Coppola Comment

  It's been evident for some years now that those selling risky crypto products to risk-averse investors like to have federal branding on their snake oil. Tether claimed to have 100% actual dollar backing for its stablecoin. Various exchanges and platforms claimed that customer deposits were FDIC insured. The New York Attorney General showed that Tether didn't have 100% dollar backing or anything like it. And now the FDIC has sent cease & desist orders to  FTX , Voyager and several other crypto companies , it has become dangerous even to mention FDIC insurance in marketing material.  But that doesn't meant they've given up on the quest for a credible claim to Federal backing. The new Holy Grail is gaining access to Federal Reserve funding without becoming a licensed bank. Accordingt to analysts at Barclays, Circle, the issuer of the USDC stablecoin widely regarded in crypto markets as a "safe" dollar equivalent, may have found a way:  This screenshot com

This post was sparked by conversations with people who have opposing views of how money creation works. Some people think that classical models such as IS-LM don't work with endogenous money theory, therefore the models need to be discarded: others think that there's nothing wrong with the model and the problem is endogenous money theory. Personally I think that simple models like IS-LM can be powerful tools to explain aspects of the working of a market economy, and it behooves us therefore to find ways of adapting them to work with an endogenous fiat money system. So this is my attempt to reconcile IS-LM with endogenous money. I don't claim that it is anything like the final word on the subject, so comments are welcome.  The IS-LM model looks like this: : where M is the quantity of money in circulation, L is the "liquidity preference" (the degree to which investors prefer to hold interest-bearing, less liquid assets rather than to zero-interest, highly liquid mon

"Britain nearly went bust in March, says Bank of England", reads a headline in the Guardian . In similar vein, the Telegraph's Business section reports "UK finances were close to collapse, says Governor": Eh, what? The Governor of the Bank of England says the UK nearly turned into Venezuela? Well, that's what the Telegraph seems to think:  The Bank of England was forced to save the Government from potential financial collapse as markets seized up at the height of the coronavirus crisis, Governor Andrew Bailey has said. In his most explicit comments yet on the country's precarious position in mid-March, Mr Bailey said 'serious disorder' broke out after panicking investors sold UK government bonds in a desperate hunt for cash. It left Britain at risk of failing to auction off the gilts needed to fund crucial spending - and Threadneedle Street had to pump £200bn into markets to restore a semblance of order. Reading this, you would think that the UK

Below are the slides from my presentation at Beyond Covid on 12th June. The whole webinar can ve viewed here . The pandemic seems to me to resemble the "nuclear disaster" scenarios of my youth: hide in the bunker, then creep out when the immediate danger is over, only to find a world that is still dangerous and has fundamentally changed in unforeseeable ways.  Rabbits hiding from a hawk is perhaps a kinder image, though hawks don't usually leave devastation in their wake. And I like rabbits. So this presentation is illustrated with rabbits, not nuclear bombs.  This is where we were in March/April/May. Hiding in our homes, waiting for the danger to pass: And this is what central banks should have been doing then: To their credit, this is exactly what they did. By supporting sovereign finances and warding off a financial crisis, they enabled fiscal authorities to take the extraordinary measures needed to keep people and businesses alive in their burrows.  Some economists mi

The Fed's interventions in the repo market are attracting considerable comment. A lot of people seem to think the Fed has embarked on another QE program without Congressional approval. And the usual suspects are complaining that the Fed is pumping up stock prices and debasing the dollar.  Stocks are indeed heading for the moon - though so is the dollar, which rather undermines those who think it is being debauched. But the Fed's interventions in the repo markets have nothing to do with stock prices. They are all about banks. Last September, sudden spikes in the Fed Funds Rate (FFR) and its repo market equivalent, the Secured Overnight Funding Rate (SOFR), caught the Fed off guard. It  acted quickly, injecting copious quantities of reserves to bring the rates down. But this was by any standards a seat-of-the-pants operation. The Fed simply hadn't expected banks to run out of reserves. After all, despite the Fed's balance sheet reduction, total reserves were still fa

A version of this post appeared on Pieria in December 2013.  In my post “ The desert of plenty ”, I described a world in which goods and services are so cheap to produce that less and less capital is required for investment , and so easy to produce that less and less labour is required to produce them. Prices therefore go into freefall and there is a glut of both capital and labour. This is deflation. There are two kinds of deflation. There is the “bad” kind, where asset prices go into a tailspin and banks and businesses fail in droves, bankrupting households and governments and resulting in massive unemployment, poverty and social collapse. America experienced this in the Great Depression and narrowly avoided it in the Great Recession. More recently, at least one European country has felt the effects of this catastrophe. But there is also another kind. This is where falling costs and increasing efficiency of production create a glut of consumer goods and services.

My debut post at CapX develops a theme I have written about many times. Central bankers are tasked with controlling inflation, but they don't understand it. For the last decade, central banks in developed countries have been pursuing policies designed to raise inflation. Quantitative easing, cheap funding for banks, tinkering with yield curves, low and negative interest rates – all aim to raise inflation to the ubiquitous 2% target. Understandably, central banks’ inflation forecasts assume that their policies will return inflation to target over the medium term. But as time goes by, and inflation stays stubbornly low, their forecasts are becoming increasingly difficult to believe. This does not bode well for central banks that depend above all on credibility..... Read on here . Related reading: Inflation is always and everywhere a political phenomenon Image is of the Bank of England's note printing centre at Debden. Image by  Benj Roberts - originally posted to F

We don't understand inflation. Those who lived through the high inflation of the 1970s are convinced that inflation is always and everywhere caused by wage-price spirals. Germans, economic Austrians and Bitcoiners are convinced that inflation is always and everywhere caused by central bank money printing. Small-state supporters are convinced that inflation is always and everywhere caused by profligate governments borrowing and spending excessively. Hard money enthusiasts are convinced that inflation is always and everywhere caused by currency devaluation. Every school of economics has its own theory of inflation. We don't even know what we mean by inflation. As the Cleveland Fed  entertainingly discusses , inflation originally meant expansion of (paper) currency in a manner that resulted in higher prices. But over time, that definition has widened to mean anything and everything that raises prices, not just monetary expansion. And not only consumer prices, either. We now