The momentum behind the rise of cryptocurrencies is being fueled by populist aspirations to decentralize finance in the name of democracy—in radical defiance of central bank polices that are perceived as favoring big investors, big business, and big government. Even as the Fed appears to be signaling its willingness to comply with a progressive agenda that would enlist our nation’s central bank in efforts to focus on climate change or systematic racism, there is growing skepticism that the solution to such problems is to be found in Fed purchases of Treasury debt and government-backed mortgage securities.
The entire essay is useful as a compendium of gobbledygook. For a more reasoned interpretation of cryptocurrency popularity, see Charles Engel’s paper, “Lessons for Cryptocurrencies from Foreign Exchange Markets”:
We have maintained that cryptocurrencies do have a fundamental value, arising principally from their ability to potentially provide greater privacy and anonymity compared to the conventional banking system. But that feature is difficult to value, which makes cryptocurrency exchange rates volatile and subject to bubbles. In addition, that very feature makes these assets desirable for the conduct of illegal activities, which is likely to invite increasing surveillance and regulation. In turn, those controls will work to reduce the value of cryptocurrencies, not only for use in illicit transactions, but for legitimate users as well.
In other words, cryptocurrencies might be gaining value exactly for reasons opposite of what Dr. Shelton highlights. From Laboure, “The Shadow Economy: From Cash to
Crypto ,” Deutsche Bank, July 21, 2020 (not online):
Cryptocurrencies are already widely used in the shadow economy (second only to cash). They make up one of the largest unregulated markets in the world. A study reported that approximately one-quarter of bitcoin users are involved in an illegal activity. Approximately $76 billion of illegal activity per year involves bitcoin, or 46 percent of all bitcoin transactions. This amount is close to the scale of the US and European markets for illegal drugs. Much of this illegal activity involves trading within darknet marketplaces. Another study reported that 44 percent of all bitcoin transactions were illegal. There is strong demand for legal uses of cryptocurrencies, but along with those good uses, criminal conduct is facilitated. In other words, it is all blended, and therefore problematic.
Addendum:
More on cryptocurrencies, from Eswar Prasad.
Less than 5% of the 100+ people i know who own crypto care about privacy. >90% of them will mention Fed QE as part of their thesis.
@ Effem
Two things here, we’ll have to take you at your word, but I’m cynical on your statement. But let’s just say your statement is as honest as a 1950s era Boy Scout. Do you think people might tell you different reasons than their actual reasons for buying bitcoin/crypto?? Because usually the very next question someone asks after you state your reason for wanting privacy is, “What do you need to keep private??” or “What exactly do you have to hide??”. “Because QE” is a preemptive killing of that question, when in reality on an individual basis QE effects people very minimally, and those it does effect can usually find other defensive measures than crypto.
And let me add an aside here, the more people I see on the internet/TV etc telling me “crypto is not about privacy” is like the actor taking a bad roll in a garbage film, or an NBA player/ NFL player/ NFL coach/ changing teams, or Business Executive changing companies looking into the TV camera and saying “It’s not about the money” because as soon as those words depart their mouth is the same moment I become certain it was about the money.
*bad role, excuse me
There is a simple test. If you use Coinbase you don’t have nearly the privacy of other crypto exchanges. And clearly Coinbase has a huge (and growing) market share.
i own crypto in coinbase. i bought it with absolutely no interest in the privacy crypto is supposed to have.
Same reason people buy gold.
Gold is what Shelton is peddling – sort of like Glenn Beck.
they talk about Fed QE to me too, but when i challenge them to value bitcoin using math like you would a real investment – ie to put up or shut up – they shut up. investments have intrinsic value based on the present value of future projected cash flows. currencies have relative value based on the theory of interest rate parity. bitcoin’s value is based on the “bigger fool” theory that someone will pay more than the previous buyer.
and if you ask the same questions about gold, what response do you get?
https://news.cgtn.com/news/2021-05-19/China-bans-financial-payment-institutions-from-crypto-business-10og4diN0t2/index.html
May 19, 2021
China bans financial, payment institutions from crypto business amid price volatility
Rounds of cryptocurrency boom-and-bust recently have raised cautions from China’s regulatory authorities, who have banned financial and payment institutions from providing services related to the virtual currency transactions and warned investors against the speculative trading.
“Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” three Chinese state-backed associations said in a statement released Tuesday.
The three associations are the National Internet Finance Association of China – an association of Chinese internet firms providing financial services, the China Banking Association on behalf of the country’s banks, and the Payment and Clearing Association of China.
According to the statement, financial institution members, payment institutions, and other agencies shall not use virtual currency to price products or services. Also, internet platform enterprises shall not provide services for virtual currency-related business activities.
It is also not allowed to underwrite insurance businesses related to virtual currencies or bring virtual currencies into insurance liability coverage….
The case against Crypto – https://bariweiss.substack.com/p/the-case-against-bitcoin
OMG, we are now quoting Bari “What is a toady??” Weiss on Bitcoin?!?!?!?!?! Are we that hard up to make the SJWs happy?? What are we doing next, grabbing random customers at the local nail salon??
It is great for money laundering. So there is that.
That’s related to Chinese citizens using crypto to skirt around capital controls and Chinese citizens finding ways to park money/capital in places outside China where their cash and assets will have a much better chance of retaining their value. I’d have other things to say to you ltr, but will save our gracious host the consternation for once.
Have to agree. The chinese policy has nothing to do with volatility, and everything to do with capital controls. They said as much a couple of years ago when the chinese went after crypto before.
The momentum behind the rise of cryptocurrencies is being fueled by populist aspirations to decentralize finance in the name of democracy…
— Judy Shelton
[ That Judy Shelton previously headed the National Endowment for Democracy (NED), a regime-change advocacy and management institution strikes me as perfectly related to this cryptocurrency rationale. ]
What I vaguely wonder about is motivation. I really have no idea why Judy Shelton should be so intent to undo the function of the federal Reserve, though that intent is obvious.
Gold bugs need a common enemy to rally around. The fed serves that purpose.
Judy Shelton has decided to pretend she is some sort of Bernie Bro progressive? And Donald Trump is a loyal husband who pays all of his taxes.’
Crypto was not the main theme of the latest BS from Ms. Gold Standard. No – she is convinced we will have runaway inflation unless we go back to a fixed exchange system with tight monetary policy to assure the dreaded inflation is dead. Check her response to Krugman’s latest for example:
Snarky is hardly the word for the crass deprecations he offers in his concurrent newsletter, wherein he notes “a lot of buzz around how the Fed’s wanton abuse of its power to create money will soon lead to runaway inflation.” The Nobel laureate dismisses fears of monetary debasement as being anchored in neither fact nor logic but rather attributable to an “infestation of monetary cockroaches.”
I’m sure Krugman is having a good chuckle Shelton’s little rant.
The Independent Institute is pro tobacco because Big Tobacco is one of its sources of funds. This institute also features some Anti-Global Warming writers. So yea – let a gold bug nutcase write on monetary policy.
Mostly this is about Shelton and bitcoin. But let me note a side issue of bitcoin versus other cryptocurrencies. For better or worse, quite possibly the latter, cryptos are here to stay, although what their form or role will be in the future, say a decade from now when things might sort of have shaken out and settled down, is hard to say.
But I shall note that there are some major differences between bitcoin, the first out the door and the largest, and some of its competitors, especially second biggest ethereum, and somewhat further back XRP, which used to be third, but has slipped a few notches. Both of these are far superior to bitcoin in mining efficiency, a matter that has turned Elon Musk against bitcoin. Apparently bitcoin mining is now using about 1/2% of the world’s electricity, about the amount Argrentina uses, with associated pollution costs based on the sources of that electricity. Bitcoin is really an environmental disaster.
