We contrast the canonical epidemiological SIR model due to Kermack and McKendrick (1927) with more tractable alternatives that offer similar degrees of “realism” and flexibility. We provide results connecting the different models which can be exploited for calibration purposes. We use the expected spread of COVID-19 in the United States to exemplify our results.
Links provided by Wanderu.
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.
A common argument against retail central bank digital currency (CBDC) is that CBDC would undermine financial stability by allowing the general public to swiftly move funds from banks to a government account. But in several countries such swift transfers are possible already today—in the US through Treasury Direct.
(The argument also has conceptual flaws, see the paper On the Equivalence of Public and Private Money with Markus Brunnermeier.)
For over a year the federal funds rate has increased relative to the rate the Fed pays on excess reserves. In mid September 2019, the federal funds rate increased abruptly, triggering the Fed to inject fresh funds. In parallel, the repo market rates spiked dramatically.
On the Cato Institute’s blog, George Selgin argues that structurally elevated demand collided with reduced supply. He mentions explicit and implicit regulation; Treasury General Account (TGA) balances; the NY Fed’s foreign repo pool (Japanese banks); and the administration’s $1 trillion deficit which required primary dealers to underwrite newly-issued government debt.
The bottom line is that regulators have managed to raise the biggest banks liquidity needs enough to compel them to sit on most of the banking system’s seemingly huge stock of excess reserves, and to do so even as repo markets present them with an opportunities to earn five times what those reserves are yielding just by lending them out overnight.
… So there you have it: a host of developments adding to banks’ demand for excess reserves, while others gradually chipped away at the stock of such reserves. Add a spike in primary dealers’ demand for short-term funding, a coinciding round of tax payments that transferred as many reserves to the TGA, and binding intraday liquidity requirements at the banks holding a large share of total system excess reserves, and you have the makings of last month’s perfect repo-market storm.
David Andolfatto and Jane Ihrig concur. On the Federal Reserve Bank of St. Louis’ On the Economy Blog, they already argued in March 2019 that banks feel compelled to hoard reserves rather than lending against treasuries:
Why should banks prefer reserves to higher-yielding Treasuries? One explanation is that Treasuries are not really cash equivalent if funds are needed immediately. In particular, for resolution planning purposes, banks may worry about the market value they would receive in the sale of or agreement to repurchase their securities in an individual stress scenario.
Consistent with this possibility, Federal Reserve Vice Chair for Supervision Randal Quarles noted, “Occasionally we hear that banks feel they are under supervisory pressure to satisfy their [high-quality liquid assets] with reserves rather than Treasury securities.”
To quantify this liquidity consideration, a recent post on the Federal Reserve Bank of New York’s Liberty Street Economics blog suggests that the eight domestic Large Institution Supervision Coordinating Committee’s banks collectively may want to hold $784 billion in precautionary reserves to cover their immediate liquidity needs in times of stress.
Andolfatto and Ihrig argue that the precautionary reserves hoarding by banks could substantially be reduced if the Fed offered a standing repo facility:
The Fed could easily incentivize banks to reduce their demand for reserves by operating a standing overnight repurchase (repo) facility that would permit banks to convert Treasuries to reserves on demand at an administered rate. This administered rate could be set a bit above market rates—perhaps several basis points above the top of the federal funds target range—so that the facility is not used every day …
With this facility in place, banks should feel comfortable holding Treasuries to help accommodate stress scenarios instead of reserves. The demand for reserves would decline substantially as a result. Ample reserves—and therefore the size of the Fed’s balance sheet—could in fact be much closer to their historical levels.
A standing repo facility could effectively impose a ceiling on repo rates. And as Andolfatto and Ihrig argue it would also have other benefits. In a follow up post, Andolfatto and Ihrig emphasize that,
[w]hile U.S. Treasuries are given equal weight with reserves in the calculation of high-quality liquid assets (HQLA) for the LCR, they are evidently not considered equivalent for resolution purposes.
Internal liquidity stress tests apparently assume a significant discount on Treasury securities liquidated in large volumes during times of stress, so that Treasuries are not treated as cash-equivalent. We have heard that banks occasionally feel under supervisory pressure to satisfy their HQLA requirements with reserves rather than Treasuries.
On the NewMonetarism blog, Stephen Williamson offers a longer-term perspective. He appears more skeptical as far as bank liquidity requirements as a possible explanation for the recent interest rate spikes are concerned. In Williamson’s view a floor system that requires even more reserves in the banking system than currently present is ineffective and should be replaced. He writes (my emphasis):
Before the financial crisis, the Fed intervened on the supply side of the overnight credit market by varying the quantity of its lending in the repo market so as to peg the fed funds rate. … a corridor system, as the central bank’s interest rate target was bounded above by the discount rate, and below by the interest rate on reserves, which was zero at the time. But, the Fed could have chosen to run a corridor by intervening on the other side of the market – by varying the quantity of reverse repos, for example. Post-financial crisis, the Fed’s floor system is effectively a mechanism for intervening on the demand side … With a large quantity reserves outstanding, those financial institutions holding reserves accounts have the option of lending to the Fed at the interest rate on reserves, or lending in the market – fed funds or repo market. Financial market arbitrage, in a frictionless world, would then look after the rest. By pegging the interest rate on excess reserves (IOER), the Fed should in principle peg overnight rates.
