IMF Senior Executives Warn of Financial Stability Risks Posed by “Crypto Boom”

In an International Monetary Fund (“IMF”) blog post, IMF senior executives warned of the risks to financial stability from “cryptoization.”

The executives reported that the value of the crypto asset market increased tenfold from early 2020 to September 2021, even though many of the industry’s intermediary entities (e.g., miners and exchanges) lack “strong operational, governance, and risk practices.” They noted the substantial disruptions experienced by crypto exchanges during times of market turmoil, as well as a number of “high-profile” hacking incidents that resulted in stolen customer funds. While such incidents have not significantly affected financial stability, they argued, the crypto industry’s growth poses significant consumer protection risks.

In addition, the executives noted the money laundering, tax evasion and terrorist financing risks arising from the data gaps associated with the “(pseudo) anonymity” of crypto products. They stated that international regulatory collaboration is critical to crypto market regulation because the majority of crypto exchange transactions take place “through entities that operate primarily in offshore financial centers.” They also expressed concern regarding the risks to implementing monetary policy effectively that may result from the widespread use of cryptocurrencies.

To address issues arising from rapid crypto industry developments, the executives recommended that regulators (i) promptly take action to reduce data gaps, (ii) improve cross-border collaboration to reduce the risk of “regulatory arbitrage” and maximize supervision and enforcement efforts, (iii) implement current international standards that are applicable to crypto assets, including with respect to securities regulation, (iv) assess the benefits of adopting a central bank digital currency and (v) prioritize making cross-border payments more economical, efficient, transparent and widely available through the G20 Cross-Border Payments Roadmap.

LOFCHIE COMMENTARY

For all of the concerns that the U.S. and global regulators have expressed regarding digital assets, there has been disappointingly little focus on distinguishing among the different types of digital assets. A “trust” currency such as Bitcoin raises very different issues from a stablecoin that is fully supported by U.S. dollars in a U.S. bank (assuming, of course, that the dollars are there). These assets are different from digital assets that represent ownership of a company and likewise different from utility tokens. The resort to proclaiming that all of these assets should be regulated as securities has the benefit of simplicity, but it is not correct (at least under U.S. law), and it will make impossible a good number of the legal uses for which digital assets are well suited.

Beers on the U.S. Debt Fight

Today, Barron’s published an op-ed by CFS senior fellow David Beers titled “Democracy is at Stake in the U.S. Debt Fight.”

David discusses the ongoing struggle with deficits and the debt ceiling within the context of Standard & Poor’s (S&P) decision to become the first major credit rating firm to downgrade U.S. debt. At the time, David led S&P’s global team of analysts responsible for sovereign and international public finance credit ratings and research. He later worked on sovereign debt, IMF, China, and Euro Area policy issues for the Bank of England.

As noted in the piece, the opinions are the author’s alone.

Many points are worth further exploration, yet some may be viewed as political. CFS focuses on analytics. CFS is nonpartisan. Hence, we leave the politics for you to sort through.

The op-ed is excellent. It clearly illustrates drivers behind the deterioration in sovereign credit quality in the U.S. as well as other sovereigns around the world. In fact, going forward, economic management with a keen eye to these drivers can reverse the slide in credit quality.

To view the full article:
https://www.barrons.com/articles/us-debt-downgrade-51633382585?tesla=y

We look forward to any comments you might have.

CFS Monetary Measures for August 2021

Today we release CFS monetary and financial measures for August 2021.  CFS Divisia M4, which is the broadest and most important measure of money, grew by 4.4% in August 2021 on a year-over-year basis versus 3.9% in July.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Aug21.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’

CFS Monetary Measures for July 2021

Today we release CFS monetary and financial measures for July 2021. CFS Divisia M4, which is the broadest and most important measure of money, grew by 3.9% in July 2021 on a year-over-year basis versus 4.4% in June.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Jul21.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’

Bair on Finance for Kids

CFS Advisory Board Member Sheila Bair is now the author of a new series of entertaining children’s books about money called “Money Tales.”

She notes that “kids ‘get money’ at an early age, and we need to feed that inquisitiveness. Over 70% of student borrowers say they wish they had better information about debt and its burdens when they decided to borrow, and over half wish they had not borrowed at all.” She wants to make sure future generations of borrowers are better prepared.

Sheila has a hidden past as a children’s book writer. She was recognized by the Council on Economic Education, Association of Educational Publishers, JumpStart Coalition, and the Institute for Financial Literacy for her efforts to teach kids and their parents about money basics.

On September 15, the new Money Tales series will include:

Billy the Borrowing Blue-Footed Booby
https://www.amazon.com/Billy-Borrowing-Blue-Footed-Booby-Money/dp/0807508128
Princess Persephone Loses the Castle
https://www.amazon.com/Princess-Persephone-Loses-Castle-Money/dp/0807566470

Her first two books, Rock, Brock and the Savings Shock and Isabel’s Car Wash, published 15 years ago, continue to sell well.

They are available for pre-order now on Amazon, for yourselves, your friends, or anyone you know with children or as donations to schools or libraries.

Barnett Keynote on BREXIT at UK Conference on Uncertainty, Risk Measurement and COVID-19 Challenges

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

Bill’s remarks explore:

  • Why is Brexit changing economic risk without a source of external shocks?
  • Mathematical properties of chaos with relevance to BREXIT and U.S. monetary policy.
  • Why chaos is not necessarily bad. It is normal in nature (weather, climate, etc.) and is relevant to science and economics. Chaos contains useful information.
  • The United Kingdom and United States economies have undergone significant structural and policy changes in the past decades rendering chaotic dynamics more relevant.
  • Meaningful policy implications stem from the existence of Shilnikov Chaos.
  • Shilnikov chaos, produced by interest rate feedback policy with sticky prices, explains the downward drift of interest rates over the past 20 years.
  • Interest rate feedback policy rules need to be augmented by simultaneous use of a second policy instrument focused on the long run to avoid unintentional downward drift of interest rates to their lower bound.

For the slide deck…
http://www.CenterforFinancialStability.org/speeches/UK_bifurcation_Barnett.pdf
For the lecture…
https://www.youtube.com/watch?v=W2URCxL5owU&ab_channel=KUDepartmentofEconomics%20

FT Letter: Investors shouldn’t bet too much on macro forecasts

Today my letter in the Financial Times (FT) responds to Howard Marks’ “Investors must not bet too much on macro forecasts.”  Marks offers a superb road map for navigating future inflation twists and turns.

However, he misses how macro rules of nature can often be measured – helping investors and public officials better achieve their respective goals.

Monetary measurements represent simply one meaningful mapping.

To view “Inflation was inevitable after the Fed fuelled monetary growth”:
https://www.ft.com/content/2f7f1bad-ed6b-4a6a-9123-0eb024541c8a

We look forward to any comments you might have.

CFS Monetary Measures for June 2021

Today we release CFS monetary and financial measures for June 2021. CFS Divisia M4, which is the broadest and most important measure of money, grew by 4.5% in June 2021 on a year-over-year basis versus 7.0% in May.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Jun21.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’

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