The other thing is that those other two cruptos have genuine uses that bitcoin does not. While they have not yet been widely used, ethereum has capabilities for businesses to engage in ongoing contracting and other useful relations. The managers of ethereum also seem to keep improving it in various ways, such as massively improving its efficiency recently through introducing sharding.
Then we have XRP, which has fallen behind the top ones in the market because it is much less volatile. It shares many of the efficiiency advantages of ethereum, but it has another use that provides a much firmer foundation for its price than anything either bitcoin or ethereum (or any other crypto) has. It has become widely used by commercial banks for transactions between each other. I supposed another crypto might displace it for that use, but this is serious and legal usage.
That arises from the the virtues that blockchains have, which can be used beyond cryptocurrencies. In effect blockchains amount to being high-powered super accurate and extensive accounting systems. So apparently many insurance companies have adopted blockchains for their internal accounting purposes, with thiese not connected to any cryptocurrencies whatever.
So much of this is in play, but in the longer term it looks like bitcoin faces problems of efficiency and pollution and just plain uselessness in comparison with some other cryptocurrencies, possibly govcoins introduced by central banks, or even just blockchain apps disconnected from cryptocurrencies entirely.
“ So much of this is in play, but in the longer term it looks like bitcoin faces problems of efficiency and pollution and just plain uselessness in comparison with some other cryptocurrencies,”
Kind of like gold. I own ethereum. Not against owning bitcoin at the right price, but longer term ethereum or a similar crypto will be better because of utility beyond store of value. The energy concern has become real for bitcoin.
baffling,
i
At least owning gold or buying and selling it doe not involve using huge amounts of polluting electricity generation.
BTW, I know some very boring and conservative local financial advisers here in the Shenandoah Valley. Their clients are mostly either retired people or those about to retire. I think their general advice is fairly reasonable, balanced cautious portfolio, blah blah blah. For a long time they advised having 3% of one’s long term retirement portfolio in gold (not some Sheltonian gold buggery). About three months ago they shifted to saying that it should be 2% gold and 1% bitcoin or some other cryptocurrency. There is your super safe establishment view as of a couple of months ago.
i agree with the 3% gold, or some equivalent with respect to gold and crypto. in this case, bitcoin is a store of value just like gold. i looked at ethereum as the same, plus some other case uses that COULD justify higher returns in the future. as you said, the argument is based upon diversification rather than some other agenda.
“At least owning gold or buying and selling it doe not involve using huge amounts of polluting electricity generation.”
ever take a look at the mining process for gold? not environmentally friendly by any stretch of the imagination.
There is mining of gold only once. Once some gold is mined, that is it. One has no further such expenses for existing gold as it is traded.
But every bitcoin transaction sets off “mining” expenses,” which are rising with time as the length of the blockchain rises and the difficulty of the problems needing to be solved for the transaction rise, thus requiring ever larger amounts of electricity.
Barkley, you have valid points. But i think you are glossing over the amount of environmental damage due to gold mining. It is pretty extensive.
As for crypto, one would argue that as we find cheaper and more plentiful renewable green energy, those concerns go away-or at least are minimized. And this is a particular issue with bitcoin, but not necessarily the other cryptos. Ethereum is undergoing an upgrade to help address the issue. It is manageable in the long run.
BTW, I just read in an article in WaPo today by Eswar Prasad that the current cost per bitcoin transaction is now about $20. It also still takes about 10 minutes to do one, as it pretty much always has. Unfortunately ethereum takes nearly as long as well, although its cost is much lower.
Going on about how eventually we shall have green electricity production is not much help for the near future. And even if it gets cleaner, why should we be using such huge amounts of electricity for such an activity that provides barely above zero social usefulness, perhaps not even net positive given the clearly high rate of use by criminals?
The transaction fee is why you see bitcoin used to purchase cars and houses, not cups of coffee. It is indeed high, today.