The problem is that overnight markets – particularly in the United States – are gummed up with various frictions. … Friction in U.S. overnight credit markets … is nothing new. Indeed, the big worry at the Fed, when “liftoff” from the 0-0.25% fed funds rate trading range occurred in December 2015, was that arbitrage would not work to peg overnight rates in a higher range. That’s why the Fed introduced the ON-RRP, or overnight reverse-repo, facility, with the ON-RRP rate set at the bottom of the fed funds rate target range, and IOER at the top of the range. The idea was that the ON-RRP rate would bound the fed funds rate from below.
… if total reserves outstanding are constant and general account balances go up, then reserve balances held in the private sector must go down by the same amount. The Fed permits these large and fluctuating Treasury balances, apparently because they think this won’t matter in a floor system, as it shouldn’t. … Another drain on private sector reserve balances is the foreign repo pool. … if the problem is low reserve balances in the private sector, those balances could be increased by about $300 billion if the Fed eliminated the foreign repo pool.
… The key problem is that the Fed is trying to manage overnight markets by working from the banking sector, through the stock of reserves. Apparently, that just won’t work in the American context, because market frictions are too severe. In particular, these frictions segment banks from the rest of the financial sector in various ways. The appropriate type of daily intervention for the Fed is in the repo market, which is more broadly-based. If $1.5 trillion in reserve balances isn’t enough to make a floor system work, without intervention through either a reverse-repo or repo facility, then that’s a bad floor system. … Make the secured overnight financing rate the policy rate, and run a corridor system. That’s what normal central banks do.
Some background information:
- NY Fed commentary on monetary policy implementation.
- Description (2009) of the primary dealer system, by Barry Ritzholtz.
- NY Fed staff report (2015) on US repo and securities lending markets, by Viktoria Baklanova, Adam Copeland and Rebecca McCaughrin.
In the FT, Cale Tilford, Joe Rennison, Laura Noonan, Colby Smith, and Brendan Greeley “break down what went wrong, what happens next, and whether markets can avoid another cash crunch” (with many figures).
This post was updated on November 21, 11:09 pm; and on November 26 (FT article).
A paper by Peter Arcidiacono, Josh Kinsler, and Tyler Ransom offers some glimpses.
The lawsuit Students For Fair Admissions v. Harvard University provided an unprecedented look at how an elite school makes admissions decisions. Using publicly released reports, we examine the preferences Harvard gives for recruited athletes, legacies, those on the dean’s interest list, and children of faculty and staff (ALDCs). Among white admits, over 43% are ALDC. Among admits who are African American, Asian American, and Hispanic, the share is less than 16% each. Our model of admissions shows that roughly three quarters of white ALDC admits would have been rejected if they had been treated as white non-ALDCs. Removing preferences for athletes and legacies would significantly alter the racial distribution of admitted students, with the share of white admits falling and all other groups rising or remaining unchanged.
The Federal Reserve Banks will develop a round-the-clock real-time payment and settlement service, FedNow. The objective is to support faster payments in the United States.
From the FAQs (my emphasis):
… there are some faster payment services offered by banks and fintech companies in the United States, their functionality can be limited. In particular, due to the lack of a universal infrastructure to conduct faster payments, most of these services rely on “closed-loop” approaches, meaning that users signed up to one service cannot exchange payments with users signed up to other services. Other services target ubiquity by relying on users’ bank accounts, but they may face challenges reaching enough banks to allow any two users to exchange payments. Moreover, these services typically use traditional retail payment methods to move funds between accounts. These methods result in a build-up of financial obligations between banks …
… fragmented market for end-user faster payment services, with services that may provide faster payment functionality in some circumstances and for some specific uses, like person-to-person payments, but that do not have sufficient reach to advance the U.S. payment system as a whole. The Federal Reserve’s goal in announcing the planned actions is to provide a much broader scope of access to safe and efficient faster payments throughout the country.
… the European Central Bank, Banco de México, and the Reserve Bank of Australia have looked to support the development of faster payments in their jurisdictions by providing services that enable payment-by-payment, real-time settlement of retail payments at any time …
First, the Federal Reserve Banks (the Reserve Banks) will develop the FedNowSM Service, a new interbank 24x7x365 real-time gross settlement (RTGS) service with integrated clearing functionality, to directly support the provision of end-to-end faster payment services by banks (or their agents). Second, the Federal Reserve will explore the expansion of hours for the Fedwire® Funds Service and the National Settlement Service (NSS), up to 24x7x365, subject to further analysis of relevant operational, risk, and policy considerations, to support liquidity management in private-sector RTGS services for faster payments, as well as provide additional benefits to financial markets beyond faster payments.
