Category Archives: Notes

Debt Monetization

On VoxEU, Refet Gürkaynak and Deborah Lucas argue in favor of helicopter drops to finance the fiscal burden due to Covid-19 and they propose an elegant way to implement such drops without undermining the central bank’s equity position (if regulators accept accounting tricks).

The special issue bonds would be zero coupon perpetuities and therefore would not obligate Treasury to any future payments. The legislation would require the Fed to buy these bonds from the banks at par. The bonds would then remain on the Fed’s balance sheet indefinitely. This monetises the special issue bonds.

Censorship Resistant Payment Technologies

On Coin Center’s blog, Matthew Green and Peter van Valkenburgh write:

Censorship resistance is the only way to guarantee that a digital asset truly is “bearer” and can be sent directly from one person to another without reliance on a third party. Cryptocurrencies achieve this property by making network participants (miners) compete for the power to add transactions to the ledger. Even if some miners wish to censor a transaction, we assume that others will not, particularly if it means they are forgoing fee revenue. A centralized digital dollar would not have competitive mining but if the role of the ledger-keeper was reduced to verifying zero-knowledge proofs then any refusal to perform that verification risks indiscriminately censoring users throughout the economy. If the Treasury became corrupt, it could degrade the performance of the network system-wide, but it would be difficult to selectively block certain individuals or surveil their activities.

None of these protections, however, are guaranteed, and new technologies always present unpredictable risks and unintended consequences. We must, therefore, preserve and defend physical cash and should never celebrate its demise. Cash, along with cryptocurrencies, is essential as a payment method of last resort that cannot be surveilled or controlled by corrupt governments or unscrupulous corporations.

The German Constitutional Court’s May 5, 2020 Verdict

The court’s press release: Beschlüsse der EZB zum Staatsanleihekaufprogramm kompetenzwidrig.

Critical discussion on Verfassungsblog by Alexander Thiele.

Critical Twitter thread by Jean-Pierre Landau.

Corinna Budras in the FAZ:

Viel größer sind die Bedenken über Kompetenzstreitigkeiten, die nun von Polen oder Ungarn angeführt werden könnten. Das wissen auch die Bundesverfassungsrichter, die diese Kritik in ihrem Urteil schon vorwegnehmen: Nur in absoluten, eng begrenzten Ausnahmefällen sei sie möglich, nämlich dann, wenn ein ausbrechender Rechtsakt” vorliege, der dazu führe, dass sich eine europäische Institution neue Kompetenzen schaffe, die ihr niemals übertragen worden seien und der deutsche Bürger dadurch in seinen Grundrechten verletzt werde. Konkret bedeutet das: Wenn sich Europa so ausbreitet, dass der demokratisch gewählte Bundestag nichts mehr zu sagen hat, steht das Bundesverfassungsgericht Gewehr bei Fuß.

Martin Wolf in the FT:

What can be done? … Or, the decision could be ignored. If a German court can ignore the ECJ, maybe the Bundesbank can ignore that court. … The EU could initiate an infringement proceeding against Germany. But its direct target would be the German government, which is caught between the EU organs on the one hand and the court on the other.

In the SZ, Wolfgang Janisch and Stefan Kornelius summarize an interview with one of the judges, Peter Michael Huber:

“Der Satz der Kommissionspräsidentin von der Leyen, das Europarecht gelte immer und ohne jede Einschränkung, ist, so gesehen, falsch”, sagte Huber in einem Interview der Süddeutschen Zeitung. “Auch die anderen Mitgliedstaaten kennen äußerste, an ihre Verfassungsidentität anknüpfende Grenzen, wo sie den Vorrang der nationalen Verfassungen vor dem Europarecht postulieren.” Das betreffe aber nur einen winzigen Teil des EU-Rechts.

… “Von der EZB verlangen wir nur, dass sie vor den Augen der Öffentlichkeit ihre Verantwortung übernimmt und auch begründet – auch gegenüber den Leuten, die Nachteile von ihren Maßnahmen haben.” Weder verlange das Gericht, das Anleihekaufprogramm zu unterlassen, noch mache es inhaltliche Vorgaben. “Wir wollen nur einen Nachweis, dass das noch innerhalb ihres Mandats ist.”

Nach Hubers Worten könnte man etwa eine Begründungspflicht in die EZB-Satzung aufnehmen. Und das Verhältnis zum EuGH ließe sich durch einen Mechanismus zur Konfliktschlichtung entschärfen. “Das Vernünftigste wäre, den Ball flach zu halten und zu überlegen, ob unser Urteil nicht doch ein paar richtige Punkte enthält.”