Renewables and crypto will continue to grow together. Just because it is problematic today, you should not dismiss. As you noted, it will be less problematic in the future. Personally, i see the world as energy independent within a century, meaning technology will have developed very low cost energy production and distribution at that time. We will have bigger issues to address than energy conservation sooner than you think.
Anyone look at the 5 day graph for crude oil futures on “ino dot com” today?? HINT: It’s dropping at a faster rate than soybean futures.
Rumors are now rampant among the QAnon that market exchanges are now part of the liberal media conspiracy, and are now quoting incorrectly low moving commodities prices. Someone phone up “Princeton”Kopits before he loses his life’s savings on breakfast bagels.
Even the spot price has fallen below $62. In inflation adjusted terms, oil prices were double this back in April 2011 (or 1980). But Princeton Stevie boy is 100% confident oil prices will hit historical levels by year end. If not – he can ask Judy Shelton to cook the books for him!
Oh come on you guys, this day to day stuff is just bs. Oil went up today, although not by all that much.
The more serious matter for Steven is that it seems that $70 per barrel for Brent seems to be an upper limit for now. It has almost hit that several times in recent months, but falls back every time it gets there. That seems to bring out various supply responses.
That said, it remains not impossible that there could be some shock from one of those grey swan, if not black, events that could really mess with the oil market and push the price a lot higher. But for now it looks like $70 per barrel on Brent is a pretty hard ceiling.
https://www.nytimes.com/2021/05/20/opinion/cryptocurrency-bitcoin.html
May 20, 2021
Technobabble, Libertarian Derp and Bitcoin
By Paul Krugman
A number of readers have asked me to weigh in on Bitcoin and other cryptocurrencies, whose fluctuations have dominated a lot of market news. Would I please comment on what it’s all about, and what’s going on?
Well, I can tell you what it’s about. What’s going on is harder to explain.
The story so far: Bitcoin, the first and biggest cryptocurrency, was introduced in 2009. It uses an encryption key, similar to those used in hard-to-break codes — hence the “crypto” — to establish chains of ownership in tokens that entitle their current holders to … well, ownership of those tokens. And nowadays we use Bitcoin to buy houses and cars, pay our bills, make business investments, and more.
Oh, wait. We don’t do any of those things. Twelve years on, cryptocurrencies play almost no role in normal economic activity. Almost the only time we hear about them being used as a means of payment — as opposed to speculative trading — is in association with illegal activity, like money laundering or the Bitcoin ransom Colonial Pipeline paid to hackers who shut it down.
Twelve years is an eon in information technology time. Venmo, which I can use to share restaurant bills, buy fresh fruit at sidewalk kiosks, and much more, was also introduced in 2009. Apple unveiled its first-generation iPad in 2010. Zoom came into use in 2012. By the time a technology gets as old as cryptocurrency, we expect it either to have become part of the fabric of everyday life or to have been given up as a nonstarter.
If normal, law-abiding people don’t use cryptocurrency, it’s not for lack of effort on the part of crypto boosters. Many highly paid person-hours have been spent trying to find the killer app, the thing that will finally get the masses using Bitcoin, Ethereum or some other brand daily.
But I’ve been in numerous meetings with enthusiasts for cryptocurrency and/or blockchain, the concept that underlies it. In such meetings I and others always ask, as politely as we can: “What problem does this technology solve? What does it do that other, much cheaper and easier-to-use technologies can’t do just as well or better?” I still haven’t heard a clear answer….
https://twitter.com/paulkrugman/status/1395731779554877447
Paul Krugman @paulkrugman
Friends asking why this piece didn’t get into the environmental issues with Bitcoin. Answer: 850 words. Enough space to focus on the silly, not the evil. But … 1/
https://www.nytimes.com/2021/05/20/opinion/cryptocurrency-bitcoin.html
Technobabble, Libertarian Derp and Bitcoin
Rising asset prices don’t mean that silly ideas make sense.