… Board has concluded that private-sector real-time gross settlement (RTGS) services for faster payments alone cannot be expected to provide an infrastructure for faster payments with reasonable effectiveness, scope, and equity. In particular, private-sector services are likely to face significant challenges in extending equitable access to the more than 10,000 diverse banks across the country.
the service will settle obligations between banks through adjustments to balances in banks’ master accounts at the Reserve Banks; these funds will be eligible to earn interest and count toward banks’ reserve requirements. Consistent with the goal of supporting faster payments, use of the FedNow Service will require participating banks to make the funds associated with individual payments available to their end-user customers immediately after receiving notification of settlement from the service. The service will support values initially limited to $25,000
… the FedNow Service will be available to banks eligible to hold accounts at the Reserve Banks …
By expanding Fedwire Funds Service and NSS hours, the Federal Reserve would provide further support to private-sector RTGS services for faster payments based on a joint account.
Some decision makers at the Fed believed that the Fed lacks authority to regulate banks operating payment systems in order to coerce them to offer access also to smaller banks.
In an NBER working paper, James Stock and Mark Watson argue that the correlation between cyclically sensitive inflation (CSI) and bandpass filtered activity measures is high and has not declined over the last decades, contrary to standard measures of the slope of the Phillips curve.
… we construct a new price index designed to maximize the cyclical variation in the price index. This index, which we call Cyclically Sensitive Inflation (CSI), estimates the weights on the component prices to maximize the correlation of the CSI with our bandpass measure of aggregate cyclical variation. … this index places low weights on tradeable goods, such as energy, motor vehicles & parts, and durable household equipment. The index also places low weight on the least well-measured sectors, such as clothing & footwear and final consumption of nonprofit institutions serving households (NPISH). The sectors that receive the greatest weight – housing excluding gas & electric utilities, followed by food & beverages for off-premises consumption, and recreational services – tend to be both locally determined (nontradeable) and relatively well-measured.
280 pages of frantic search for an end. New York, Denver, San Francisco, New Orleans, Mexico City, and the miles in between. Music, drugs, talk, sex.
Inspired by a 10000-word rambling letter from his friend Neal Cassady, Kerouac in 1950 outlined the “Essentials of Spontaneous Prose” and decided to tell the story of his years on the road with Cassady as if writing a letter to a friend in a form that reflected the improvisational fluidity of jazz. In a letter to a student in 1961, Kerouac wrote: “Dean and I were embarked on a journey through post-Whitman America to find that America and to find the inherent goodness in American man. It was really a story about 2 Catholic buddies roaming the country in search of God. And we found him.”
We propose a theory of tax centralization in politico-economic equilibrium. Taxation has dynamic general equilibrium implications which are internalized at the federal, but not at the regional level. The political support for taxation therefore differs across levels of government. Complementarities on the spending side decouple the equilibrium composition of spending and taxation and create a role for inter governmental grants. The model provides an explanation for the centralization of revenue, introduction of grants, and expansion of federal income taxation in the U.S. around the time of the New Deal. Quantitatively, it accounts for approximately 30% of the federal revenue share’s doubling in the 1930s, and for the long-term increase in federal grants.
- European firms dealing with Iran face U.S. “secondary sanctions.”
- European counter measures (including a blocking statute) prove toothless.
- Even central banks in the European Union surrender to U.S. pressure, as does SWIFT.
- Ignorance is bliss: For a sovereign, the best protection against foreign states pressuring to monitor domestic citizens and businesses may be to know as little as possible.
Laurent Ruessmann and Jochen Beck, FieldFisher, 17 July 2018, International firms caught between US Iran sanctions and EU blocking statute.
Several authors, Gibson, Dunn & Crutcher LLP, 9 August 2018, The “New” Iran E.O. and the “New” EU Blocking Sanctions—Navigating the Divide for International Business.
The “primary sanctions” that limit U.S. companies and persons from engaging with Iran have on the whole never been lifted. The principal sanctions relief provided by the United States [until 2018] have been of “secondary sanctions” that focus on non-U.S. companies’ transactions with Iran. These measures are designed to force non-U.S. firms to choose to either engage with Iran or the United States. …
All of the sanctions and [the EU’s] counter-sanctions are in large part discretionary. …
… the Blocking Statute allows EU operators to recover damages arising from the application of the extraterritorial measures. Though it is unclear how this would work in practice, it appears to allow an EU operator to exercise a private right of action and to be indemnified by companies that do comply with the U.S. laws if in so doing those companies injure the EU operator. …
The United Kingdom has in place a law … which broadly makes compliance with Blocked U.S. Sanctions a criminal offence. … other Member States have also opted for the creation of criminal offences, including Ireland, the Netherlands and Sweden. Other Member States, including Germany, Italy and Spain, have devised administrative penalties for non-compliance. Meanwhile some Member States, including France, Belgium and Luxembourg, do not appear ever to have even implemented the EU General Blocking Regulation …
… element of flexibility in the Blocking Statute is that EU operators will not be forced to continue business with Iran. Rather, the Guidance notes that EU operators are still free to conduct their business as they see fit …
Several authors, Dechert LLP, August 2018, Iran Sanctions—U.S. Reimposes Sanctions After JCPOA Withdrawal, First Measures Come Into Effect.