Michael Rasch in the NZZ:

Die Verfassungsrichter vermissten besonders eine Prüfung der Verhältnismässigkeit durch den EuGH. Die Luxemburger Richter hatten, wie auch die deutschen Verfassungsrichter, von der EZB die Verhältnismässigkeit der Massnahmen eingefordert, diese aber eben nicht analysiert.

On German TV, Frank Bräutigam interviews Andreas Voßkuhle.

(Updated repeatedly.)

China’s Digital Renminbi

In the NZZ, Matthias Müller reports how China’s CBDC plans progress:

In China beginnen nun im Viertel Xiangcheng, das zu der unweit von Schanghai gelegenen Millionenstadt Suzhou gehört, in einem geschlossenen System erste Tests. …

Die PBoC dürfte ein zweistufiges System entwickelt haben. Auf der ersten Ebene wird die digitale Währung an die Geschäftsbanken ausgegeben. Auf der zweiten Ebene können dann die Haushalte und Unternehmen den digitalen Yuan abheben und verwenden. …

In Suzhou werden im April in einem ersten Schritt die digitalen Geldbeutel auf die Smartphones ausgewählter Testpersonen aufgespielt, wobei es sich um Angehörige des öffentlichen Diensts handelt.

Libra 2.0

What’s left? The new plans envision

  • Several stablecoins tied to existing fiat currencies rather than (or in addition to) to the originally planned currency basket.
  • No more “permissionless” transactions, no more “censorship resistance.”
  • Vetting of new wallets by the operator (KYC, AML).

The new Libra White Paper.
Teunis Brosens and Carlo Cozucco in ING’s THINK.
Kiran Stacey and Hannah Murphy in the FT.
Philip Sandner and Jonas Gross in Medium.
Updated (April 25): Eichengreen and Viswanath-Natraj on VoxEU.

 

Medical Specialist Condemns Swiss Covid-19 Preparations and Response

In Die Mittelländische Zeitung, a Swiss doctor criticizes Switzerland’s preparations and response to Covid-19. He points to

  • Lack of preparation by political decision makers
  • Misleading communication by federal health officials
  • Their apparent lack of awareness of academic work on the topic
  • Arrogance in Switzerland and the West vis-à-vis China and other far eastern countries
  • Sensationalist scare mongering in the media
  • Calls for systematic infection of groups that are less at risk

Informative as far as medical aspects are concerned. Not convincing when criticizing statistical approaches to grasping the problem. Questionable as far as ex-post validation of eight studies and calls for action are concerned.

Switzerland Peps Up SMEs

How Switzerland peps up SMEs: Banks are encouraged to extend credit (at 0%). The treasury guarantees the loans. The SNB refinances banks and accepts the guaranteed loans as collateral. Fast and efficient. Eventually, some of these loans will turn into grants of course. But that’s ok; the first-best response to a shock with asymmetric effects does involve transfers if markets are incomplete.

Data and Research on the Coronavirus

The first of a long sequence of nice papers on the virus by economists are out:

  • Martin Eichenbaum, Sergio Rebelo, and Mathias Trabandt (2020), The Macroeconomics of Epidemics. NBER wp 26882. (My comments on Twitter.)
  • James Stock (2020), Coronavirus Data Gaps and the Policy Response to the Novel Corona Virus. Mimeo. Conclusion: There is an urgent need to reliably estimate the asymptomatic rate—the share among the infected who do not show strong symptoms.

For more recent papers, see for example CEPR’s Covid Economics: Vetted and Real-Time Papers.

Data:

Estimates and forecasts:

Oxford University’s government response tracker.

Coronavirus link database.

Updated: March 26, April 26, …

Coronavirus: The Hammer and the Dance

An excellent article written by Tomas Pueyo and published on Medium.

Summary of the article: Strong coronavirus measures today should only last a few weeks, there shouldn’t be a big peak of infections afterwards, and it can all be done for a reasonable cost to society, saving millions of lives along the way. If we don’t take these measures, tens of millions will be infected, many will die, along with anybody else that requires intensive care, because the healthcare system will have collapsed.

… Here’s what we’re going to cover today, again with lots of charts, data and models with plenty of sources:

  1. What’s the current situation?
  2. What options do we have?
  3. What’s the one thing that matters now: Time
  4. What does a good coronavirus strategy look like?
  5. How should we think about the economic and social impacts?

When you’re done reading the article, this is what you’ll take away:

  • Our healthcare system is already collapsing.
  • Countries have two options: either they fight it hard now, or they will suffer a massive epidemic.
  • If they choose the epidemic, hundreds of thousands will die. In some countries, millions. And that might not even eliminate further waves of infections.
  • If we fight hard now, we will curb the deaths.
  • We will relieve our healthcare system.
  • We will prepare better.
  • We will learn.
  • The world has never learned as fast about anything, ever.
  • And we need it, because we know so little about this virus.
  • All of this will achieve something critical: Buy Us Time.