9:22 AM · May 21, 2021
It’s not just the climate damage. The long-term progress of money has involved moving away from tying up productive resources in what is basically just an accounting system; gold coins to paper money to digital payments 2/
Here’s what Adam Smith said about the advantages of paper currency, still something of a novelty in 1776: 3/
https://pbs.twimg.com/media/E16jlyJWQAARwTJ?format=jpg&name=large
But now we’re supposed to go back to using vast quantities of energy and computing power to perform functions that are, again, basically just record-keeping. How is this the future? 4/
“Venmo, which I can use to share restaurant bills, buy fresh fruit at sidewalk kiosks, and much more, was also introduced in 2009.”
Matt Gaetz also uses Venmo to share those expensive dates with his Florida cronies. Ain’t it a shame that this crew did not take one for the team by paying the girls in bitcoin?
https://www.globaltimes.cn/page/202105/1224151.shtml
May 22, 2021
China re-stresses crackdown on Bitcoin mining and trading during high-level meeting
Chinese officials have stressed that the country would crack down on Bitcoin mining and trading during a meeting convened by the State Council Financial Stability and Development Committee on Friday. This comes at a time when Bitcoin price rode a roller coaster in recent days.
The meeting, hosted by Vice Premier Liu He, stressed that the country will strike against Bitcoin related activities to prevent individual risks from spreading into the whole society. The meeting also noted that China should safeguard “stable operation” of its stock, bond and foreign currency markets and crack down on financial crimes.
The committee’s warning against Bitcoin came just on the heels of several Chinese financial institutions’ public statements to curb Bitcoin trading. On Tuesday, the People’s Bank of China (PBC), China’s central bank, issued a statement prohibiting financial institutions and payment companies from providing services related to cryptocurrencies. In the statement, it also warned the public about the risks of cryptocurrency trading….
china had issues with the bitcoin energy drain years ago.
Thank you, ltr. You may ignore bad things the Chinese government does, but you do also inform us of some interesting and useful things they are doing.
So indeed, this looks to be a major reason why the overall crypto market has lost about a quarter of its value in recent days. This is way more important than whatever Elon Musk is saying at any given moment, although he is not completely irrelevant (and he has also gone negative recently).
An important bottom line is that for those who do not know, the whole crypto market is overwhelmingly driven by the Northeast Asians, including non-trivially the North Koreans. Anybody in the US thinking they can forecast what the market players there are going to do next are just delusional.
https://fred.stlouisfed.org/graph/?g=Eb24
January 15, 2018
Real Broad Effective Exchange Rate for United States, Switzerland and China, 1994-2021
(Indexed to 1994)
https://fred.stlouisfed.org/graph/?g=Eb2h
January 15, 2018
Real Broad Effective Exchange Rate for United States, Switzerland and China, 2007-2021
(Indexed to 2007)
[ The real value of Chinese currency has been increasing since 1994. ]
Ms. Shelton, whom Trump thought a good choice for a Fed governorship, seems not to know the difference between the Fed’s monetary policy role and the Fed’s regulatory role:
“Even as the Fed appears to be signaling its willingness to comply with a progressive agenda that would enlist our nation’s central bank in efforts to focus on climate change or systematic racism, there is growing skepticism that the solution to such problems is to be found in Fed purchases of Treasury debt and government-backed mortgage securities.”
Any such skepticism is limited to pople who think preventing redlining or demanding that banks adequately account for risks to their asset from climate change have something to do with Fed asset purchases. Ya know, dumbies.
Maybe we should do some research and see if Judy Shelton lives on a floodplain. Or future floodplains (Miami, etc). Does Shelton think it’s “the American way” that we bail her out after the next hurricane initiated flood?? I know a lot of wealthy New Jerseyites professing to be free market believers think America owes them. But they all have their hand out to the federal government when that water damage destroys their home they bought right on the edge of the coast. Just like the TBTF banks circa 2008–2009 they suddenly become believers in government welfare, when it’s being stuffed into their own pocket.
I confess that I’ve found anything I’ve read that she’s written, and written transcripts of testimony she’s given, to seem confused about at least one thing, often several. For that reason, I’ve also found them to be confusing to me. I think I’m better off if I ignore her.