The practical effect of these developments is to return the U.S. secondary sanctions regime to the status quo pre-JCPOA. However, the New Iran E.O. does expand upon the U.S. primary sanctions regime in one critical respect: U.S. owned or controlled foreign entities … Until now, OFAC’s sanctions have not prohibited a foreign subsidiary from dealing with a non-Iranian SDN. Although many such transactions would likely have subjected U.S. owned and controlled foreign entities to potential secondary sanctions pre-JCPOA (on the basis that they were providing material support to an SDN), they may now result in civil or criminal liability under U.S. law.
For other foreign businesses … The New Iran E.O. does little to clarify the Administration’s current posture, but does grant it significant discretion to target a wide range of activity, effective immediately. Given the Trump Administration’s rapidly shifting approach on other issues relating to international trade and national security, from tariffs to North Korea, businesses should plan for the worst while continuing to strategize and advocate for a more pragmatic approach.
Jeremy Paner, Holland & Hart, 8 November 2018, The Return of All Financial Secondary Sanctions on Iran:
U.S. law currently authorizes OFAC to impose correspondent and payable-through account sanctions on non-U.S. financial institutions that knowingly conduct or facilitate any significant financial transaction involving the following:
- the Central Bank of Iran;
- a designated Iranian individual or entity, other than banks solely designated for being Iranian;
- the automotive sector of Iran;
- the National Iranian Oil Company (NIOC) or Naftiran Intertrade Company (NICO);
- petroleum, petroleum products, or petrochemical products from Iran;
- the purchase or sale of Iran rials; and
- a derivative, swap, future, forward, or other similar contract whose value is based on the exchange rate of the Iranian rial.
Additionally, non-U.S. financial institutions that maintain Iranian rial denominated funds or accounts outside of Iran are exposed to potential correspondent and payable-through account sanctions.
suspends certain Iranian banks’ access to its cross border-payment network.
According to Peel, SWIFT explains the step as follows:
“This step, while regrettable, has been taken in the interest of the stability and integrity of the wider global financial system.”
This does not only expose SWIFT to punitive actions by the European Union since
… new EU rules … forbid companies from complying with the US Iran sanctions.
It also seems to contradict the explanations that SWIFT provides on its homepage:
[w]hilst sanctions are imposed independently in different jurisdictions around the world, SWIFT cannot arbitrarily choose which jurisdiction’s sanction regime to follow. Being incorporated under Belgian law it must instead comply with related EU regulation, as confirmed by the Belgian government.
E.O. 13846 reimposes relevant blocking sanctions, correspondent and payable-through account sanctions, and menu-based sanctions previously provided for in E.O.s 13574, 13590, 13622, and 13645, which were revoked by E.O. 13716, and continues in effect sanctions authorities provided for in E.O.s 13628 and 13716. As incorporated into E.O. 13846, these measures include implementing authority for and additional tools related to: the Iran Sanctions Act of 1996, as amended (ISA), the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010, as amended (CISADA), the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA), and the Iran Freedom Counter-Proliferation Act of 2012 (IFCA) (see FAQ 605). As a general matter, E.O. 13846 incorporates exceptions to these sanctions, including for transactions for the provision of agricultural commodities, food, medicine, or medical devices to Iran, to the same extent such exceptions applied under the prior E.O.s. E.O. 13846 also broadens the scope of certain provisions contained in those E.O.s, as outlined in FAQ 601 below.
Section 1 of E.O. 13846 authorizes blocking sanctions on persons determined:
i. On or after August 7, 2018, to have provided material support for, or goods or services in support of, the purchase or acquisition of U.S. bank notes or precious metals by the Government of Iran (GOI) (subsection 1(a)(i));
ii. On or after November 5, 2018, to have provided material support for, or goods or services in support of, the National Iranian Oil Company (NIOC), the Naftiran Intertrade Company (NICO), or the Central Bank of Iran (CBI) (subsection 1(a)(ii));
iii. On or after November 5, 2018, to have provided material support for, or goods or services in support of:
a. Any Iranian person on the List of Specially Designated Nationals and Blocked Persons (SDN List) (other than an Iranian depository institution whose property and interests in property are blocked solely pursuant to E.O. 13599) (subsection 1(a)(iii)(A)); or
b. Any other person on the SDN List whose property and interests in property are blocked pursuant to subsection 1(a) of E.O. 13846 or E.O. 13599 (other than an Iranian depository institution whose property and interests in property are blocked solely pursuant to E.O. 13599) (subsection 1(a)(iii)(B)); or
iv. Pursuant to the relevant statutory authorities in IFCA, to be:
a. Part of Iran’s energy, shipping, or shipbuilding sectors (subsection 1(a)(iv)(A));
b. A port operator in Iran (subsection 1(a)(iv)(B)); or
c. A person that knowingly provides significant support to a person determined to be part of Iran’s energy, shipping, or shipbuilding sectors, a port operator in Iran, or an Iranian person included on the SDN List (other than a person described in section 1244(c)(3) of IFCA)) (subsection 1(a)(iv)(C)).