If we choose to fight hard, the fight will be sudden, then gradual. We will be locked in for weeks, not months. Then, we will get more and more freedoms back. It might not be back to normal immediately. But it will be close, and eventually back to normal. And we can do all that while considering the rest of the economy too.

Marshall Islands CBDC

The Marshall Islands CBDC project moves forward. Algorand, the project partner, reports that

blockchain for the world’s first national digital currency, the Marshallese sovereign (SOV), will be built using Algorand technology. The SOV will circulate alongside the US dollar and help the Marshall Islands efficiently operate in the global economy.

Coronavirus: Effects on Course Program in Gerzensee

The Central Bankers Course ”Monetary Policy, Exchange Rates, and Capital Flows” has been postponed to 2021.

Doctoral courses currently take place as usual, subject to the following restrictions:

  • Participants are not allowed to attend Study Center Gerzensee events nor enter the Center’s premises for 14 days after returning from areas where the Coronavirus has spread. As of 2 March 2020, these areas are China, South Korea, Singapore, Iran, and Northern Italy defined as Tuscany, Emilia-Romagna and all other Italian regions further north.
  • Participants with symptoms of any mild or severe sickness are not allowed to attend Study Center Gerzensee events nor to check in at the Study Center.
  • Participants who experience symptoms after check in must stay in their hotel room and wait for instructions by local authorities.

On the Future of Payments and Settlement

In its Quarterly Review, the BIS offers nice perspectives on the future of payments. Morten Bech and Jenny Hancock survey innovations in payments, and where the problems lie. Tara Rice, Goetz von Peter and Codruta Boar examine the fall in the number of correspondent banks. Morten Bech, Umar Faruqui and Takeshi Shirakami discuss cross border payments. Morten Bech, Jenny Hancock, Tara Rice and Amber Wadsworth discuss securities settlement. And Raphael Auer and Rainer Böhme explore design choices of a retail CBDC.

e-krona Pilot

The Riksbank starts a pilot project with Accenture to develop a technical solution for a retail e-krona.

Users shall be able to hold e-kronor in a digital wallet, make payments, deposits and withdrawals via a mobile app. The user shall also be able to make payments via wearables, such as smart watches, and cards.

The pilot runs for a year, on a distributed ledger, according to the Riksbank’s press release. More detailed information is contained in this note.

 

 

 

Pretend Economists

In Foreign Affairs, Paul Romer criticizes “pretend economists” who pretend that economics—and they themselves—can answer normative questions on scientific grounds. He argues that “pretend economists” open the field to corruption.

The alternative is to make honesty and humility prerequisites for membership in the community of economists. The easy part is to challenge the pretenders. The hard part is to say no when government officials look to economists for an answer to a normative question. Scientific authority never conveys moral authority. No economist has a privileged insight into questions of right and wrong, and none deserves a special say in fundamental decisions about how society should operate. Economists who argue otherwise and exert undue influence in public debates about right and wrong should be exposed for what they are: frauds.

Edward Snowden’s “Permanent Record”

An intriguing description of America’s intelligence community and the industry surrounding it; the slippery slopes; and Snowden’s motivation for following his conscience rather than the money. From the book, how we got here:

[After 9/11] [n]early a hundred thousand spies returned to work at the agencies with the knowledge that they’d failed at their primary job, which was protecting America. …

In retrospect, my country … could have used this rare moment of solidarity to reinforce democratic values and cultivate resilience in the now-connected global public. Instead, it went to war. The greatest regret of my life is my reflexive, unquestioning support for that decision. I was outraged, yes, but that was only the beginning of a process in which my heart completely defeated my rational judgment. I accepted all the claims retailed by the media as facts, and I repeated them as if I were being paid for it. … I embraced the truth constructed for the good of the state, which in my passion I confused with the good of the country.

And what to make of it:

Ultimately, saying that you don’t care about privacy because you have nothing to hide is no different from saying you don’t care about freedom of speech because you have nothing to say. Or that you don’t care about freedom of the press because you don’t like to read. … Just because this or that freedom might not have meaning to you today doesn’t mean that it doesn’t or won’t have meaning tomorrow, to you, or to your neighbor – or to the crowds of principled dissidents I was following on my phone who were protesting halfway across the planet, hoping to gain just a fraction of the freedom that my country was busily dismantling. …

Any elected government that relies on surveillance to maintain control of a citizenry that regards surveillance as anathema to democracy has effectively ceased to be a democracy.

Buy the book from a key contractor of the intelligence community. Reviews on goodreads. Youtube video of the 2013 presentation by CIA CTO Gus Hunt which Snowden discusses in the book.