This looks bad for “Princeton”Kopits prediction of $4 at the pump before late June 2022. Looks like no money for bagels and lots of late night weeping for “Princeton”Kopits. Get ready for lots of angry and bitter comments from Kopits about how everyone in the Econbrowser comment section is cruel to him:
https://www.reuters.com/world/middle-east/oil-falls-third-day-rising-coronavirus-infections-us-stockpiles-2021-05-20/
Is this a strong indicator oil supply might increase faster than demand?? Naaaah, Rouhani probably wants his entire nation hating him until the next Iran “election”.
I bet Bruce Hall thinks Lauren Boebert (R-Colorado) is HOT. After all she has been praising Texas for its mandate not to have mask mandates claiming that since March 2 there have been no COVID 19 deaths. Could this be true? Oh gee – Kevin Drum has fact check this little lying witch with a b and yea she is lying:
https://jabberwocking.com/no-texas-has-not-had-zero-covid-19-deaths-since-it-lifted-its-mask-mandate/
But yea – she is sort of attractive for a lying with with a b.
The more you read from shelton, the more you wonder why econned gets so worked up by prof chinn’s posts on her. Can you imagine if she had actually made it onto the fed? Eminent economist my a$$. Her articles indicate she is a hack.
The criticisms of Shelton’s gold bug nonsense are very akin to what Milton Friedman has eloquently noted. So could someone has Mr. Econned if he thinks Friedman is a left wing nutcase?
Under Armour has some Dick Cheney style creative accounting. Forecast high sales growth and when it does not materialize, lie to its shareholders:
https://www.natlawreview.com/article/under-armour-inc-pulls-sales-forward-sec-and-stockholders-push-back
It is as if they hired Princeton Steve as their consultant!
A lot of guys exaggerate the size of growth under their undies.
off topic but still newsworthy
https://www.washingtonpost.com/education/2021/05/19/unc-nikole-hannah-jones-tenure/
it is a shame that republicans in north carolina stonewalled a pulitzer and MacArthur winner, denied tenure because it rubbed republican politics the wrong way. for those who have complained about a liberal academy silencing the right, you have no more argument. dirty white old men in north carolina continue to pollute our nation. some people are still living in the jim crow era.
I have one word for all you INFLATIONISTAS:
Copper!
https://fred.stlouisfed.org/series/PCOPPUSDM
Back in 2011 its price reached $4.50 a pound, which was a historical record. That did not last very long but now we have a new copper boom with the price getting close to $4.25 a pound. We should Glenn Beck to start pushing that people buy this commodity in tonight’s show!
Princeton Steve and his fixation on oil backed the wrong horse again.
And I bet Shelton and Stephen Moore are working on their new paper on monetary policy, which advocates a copper standard!
Some people assume people working at non-profits don’t make any money and by definition “non-profit” outfits don’t make any money. Often it is quite the reverse. Line 15 on the first page is what you want to look at:
https://www.independent.org/pdf/finances/2020_fy_form_990.pdf
It’s kind of like Oral Roberts and all these TV evangelists saying they are “doing God’s work”, but all they are really doing is feeding you rat poison labeled “multi-vitamin supplements”.
https://www.nytimes.com/2021/05/21/opinion/money-federal-reserve-deficit.html
May 21, 2021
Krugman Wonks Out: What We Talk About When We Talk About Money
By Paul Krugman
Lately I’ve been getting a lot of mail from readers infuriated by my relative nonchalance about two issues: budget deficits and money growth. When I point out that the federal government is able to borrow at incredibly low interest rates, some retort that this is only because the Federal Reserve is buying a lot of debt. When I say that we shouldn’t be worried about runaway inflation, some point to the rapid growth in the money supply and say that we’re on the verge of becoming Venezuela.
These are actually related complaints — and both, I’d argue, reflect common misunderstandings about what’s actually going on both with the Fed’s balance sheet and with the “money supply.” (Scare quotes explained shortly.)