Section 2 of E.O. 13846 authorizes correspondent and payable-through account sanctions on foreign financial institutions (FFIs) determined to have knowingly conducted or facilitated any significant financial transaction:
i. On or after August 7, 2018, for the sale, supply, or transfer to Iran of significant goods or services used in connection with Iran’s automotive sector (subsection 2(a)(i));
ii. On or after November 5, 2018, on behalf of an Iranian person on SDN List (other than an Iranian depository institution whose property and interests in property are blocked solely pursuant to E.O. 13599) or any other person on the SDN List whose property is blocked pursuant to subsection 1(a) of E.O. 13846 or E.O. 13599 (other than an Iranian depository institution whose property and interests in property are blocked solely pursuant to E.O. 13599) (subsection 2(a)(ii));
iii. On or after November 5, 2018, with NIOC or NICO, except for the sale or provision to NIOC or NICO of the products described in section 5(a)(3)(A)(i) of ISA provided that the fair market value of such products is lower than the applicable dollar threshold specified in that provision (subsection 2(a)(iii));
iv. On or after November 5, 2018, for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran (subsection 2(a)(iv)); and
v. On or after November 5, 2018, for the purchase, acquisition, sale, transport, or marketing of petrochemical products from Iran (subsection 2(a)(v)).
Section 3 of E.O. 13846 authorizes menu-based sanctions on persons determined to:
i. Have knowingly engaged, on or after August 7, 2018, in a significant transaction for the sale, supply, or transfer to Iran of significant goods or services used in connection with Iran’s automotive sector (subsection 3(a)(i));
ii. Have knowingly engaged, on or after November 5, 2018, in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran (subsection 3(a)(ii));
iii. Have knowingly engaged, on or after November 5, 2018, in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petrochemical products from Iran (subsection 3(a)(iii)); or
iv. Be a successor entity to a person determined to meet any of the criteria set out in subsections 3(a)(i)-(a)(iii) of E.O. 13846 (subsection 3(a)(iv)); or
v. Own or control a person determined to meet any of the criteria set out in subsections 3(a)(i)-(a)(iii) of E.O. 13846 and to have had knowledge that the person engaged in the activities referred to in the relevant subsection (subsection 3(a)(v)); or
vi. Be owned or controlled by, or under common ownership or control with, a person determined to meet any of the criteria set out in sections 3(a)(i)-3(a)(iii) of E.O. 13846, and knowingly engaged in the activities referred to in the relevant subsection (subsection 3(a)(vi)).
Section 4 of E.O. 13846 provides authority for the heads of relevant agencies of the U.S. government to implement the menu-based sanctions provided for in section 3.
Section 5 of E.O. 13846 provides authority for the Treasury Department to implement the menu-based sanctions provided for in ISA, CISADA, TRA, IFCA, and section 3 of E.O. 13846
Section 6 of E.O. 13846 authorizes correspondent or payable-through account sanctions or blocking sanctions on FFIs that are determined to have, on or after August 7, 2018: (a) knowingly conducted or facilitated any significant transaction related to the purchase or sale of Iranian rials or a derivative, swap, future, forward, or other similar contract whose value is based on the exchange rate of the Iranian rial (subsection 6(a)(i)); or (b) maintained significant funds or accounts outside the territory of Iran denominated in the Iranian rial (subsection 6(a)(ii)).