Digital Dollar Project

Accenture, the Digital Dollar Foundation, and FTI Consulting are pushing for a digital USD. They have formed the Digital Dollar Project

to advance exploration of a United States Central Bank Digital Currency (CBDC). The purpose of the Project is to encourage research and public discussion on the potential advantages of a digital dollar, convene private sector thought leaders and actors, and propose possible models to support the public sector. The Project will develop a framework for potential, practical steps that can be taken to establish a dollar CBDC.

Central Banks Zoom In on CBDC

According to a BIS press release, several leading central banks collaborate with the BIS on matters relating to the introduction of CBDC:

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank and the Swiss National Bank, together with the Bank for International Settlements (BIS), have created a group to share experiences as they assess the potential cases for central bank digital currency (CBDC) in their home jurisdictions.

The group will assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies. It will closely coordinate with the relevant institutions and forums – in particular, the Financial Stability Board and the Committee on Payments and Market Infrastructures (CPMI).

The group will be co-chaired by Benoît Cœuré, Head of the BIS Innovation Hub, and Jon Cunliffe, Deputy Governor of the Bank of England and Chair of the CPMI. It will include senior representatives of the participating institutions.

Wealth Inequality and Wealth Taxes

In a series of blog posts, John Cochrane criticizes the Saez-Zucman proposal for higher wealth taxes. In posts #1 to #4 he argues that economic arguments for wealth taxes are inconsistent or not convincing. In post #5 he concludes that Saez-Zucman truly are motivated by political objectives which are grounded in the view that wealth of the rich is ill-gotten or that the rich have a disproportionate, negative influence on politics.

Saez and Zucman want to confiscate billionaires’ wealth, because they think billionaires have too much political power, billionaires all got their money unjustly, and somehow though big government cronyism is the problem, bigger government is the answer.

Cochrane rejects this view.

Debt, Deficits, and MMT

One of the American Economic Association sessions in this year’s ASSA Meetings focused on “Modern Monetary Theory” (MMT) and (maybe somewhat unfairly in the same session) on last year’s presidential address by Olivier Blanchard, which suggested that persistently low interest rates on public debt render government budget constraints non-binding.

Greg Mankiw concluded in his paper that “MMT contains some kernels of truth, but its most novel policy prescriptions do not follow cogently from its premises,” in line with my own assessment.

Papers by Richard Evans, Michael Boskin, Jasmina Hasanhodzic, as well as by Johannes Brumm, Laurence Kotlikoff, and Felix Kubler argued that Blanchard’s conclusions are not robust, for various reasons.

Redrawing the Map of Global Capital Flows

Redrawing the Map of Global Capital Flows: The Role of Cross-Border Financing and Tax Havens, by Antonio Coppola, Matteo Maggiori, Jesse Schreger, and Brent Neiman:

We start with the dataset of global mutual fund and exchange traded fund (ETF) holdings provided by Morningstar and assembled in Matteo Maggiori, Brent Neiman and Jesse Schreger (2019a, henceforth MNS). For each position in the data, we link the security’s immediate issuer to its ultimate parent. The resulting data can then be used to create a mapping that transforms cross-border positions from a residency to nationality basis and that sheds light on how global firms finance themselves. …

First, in the case of bonds, positions are almost always reallocated away from Bermuda, the Cayman Islands, and other tax havens. Under nationality, these positions are often associated with developing countries like Brazil, China, India, and Russia, which may reflect the fact that developing countries find it easier to issue offshore than onshore, where the legal system and institutional quality may be of concern to foreign investors. Reallocating positions from tax havens to developed countries is also common, though, perhaps because tax havens allow them to access international investors with less onerous rules governing the withholding of taxes on interest payments. These patterns may also reflect tax-driven profit-shifting, whereby one unit of a company raises money at a low interest rate in a low-tax regime and loans it at a higher interest rate to an affiliated unit in a high-tax regime.

Second, in the case of equities, we find that many developed-country investments in tax havens are actually associated under nationality with China. Many of these positions are in securities issued through Variable Interest Entities (VIE), a structure designed to avoid China’s capital controls and the legality of which may rest on tenuous ground. Relatedly, we see a large share of equities reallocated by our algorithm away from Ireland and to developed countries, an adjustment reflecting the popularity of “tax inversions” there.

Third, in the case of asset-backed securities, for several investor countries, we find large reallocations toward the domicile of the investor, often because the underlying assets are found there. For example, our reallocation matrix records that 73.4 percent of U.S. investment in Cayman Islands’ asset-backed securities should instead be thought of as U.S. domestic investment, largely because those securities are backed by U.S. mortgages.