UK Invitation: Uncertainty, Risk Measurement and COVID-19 Challenges Conference

An important United Kingdom economics conference “Post BREXIT: Uncertainty, Risk Measurement and COVID-19 Challenges” is being held online on July 20-21.

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.
  • Jagjit Chadha: Director of the National Institute of Economic and Social Research (NIESR).
  • Marcelle Chauvet, Professor of Economics, University of California Riverside.
  • Costas Milas: Professor of Finance at the Management School, University of Liverpool.
  • Patrick Minford: Professor of Applied Macroeconomics at Cardiff University.
  • Federica Romei, Associate Professor in Economics, University of Oxford

The full agenda is available at
http://www.centerforfinancialstability.org/events/Post_Brexit_Conference_Programme.pdf

Attendance and registration are free of charge and available at
https://www.birmingham.ac.uk/schools/business/events/2021/post-brexit-conference.aspx

Congratulations to Professor Jane Binner, Chair of Finance at the University of Birmingham, and her colleagues for organizing a timely and impactful conference.

Rhodes on France / Promotion to the Rank of Commander, Legion of Honor

Congratulations to William R. Rhodes – CFS Advisory Board Chairman – for his promotion to the rank of Commander in the Legion of Honor by France.

As Bill notes, “France is our oldest ally, and the friendship between France and the United States has allowed our countries to achieve great things together and to affect the course of history and international relations.”

I was privileged to attend the ceremony and was moved by Bill’s perspective on French and American history as well as his personal engagement with France over the years.

Hence, I thought that you too might enjoy his remarks on receiving this prestigious award…
www.CenterforFinancialStability.org/speeches/William_Rhodes_Legion_of_Honor_Remarks.pdf

Now, Inflation is Clear and Global

Across the board higher consumer price inflation in the United States removes any ambiguity or doubt regarding the existence of price pressures beyond transitory or base effects.

Overall consumer prices increased by 5.4% on the year ending in June. Core inflation increased by 4.5% over the same period.  In fact, in the last 4 months, both overall and core inflation exceeded market expectations and increased relative to the previous month’s release.

The phenomenon also extends well beyond simply the United States. It is global.

A diffusion index of every inflation release relative to the prior release for 49 countries shows an upward impulse since the beginning of the year. More pointedly, a diffusion index of reported inflation relative to expectations for the same complex of countries illustrates how actual inflation has been exceeding expected inflation especially since May 2021.
(see Figures 1 and 2… www.CenterforFinancialStability.org/amfm/studies/Global_inflation_071421.pdf)

The Center for Financial Stability (CFS) has been clear about risks and financial stability implications.  Our first email on April 22, 2020 noted how the initial impulse in the signal from CFS broad money would be a period of disinflation followed by inflation.

Inflation Fears Offers the Fed a Chance to Modernize with Money
http://www.centerforfinancialstability.org/research/Modernize_Money_042621.pdf
Post-Pandemic Economic Risks
http://www.centerforfinancialstability.org/research/Post_Pandemic_Economic_Risks_050521.pdf

June CFS Divisia money and financial liability data will be released on August 2 at 9:00 AM ET.

The present global macro backdrop for investors and officials is one of the most challenging and complex in decades. We look forward to any comments you might have.

CFS Monetary Measures for May 2021

Today we release CFS monetary and financial measures for May 2021. CFS Divisia M4, which is the broadest and most important measure of money, grew by 7.0% in May 2021 on a year-over-year basis versus 12.2% in April.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_May21.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
2) ECST T DIVMM4IY
3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’

Senate Subcommittee Considers Benefits of a Central Bank Digital Currency

The U.S. Senate Banking Subcommittee on Economic Policy considered testimony on the benefits of issuing a central bank digital currency (“CBDC”).

Subcommittee Chair Senator Elizabeth Warren (D-MA) expressed support for a “well-designed” and “efficiently executed” CBDC because of its potential to “drive out bogus digital private money while improving financial inclusion, efficiency, and the safety of our financial system.” By contrast, Ms. Warren criticized cryptocurrencies, calling them a “fourth-rate alternative to real currency” and asserting that they are:

  • a “lousy” means of transacting, since their value substantially fluctuates as a result of speculative day trading;
  • a poor investment, given that there are currently no consumer protections for crypto investors, and pump-and-dump schemes “have become routine in crypto trading”;
  • substantial facilitators of illegal activity, as the secrecy component of cryptocurrencies has enabled criminals to more easily move money; and
  • “staggering” consumers of energy; she pointed to (i) the amount of energy required in “proof-of-work” mining for new cryptocurrency tokens, and (ii) the fact that Bitcoin-related energy consumption is higher than the yearly energy consumption of the Netherlands.