Section 7 of E.O. 13846 carries forward sections 2 and 3 of E.O. 13628 and subsection 3(c) of E.O. 13716 (see FAQ 602 below) by providing for blocking sanctions on persons determined to:
i. Have engaged, on or after January 2, 2013, in corruption or other activities relating to the diversion of goods, including agricultural commodities, food, medicine, and medical devices, intended for the people of Iran (subsection 7(a)(i));
ii. Have engaged, on or after January 2, 2013, in corruption or other activities relating to the misappropriation of proceeds from the sale or resale of goods described in subsection 7(a)(1) of E.O. 13846 (subsection 7(a)(ii));
iii. Have knowingly, on or after August 10, 2012, transferred or facilitated the transfer of, goods or technologies to Iran, any entity organized under the laws of Iran, or otherwise subject to the jurisdiction of the GOI, or any national of Iran for use in or with respect to Iran, that are likely to be used by the GOI or any of its agencies or instrumentalities, or by any person on behalf of the GOI or any such agencies or instrumentalities, to commit serious human rights abuses against the people of Iran (subsection 7(a)(iii));
iv. Have knowingly, on or after August 10, 2012, provided services, including services relating to hardware, software, or specialized information or professional consulting, engineering, or support services with respect to goods or technologies that have been transferred to Iran and that are likely to be used by the GOI or any of its agencies or instrumentalities, or by any person on behalf of the GOI or any such agencies or instrumentalities, to commit serious human rights abuses against the people of Iran (subsection 7(a)(iv));
v. Have engaged in censorship or other activities with respect to Iran, on or after June 12, 2009, that prohibit, limit, or penalize the exercise of freedom of expression or assembly by citizens of Iran, or that limit access to print or broadcast media, including the facilitation or support of intentional frequency manipulation by the GOI or an entity owned or controlled by the GOI that would jam or restrict an international signal (subsection 7(a)(v));
vi. Have materially assisted or provided other support for activities listed in subsections 7(a)(i)-(a)(v) of E.O. 13846 (subsection 7(a)(vi)); or
vii. Be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant section 7 of E.O. 13846 (subsection 7(a)(vii)).
Section 8 of E.O. 13846 continues in effect the sanctions previously contained in section 4 of E.O. 13628, which prohibit an entity owned or controlled by a U.S. person and established or maintained outside the United States (a “U.S.-owned or -controlled foreign entity”) from knowingly engaging in any transaction, directly or indirectly, with the GOI or any person subject to the jurisdiction of the GOI, if that transaction would be prohibited by specified authorities if engaged in by a U.S. person or in the United States (see FAQs 621-623 below).
Section 9 of E.O. 13846 provides that it revokes and supersedes E.O.s 13628 and 13716 (see FAQ 602 below).
Sections 10-22 of E.O. 13846 contain exceptions, definitions, and other implementing provisions related to the sanctions in the E.O. [08-06-2018]
The Treasury’s recommendations fall into four categories:
Adapting regulatory approaches to changes in the aggregation, sharing, and use of con- sumer financial data, and to support the development of key competitive technologies;
Aligning the regulatory framework to combat unnecessary regulatory fragmentation, and account for new business models enabled by financial technologies;
Updating activity-specific regulations across a range of products and services offered by nonbank financial institutions, many of which have become outdated in light of techno- logical advances; and
Advocating an approach to regulation that enables responsible experimentation in the financial sector, improves regulatory agility, and advances American interests abroad.
In the FAZ, Philip Plickert reports that Deutsche Bundesbank changed its terms of business. Starting August 25, the Bundesbank may refuse cash transactions with a bank if the Bundesbank fears that, counter to the bank’s assurances, the cash transaction might help the bank or its customers evade sanctions or restrictions with the aim to impede money laundering or terrorism finance.
Conveniently, this will allow the Bundesbank to reject a request by European-Iranian Handelsbank to withdraw several hundred Euros.
Die staatliche Europäisch-Iranische Handelsbank (EIHB) in Hamburg hatte Anfang Juli bei der Bundesbank beantragt, mehr als 300 Millionen Euro in bar abzuheben. Nach Informationen der F.A.Z. war sogar von 350 bis 380 Millionen Euro die Rede. Dem Vernehmen nach soll es sich um Guthaben der iranischen Zentralbank bei der EIHB handeln. … Derzeit prüft die Finanzaufsicht Bafin, ob die EIHB die Vorschriften zur Prävention von Geldwäsche und Terrorfinanzierung einhält. Diese Prüfung könne sich hinziehen, heißt es in Berlin aus dem Finanzministerium. Bis die Bafin ihr Urteil abgibt, dürften die geänderten AGB der Bundesbank greifen.
The US has pressured the German government to prevent the cash withdrawal. And the Bundesbank closely cooperates with the Federal Reserve.
In ihren geänderten Geschäftsbedingungen ist explizit die Rede davon, dass auch die „drohende Beendigung von wichtigen Beziehungen zu Zentralbanken und Finanzinstitutionen dritter Länder“ ein Ablehnungsgrund für Bargeldgeschäfte sein könne.
In July, JP Koning had blogged about the bank’s request. His conclusion was:
There are sound political and moral reasons for both censoring Iran and not censoring it. Moral or not, my guess is that most nations will breathe a sigh of relief if German authorities see it fit to let the €300 million cash withdrawal go through. It would be a sign to all of us that we don’t live in a unipolar monetary world where a single American censor can prevent entire nations from making the most basic of cross-border payments. Instead, we’d be living in a bipolar monetary world where censorship needn’t mean being completely cutoff from the global payments system.