So, what makes an asset money? There’s no ineffable essence that makes green pieces of paper bearing portraits of dead presidents money, whereas vintage comic books aren’t. Money is defined by what it can do — above all, serve as a medium of exchange, something you accept in return for what you have, and then hand over for what you want.
To play this role an asset must also be a reasonably stable store of value — not losing or gaining 30 percent over the course of a day. And a widely used medium of exchange also becomes a unit of account: we calculate profits and debts, make financial deals, in dollars — not with promises to hand over, say, a certain number of sheep.
Since money is a role, not a thing, does it even make sense to calculate the quantity of money? Yes, under certain circumstances. Tracking the number of dead presidents in circulation sometimes helps predict inflation. Tracking broader “monetary aggregates,” which include things like bank deposits that can also be used for payment, may also be useful.
In their landmark 1963 book “A Monetary History of the United States,” Milton Friedman and Anna Schwartz convinced many economists that M2, a measure that included both checkable deposits and other bank deposits that could easily be transferred to checking accounts, was a powerful economic predictor — so much so that the Federal Reserve could basically cure the business cycle simply by keeping M2 growing slowly but steadily. In particular, they argued that the Fed could have prevented the Great Depression if it had prevented M2 from falling 30 percent from 1929 to 1933.
But here’s the thing: the Fed doesn’t directly control M2. All it controls is the “monetary base,” the sum of bank reserves and currency in circulation. (It only controls the sum, not the individual components, since people can decide to withdraw currency from banks or put it back.) What Friedman and Schwartz asserted was that the Fed can control M2 indirectly — that it can push monetary aggregates up or down if it’s willing to move the monetary base enough.
The 2008 financial crisis wasn’t kind to that view. The Fed hugely increased the monetary base, but banks basically just sat on the additional reserves, so that deposits and hence M2 didn’t rise much:
https://static01.nyt.com/images/2021/05/25/opinion/250521krugman1/250521krugman1-jumbo.png?quality=90&auto=webp
Does the Fed really control the money supply?
This in turn very much calls into question the notion that the Fed could have prevented the Great Depression. But that’s another story.
More to the current point, M2 has in fact soared during the pandemic:
https://static01.nyt.com/images/2021/05/25/opinion/250521krugman2/250521krugman2-jumbo.png?quality=90&auto=webp
M2, reaching for the sky.
And the Fed has indeed bought a lot of government debt. But is the Fed really financing the budget deficit?
Not really. At a fundamental level, households are financing the deficit: the funds being borrowed by the government are coming out of the huge savings undertaken by families saving much of their income in an environment where much of their usual consumption hasn’t felt safe.
However, household financing of the deficit isn’t direct. Instead, it has taken the form of a sort of financial daisy chain. Families are stashing their savings in banks. Banks, in turn, have been accumulating reserves — that is, lending to the Fed, which these days pays interest on bank reserves. And the Fed has been buying government bonds.
Here’s a rough picture:
https://static01.nyt.com/images/2021/05/25/opinion/250521krugman3/250521krugman3-jumbo.png?quality=90&auto=webp
The monetary daisy chain.
More or less, households have acquired $2 trillion in deposits; banks have acquired $2 trillion in reserves; and the Fed has acquired $2.5 trillion in government securities. Wait, what’s that extra $500 billion? It appears that someone has been stashing away huge amounts of currency — probably mostly $100 bills, probably mostly outside the U.S. I guess not all Russian gangsters trust Bitcoin.
Exactly why the process has been so indirect is an interesting question….
https://fred.stlouisfed.org/graph/?g=qSdH
January 30, 2016
Monetary Base and M2 Money Stock, 2007-2015
(Indexed to 2007)
https://fred.stlouisfed.org/graph/?g=woas
January 30, 2018
M2 Money Stock, 1960-2021
(Percent change)
https://fred.stlouisfed.org/graph/?g=E8Gg
January 30, 2020
Bank Assets (Treasuries), Reserves and Demand Deposits, 2020-2021
Like any good con, these crypto “currencies” have a good story that easily sells to those who do not know how to think and/or find reliable information.
