BREAKING NEWS!! Fed is now openly discussing NGDP targeting

This is huge news…more to come…

News updates


And a bit of negative spin on the news from the Journal.

What can I say…WAUW! Good work Scott Sumner and all you other hard blogging Market Monetarists out there…

A month ago nobody was talking about NGDP targeting. Now it is all over the media – and any financial market participant who want to be on top of things will have to get used to talk about NGDP targeting. This is now a market theme.

And yes, yes I know this is just discussions and Bernanke is not on board – yet. Nonetheless I think Scott can be very proud today!

I have been saying we are in 1931 – European debt problems – but we are now moving towards 1933 when FDR de-pegged from gold. I guess the US now is in 1932 – maybe even late 1932.

PS I still think Bernanke needs to invite Scott for lunch


M-pesa – Free Banking in Africa?

A number of my readers have an interest in monetary reform and especially in Free Banking. In that regard developments in Kenya are in fact very interesting, but I guess little known to Free Banking theorists.

Since 2007 a new “currency” has come to live in Kenya. It is the so-called m-pesa. M for mobile and pesa is money in Swahili.

Here is how M-pesa is described on Wikipedia:

“M-PESA is the product name of a mobile-phone based money transfer service for Safaricom, which is a Vodafone affiliate…The initial concept of M-PESA was to create a service which allowed microfinance borrowers to conveniently receive and repay loans using the network of Safaricom airtime resellers. This would enable microfinance institutions (MFIs) to offer more competitive loan rates to their users, as there is a reduced cost of dealing in cash. The users of the service would gain through being able to track their finances more easily. But when the service was trialled, customers adopted the service for a variety of alternative uses; complications arose with Faulu, the partnering microfinance institution (MFI). M-PESA was re-focused and launched with a different value proposition: sending remittances home across the country and making payments.”

Today, it is common to pay for services and goods around Kenya with M-pesa and as such the it has developed in to payment form, which is commonly accepted and trusted – some would say even more than the local currency – Kenyan shilling. In fact the Kenyan government will now even accept taxes paid with M-pesa.

I don’t know enough about M-pesa, but I don’t think it is a real currency at the moment and one cannot say that the M-pesa system is a Free Banking system. However, in my view would it could be developing in that direction.

I would be very interested in hearing what your views are on these developments and whether it can teach us anything in terms of monetary theory.

For more on M-pesa see this interesting NBER Working Paper.

PS for those interested in Kenyan monetary policy should note that the Kenyan central bank hiked its key policy rate by 550bp to 16.50% from 11.50%.

PPS when I started this blog I promised that it would not be US centric – I hope this post confirms this.

Germany 1931, Argentina 2001 – Greece 2011?

The events that we are seeing in Greece these days are undoubtedly events that economic historians will study for many years to come. But the similarities to historical crises are striking. I have already in previous posts reminded my readers of the stark similarities with the European – especially the German – debt crisis in 1931. However, one can undoubtedly also learn a lot from studying the Argentine crisis of 2001-2002 and the eventual Argentine default in 2002.

What this crises have in common is the combination of rigid monetary regimes (the gold standard, a currency board and the euro), serious fiscal austerity measures that ultimately leads to the downfall of the government and an international society that is desperately trying to solve the problem, but ultimately see domestic political events makes a rescue impossible – whether it was the Hoover administration and BIS in 1931, the IMF in 2001 or the EU (Germany/France) in 2011. The historical similarities are truly scary.

I have no clue how things will play out in Greece, but Germany 1931 and Argentina 2001 does not give much hope for optimism, but we can at least prepare ourselves for how things might play out by studying history.

I can recommend having a look at this timeline for how the Argentine crisis played out. You can start on page 3 – the Autumn of 2001. This is more or less where we are in Greece today.

Milton Friedman on exchange rate policy #6

Gold standard?

The last remnants of the global gold standard system died when the Bretton Woods agreement collapsed in 1971, but the notion of a global currency system based on a gold standard occasionally pops up in both general and academic debates, especially in the USA.

Friedman was never any great proponent of the gold standard or other goods-based currency systems. He sees a gold standard system as neither possible nor desirable in a today’s world: undesirable because its reintroduction would imply enormous costs in connection with purchasing gold, and not possible because the “mythology” that surrounded the gold standard in the nineteenth century no longer exists. In the nineteenth century everyone expected changes in the money supply to be determined by developments in the price of gold, and that money and gold were close substitutes. Today, we expect the central bank – not gold – to ensure the value of our money. A reintroduction of the gold standard would require a shift in this perception.

In the nineteenth century the gold standard ensured low (or more correctly no) inflation for long periods of time. On the other hand, prices fluctuated considerably from year to year as gold production rose and fell. According to Friedman this was possible because the goods and labour markets were much more flexible at that time than now. Any attempt to reintroduce the gold standard now would result in exactly the same negative outcomes as a fixed exchange rate policy.

Despite the global gold standard having been abandoned many years ago, most central banks continue to own large amounts of gold. Friedman’s view is that one should fully acknowledge the end of the gold standard system and auction off the gold reserves of the central banks.

This concludes my little series on Milton Friedman’s view on FX policy. See the other posts here:

Milton Friedman on exchange rate policy #1
Milton Friedman on exchange rate policy #2
Milton Friedman on exchange rate policy #3
Milton Friedman on exchange rate policy #4
Milton Friedman on exchange rate policy #5

80 years ago – history keeps repeating itself

Scott Sumner has a excellent post on events 80 years ago and the comparison with the situation today.

I share Scott’s view of the dismal situation 80 years ago and today.

See my posts on the issue from last week here and here.

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