The sooner the Bundesbank prints up and dispatches the €300 million, the better for us all.
In an earlier column, Koning had described the difficulties for financial institutions worldwide to circumvent U.S. financial sanctions.
In an NBER working paper, Niels Johannesen, Patrick Langetieg, Daniel Reck, Max Risch, and Joel Slemrod discuss the effects of recent U.S. tax enforcement initiatives on tax compliance. They offer background information about U.S. initiatives since 2009 and conclude, based on administrative microdata, that
[e]nforcement caused approximately 60,000 individuals to disclose offshore accounts with a combined value of around $120 billion. Most disclosures happened outside offshore voluntary disclosure programs by individuals who never admitted prior noncompliance. The disclosed accounts were concentrated in countries whose institutions facilitate tax evasion. The enforcement-driven disclosures increased annual reported capital income by $2.5-$4 billion corresponding to $0.7-$1.0 billion in additional tax revenue.
… meanwhile, inequality in the US remains more of an issue.
On Alphaville, Kadhim Shubber summarizes a DB Global Markets Research study on US inequality:
- More than 30% of US households have zero or negative non-home wealth.
- Wealth is increasingly concentrated among the old, and among the wealthy.
Observers paint the picture of an increasingly dysfunctional society.
And they point to the relevance of inequality for political polarization and accountability.
From About this Report:
[T]he U.S. Global Change Research Program (USGCRP) oversaw the production of this stand-alone report of the state of science relating to climate change and its physical impacts. …
The USGCRP is made up of 13 Federal departments and agencies that carry out research and support the Nation’s response to global change. The USGCRP is overseen by the Subcommittee on Global Change Research (SGCR) of the National Science and Technology Council’s Committee on Environment, Natural Resources, and Sustainability (CENRS), which in turn is overseen by the White House Office of Science and Technology Policy (OSTP). The agencies within USGCRP are the Department of Agriculture, the Department of Commerce (NOAA), the Department of Defense, the Department of Energy, the Department of Health and Human Services, the Department of the Interior, the Department of State, the Department of Transportation, the Environmental Protection Agency, the National Aeronautics and Space Administration, the National Science Foundation, the Smithsonian Institution, and the U.S. Agency for International Development.
From the Executive Summary:
… it is extremely likely that human activities, especially emissions of greenhouse gases, are the dominant cause of the observed warming since the mid-20th century. For the warming over the last century, there is no convincing alternative explanation supported by the extent of the observational evidence. …
The magnitude of climate change beyond the next few decades will depend primarily on the amount of greenhouse gases (especially carbon dioxide) emitted globally. Without major reductions in emissions, the increase in annual average global temperature relative to preindustrial times could reach 9°F (5°C) or more by the end of this century. With significant reductions in emissions, the increase in annual average global temperature could be limited to 3.6°F (2°C) or less.
In the New York Times, Lisa Friedman and Glenn Thrush write that the report contradicts positions of the Trump administration on climate change.
While there were pockets of resistance to the report in the Trump administration, according to climate scientists involved in drafting the report, there was little appetite for a knockdown fight over climate change among Mr. Trump’s top advisers …
The White House put out a statement Friday that seemed to undercut the high level of confidence of the report’s findings. …
Responsibility for approving the report fell to Gary D. Cohn, director of the National Economic Council, who generally believes in the validity of climate science and thought the issue would have been a distraction from the tax push, according to an administration official with knowledge of the situation.
That’s what Gerald Auten and David Splinter argue in a paper from last year.
… new estimates of top income shares using two consistent measures of income. Our measure of consistent market income includes full corporate profits and adjusts for changes from TRA86, including changes to the tax base and increased filing by dependent filers. In addition, we include employer paid payroll taxes and health insurance and adjust for falling marriage rates. The effect of these adjustments on estimated top income shares are dramatic. Using a consistent measure of market income shows that the increase in income shares of the top one percent since 1979 is about half of the PS unadjusted estimate. The increase since 1960 is about one-quarter of the unadjusted estimate. Moreover, our measure of broad income that includes government transfers reduces the top one percent share increase to one-tenth of the unadjusted estimate.
But in an NBER working paper, Annette Alstadsaeter, Niels Johannesen, and Gabriel Zucman argue that tax evasion and offshore wealth holdings work in the opposite direction:
Because offshore wealth is very concentrated at the top, accounting for it increases the top 0.01% wealth share substantially in Europe, even in countries that do not use tax havens extensively. It has considerable effects in Russia, where the vast majority of wealth at the top is held offshore. These results highlight the importance of looking beyond tax and survey data to study wealth accumulation among the very rich in a globalized world.
On VoxEU, Mary Amiti, Emmanuel Farhi, Gita Gopinath, and Oleg Itskhoki discuss a border adjustment tax and its consequences.
