advantages to being an exchange, and IEX wants in.

At issue in determining whether to approve the application was the meaning of the word “immediate” in an SEC regulation known as Regulation NMS.  Regulation NMS, approved by the SEC in 2005, was intended to increase competition among trading exchanges, resulting in better execution of trades and better prices for investors.  In furtherance of that goal, a part of the regulation requires that trades be made at the best price listed on any exchange and that exchanges make their quotations “immediately” and automatically available.  In the past “immediate” has been defined as “immediately and automatically executable, without any programmed delay.”  Seems clear enough, right?

Economic Lessons from Muhammad Ali

Since the passing of Muhammad Ali, the establishment has been working in overdrive to convince us that the great boxer was a member of their club. In doing so, the wisdom and wit of Ali has been on display.

Muhammad Ali’s lessons on economics, however, have been absent. Economics? Yes. The lessons were developed in a most edifying book by Donald Sull, The Upside of Turbulence: Seizing Opportunity in an Uncertain World. New York: Harper Collins, 2009 – a book that Mohamed El-Erian recommended to me.

The economic lessons are summarized in “The Boxer Matrix.” A boxer’s fate is determined by a combination of his absorption capacity (read: can he take a punch?) and agility (read: can he avoid a punch?). In the Boxer Matrix, the ideal position to be in is the Northeast quadrant: where Ali and Joe Louis boxed. But, while Ali always had terrific agility, he had to train and think his way to an above average absorption capacity. This capacity was on display in his “Rumble in the Jungle” bout with George Foreman. It was then that Ali’s “rope-a-dope” tactic was executed to perfection.

This brings us to Ali’s message on economics, with particular reference to countries that are heavily dependent on the production of oil. In turbulent times (read: oil price plunges), countries like Saudi Arabia, Venezuela, and Nigeria experience a great deal of pain because their oil-dependent economies aren’t diversified. In short, they lack agility. This is reflected in their position in the lower half of the Boxer Matrix.

Buiter on the Politics of Normalization

The most stinging rebuke, as well as the  most public one, I ever received over the course of my academic career, was delivered to me in the pages of The Economic Journal.  It consisted of a  footnote to an article celebrating James Tobin’s contributions to economics.  The footnote offered a paper of mine, also published in the EJ, as a “striking example” of the “comeback” of models relying upon “ad-hoc, backward-looking, mechanical expectation formation models of the early 1960s…in the guise of adaptive learning rules.”

What made my example especially egregious, in my chastiser’s  view, was the fact that, though I referred to “adaptive learning,” my argument was mainly couched in terms of static expectations — an especially naive sort.  To make matters worse, in defending my method, I referred to some other works that seemed to me to supply a rationale for such “naive” thinking in certain contexts.  By so doing, it seems, I was treating “appeal to higher authority (Marx, Keynes, Lucas etc.) [as] an acceptable substitute for empirical evidence or logical argument starting from reasonable primitive assumptions,” thereby supplying “evidence of the immaturity of economics as a science.”  Ouch!

Sound Money in Theory and Practice

In this commentary, I will analyze the concept of sound money and its relevance today.  The concept evolved in the 19th century as many countries adopted the gold standard.  It became associated with commodity money or “hard currency.”  For example, Mises (1966: 782) stated:

The principle of soundness meant that the standard coins — i.e., those to which unlimited legal tender power was assigned by the laws — should be properly assayed and stamped bars of bullion coined in such a way as to make the detection of clipping, abrasion, and counterfeiting easy.  To the government’s stamp no function was attributed other than to certify the weight and fineness of the metal contained.

There was no requirement that “standard coins” be the exclusive or even preponderant means of payment in day-to-day transactions.  So long as banks of issue (private or central banks) maintained convertibility, then the monetary system had the characteristics of sound money.  As Mises suggested, government’s role was minimal.

As a matter of history, sound money is associated with commodity money.  Mises’ characterization assumes commodity money.  Can there be sound fiat currency?