The Subcommittee heard testimony from the following individuals:

  • Dr. Neha Narula, MIT Digital Currency Initiative Director. Ms. Narula testified that a CBDC is not the only method for addressing the issues associated with underbanking in the traditional financial system, noting that a requirement on banks to provide free, no-minimum accounts to users might address the issue. Considering that the U.S. dollar plays a significant role in the global economy, Ms. Narula cautioned against too quickly adopting a U.S. CBDC without thoroughly determining (i) how it should be accessed and managed, and (ii) what data it makes visible, to whom and under what circumstances.
  • Lev Menand, Columbia Law School Academic Fellow and Lecturer in Law. Mr. Menand described shortcomings of the current U.S. banking system, including: (i) inaccessibility for certain U.S. households, (ii) the high cost of overdraft, deposit and minimum balance fees, (iii) slow processing times for check deposits, wire transfers and credit card payments, and (iv) complexity with respect to differing bank ledgers. Mr. Menand stated that the advent of a CBDC could address these shortcomings by, among other things, (i) expanding mainstream banking eligibility, (ii) decreasing the clearing time for payments, (iii) reducing the fees associated with banking, (iv) enhancing financial stability for businesses and institutions, and (v) decreasing regulatory complexity, considering that many of the regulations promulgated following the 2008 financial crisis were aimed at deposit substitutes.
  • Dr. Darrell Duffie, Stanford University Graduate School of Business Professor of Management and Finance. Mr. Duffie urged the United States to invest in the development of a CBDC, considering the progress that has been made internationally in similar ventures, particularly that of China’s eCNY. Mr. Duffie recommended that the United States (i) “take a leadership position” in international conversations regarding the cross-border use of CBDCs, and (ii) enhance the competitiveness and efficiency of the existing U.S. payment system.
  • J. Christopher Giancarlo, Willkie Farr & Gallagher Senior Counsel. Mr. Giancarlo promoted the Digital Dollar Project’s “champion model” proposal for a CBDC, which would involve the Federal Reserve issuing “Digital Dollars” to regulated banking entities. The former CFTC Commissioner stated that the champion model would enable the continuation of the two-tiered commercial bank and regulated money transmitter model through its deployment and recording of the Digital Dollar transition on a “new transactional infrastructure informed by distributed ledger technology.” Mr. Giancarlo asserted that the Digital Dollar would be “far superior” to Bitcoin with respect to environmental sustainability because it would not have to be mined. Rather, the Digital Dollar would be created by the Federal Reserve cryptographically and distributed electronically. Additionally, Mr. Giancarlo contended that the existence of a Digital Dollar during the earlier stages of the COVID-19 crisis would have provided a means of instant monetary relief to targeted beneficiaries. Mr. Giancarlo also noted that a Digital Dollar could be superior to competing financial instruments of foreign jurisdictions, particularly those with anti-democratic regimes that could use those instruments for surveillance purposes. He explained that it would be “in the best national interest of the United States and . . . in the interest of the world economy” to create a well-designed U.S. CBDC. One challenge, Mr. Giancarlo observed, is the ability of the United States to take a leadership role in the innovation of a CBDC, considering that “this global wave of digital currency innovation is quickly gaining momentum.”

LOFCHIE COMMENT

A U.S. dollar CBDC seems inevitable. When Senator Warren and former CFTC Chair Giancarlo agree on something, on anything, it is probably time to act. At what point does continuing to conduct studies create delays that may weaken the competitive position of the dollar in the global economy (or at least fail to capitalize on its strengths)?

PRIMARY SOURCES

  1. U.S. Senate Financial Services Subcommittee Hearing: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency
  2. Senator Elizabeth Warren Testimony: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency
  3. Neha Narula, MIT Digital Currency Initiative Testimony: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency
  4. Lev Menand, Columbia Law School Testimony: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency
  5. Darrell Duffie, Stanford Business School Testimony: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency
  6. J. Christopher Giancarlo, Willkie Farr & Gallagher Testimony: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency

Money Growth Falls – Inflation Threat Remains…

CFS broad money growth slowed to 12.1% on a year-over-year basis in the latest reading for April down from 23.8% in March.

The initial response might be to assume that the large expansion of money is reaching an end. This would be a mistake. The “base effect” elevating monetary growth on a year-over-year basis began to end in March 2021 and fully finished in April 2021. A few issues include:

  • CFS Divisia monetary growth of 12.0% in April dwarfs average growth of 5.6% since 1967 (DM4- excluding Treasury bills).
  • A high frequency reading of CFS monetary data stretching back over 54 years portrays a radically different perspective regarding the performance of broad money and its implications for inflation. It highlights how broad money growth and inflation risks are actually beginning to accelerate (chart available on request).

On April 22, 2020, we were early and clear in our email message “CFS Money Growth Soars to double digits.” The initial impulse embedded in the signal from CFS broad money would be a period of disinflation followed by inflation.

Going forward, inflation will likely continue its upward ascent and stretch beyond the Fed’s comfort zone.

The present global macro backdrop for investors and officials is one of the most challenging and complex in decades. We look forward to any comments you might have.

For more on CFS Divisia money and inflation:
http://www.centerforfinancialstability.org/research/Modernize_Money_042621.pdf
http://www.centerforfinancialstability.org/research/Post_Pandemic_Economic_Risks_050521.pdf

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Apr21.pdf

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

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

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”