… a border adjustment tax … would make export sales deductible from the corporate tax base, while expenditure on imported goods would not be deductible … Therefore, if the border adjustment extends to all imports and exports, it is akin to a combination of a uniform import tariff and an export subsidy on all international trade …
… it would limit the incentives for profit shifting across countries by means of transfer pricing towards lower tax jurisdictions … the border adjustment tax is a destination-based tax, linking the tax jurisdiction to the location of consumption, rather than the location of production.
Under certain circumstances … the border adjustment tax has no effects on economic outcomes … Lerner (1936) symmetry [implies] … that a uniform tariff on all imports is equivalent to a uniform tax of the same magnitude on all exports. As a corollary … a combination of a uniform import tariff and an export subsidy of the same magnitude … [has] no effect on imports, exports and other economic outcomes … results in an increase in the home relative wage and domestic cost of production by the amount of the tariff. … the relative cost of domestic production increases proportionally with the cost of imports, as well as with the subsidy to exports, leaving no relative price affected, nor the real wage. … As a result, tax policies that feature a border adjustment, such as the value added tax (VAT), do not have to systematically promote or demote trade.
Amiti, Farhi, Gopinath, and Itskhoki discuss several conditions for neutrality:
- Flexible wages. If wages are sticky, a nominal exchange rate appreciation may partly substitute.
- Uniformity of the border adjustment tax. This condition would likely not be met. Exchange rate fluctuations thus would affect some sectors more than others. And imports by non-incorporated businesses would be favored.
- Foreign currency denomination of gross foreign assets and liabilities. (Not met, see below.)
- Unexpected, permanent policy change, to prevent anticipation effects and currency appreciation before the fact.
- Unchanged monetary policy stance, also in other countries, in spite of the exchange rate shock. This condition would likely not be met.
If the conditions for neutrality are met the border adjustment tax generates no international transfer. The fiscal implications depend on the sign of the trade balance. A home country exchange rate appreciation (that keeps relative trade prices and flows unchanged) generates a lump-sum transfer from households to the public sector when households hold net external assets which they use to pay for imports. When households have net external debt and thus, export on net, then the fiscal implications are reversed.
Since the US has currently a negative net foreign asset position, the US must run a cumulative trade surplus in the future. … the overall transfer would be away from the government budget and towards the private sector …
When some gross positions are denominated in domestic currency an appreciation transfers wealth internationally.
Since for the United States, the foreign assets are mostly in foreign currency, while foreign liabilities are almost entirely in dollars, this would generate a massive transfer to the rest of the world and a capital loss for the US of the order of magnitude of 10% of the US annual GDP or more.
US imports and exports are predominantly invoiced in dollars. With sticky pricing a border adjustment tax would raise the relative cost of imported inputs and consumer prices.
US exports … will likely fall together with US imports in the short run, with no clear effect on the trade balance. As trade prices adjust over time, both imports and exports will recover, resulting in a neutral long-run effect of the border adjustment tax on trade.
The Economist reports about new strategies to evade taxes. One is based on an occupational retirement scheme (ORS) in Hong Kong:
A German or Australian with money to hide can set up a Hong Kong shell company, appoint himself as its director, with a local employment contract, and sign up with a trust company that provides an ORS. He can throw in cash, property or other assets, oversee the account himself, retire as soon or as far in the future as he likes, and then take out as much or as little as he chooses, whenever he wants. An ORS, in short, is like a flexible bank account.
The arrangement falls outside the CRS [Common Reporting Standard] and FATCA because the Hong Kong authorities classify ORS as “low risk” from a tax-evasion standpoint, meaning those running them are “non-reporting financial institutions” under both standards. Not surprisingly, some financial firms are hawking them enthusiastically to foreigners.
Another strategy exploits the secrecy provided by the United States:
It gets all the information it needs from other countries through its heavy-handed application of FATCA, and therefore sees no need to sign up to the CRS. So it is in the unique position of being able to take a lot, give little, and continue getting away with it. Not surprisingly, lots of tainted foreign cash is believed to have flowed into American banks, trusts and shell companies in recent years.
In the New York Times, Greg Mankiw applauds the tax reform plan discussed in Congress. He emphasizes four points:
- The reform would move the US tax system toward international norms, from worldwide to territorial taxation.
- It would move the system from income towards less distorting consumption taxation, by allowing businesses to deduct investment spending immediately.
- The reform would change the origin-based into a destination-based system (taxing imports and exempting exports, a.k.a. “border adjustment”), with similarities to a value-added tax, making it harder to game the system. “[T]he immediate impact of the change would be to discourage imports and encourage exports. … the dollar would appreciate … The movement in the exchange rate would offset the initial impact on imports and exports.”
- The reform would abolish tax deductions for interest payments to bondholders, eliminating incentives for corporate leverage. “A business’s taxes would be based on its cash flow: revenue minus wage payments and investment spending. How this cash flow is then paid out to equity and debt holders would be irrelevant.”