Most people have some fear that one day the value of their savings and assets will crash/disappear. Cryptos have somehow sold their marks on the idea that cryptos will not crash/disappear, although they in reality are a lot more likely to do that than most other asset classes.
On top of that is the old classic Ponzi/bubble scheme where people pile in and drive up the price, because prices are going up.
Even calling them currencies is a big con – they are assets (with no intrinsic value). When the day comes where I have to exchange my $ to Bitcoins before I can pay for my groceries (all priced in bitcoins), then we can talk about Bitcoins as a currency.
I’m gonna try this Washington State wine today. As you would expect from me not terribly expensive. It says it’s made around Mattawa & Quincy Washington. No cork, just a twist off bottle cap. It has a simple image of a devil’s pithfork on the bottle if that ring’s any bells for Menzie. I’ll have to query if the Chinn family has tried any, although something tells me that outside of Chinese wine at weddings or something the Chinn clan does not partake in alcohol too much. this is supposedly 3 years old (like I give a cr~~ )
OK, I gave this ZERO time to “breathe” and I poured it into a Ball brand glass mason jar, not swooshing it around AT ALL, just like all the cool guys in “Sideways” like Miles Raymond and Jack Cole did. (joke) I didn’t add ice to it (which I sometimes do, even though I know this is considered “clod” type behavior by wine connoisseurs) It’s slightly sweet for a Merlot, especially since it claims to have about 13% alc. I think this has to be one of the sweetest tasting Merlots on planet Earth, for one with 13% alc content. It actually tastes like it might be lower than 13% content. But it’s good. I like it. take that you Cali for niay snobs. : )
I should say, other than his great taste in certain physical characteristics, I don’t actually like the character of Jack Cole in that film. Except for his semi-loyal friendship bonds with Miles. I think in his own misguided way Jack is a good friend to Miles (though failing him in many levels, and in general a shallow person. Ever had a friend who was a good friend to you as an individual, but he made you so angry for his shallowness and vacant-ness in character in general ??? These people/archetypes do walk the Earth.)
But Miles. now there is a guy I can relate to, for reasons we won’t get into.
: ) SO many stories to tell, but not putting that skeet target into the air for the regular parties to shoot down. Laoshi Fang—Jack Cole~~~~it’s all the same isn’t it??
Menzie,
Charles Engel is an excellent economist but I’m afraid the facts in this case are more consistent with Judy Shelton’s views.
Charles is falling for the common twin misconceptions: 1) Bitcoin provides significantly more privacy and anonymity; and 2) Bitcoin is predominantly used for illicit transactions. As a consequence, Charles believes that the demand for cryptocurrencies arises from their usefulness in criminal activities.
However, bitcoin and most other cryptocurrencies are not designed for anonymity or privacy. In important ways, cryptocurrencies on the blockchain provide less privacy than other mediums. Cryptocurrencies such as bitcoin are pseudonymous, not anonymous. Moreover, every transaction ever conducted is recorded forever on a public blockchain, for all to see. Most users of bitcoin buy their bitcoin on an exchange using the public banking system. They therefore associate their identities with their crypto pseudonyms and every transaction they make is publicly available for anyone anywhere in the world to inspect.
To maintain privacy, you have to work to avoid associating an identity with a blockchain pseudonym. Those who do that are in the minority. I don’t know where the DB study gets its data, but blockchain security researchers estimate that only a few percent of crypto transactions are associated with illicit activity in a year. Of those, most of them are darknet transactions as well as scams. The largest darknet by far currently is Hydra, which serves a Russian-language clientelle. So darknets are geographically limited.
One of the difficulties that criminals have in using cryptocurrencies is laundering the money into conventional currency, the same problem they face using non-crypto currencies. Currently, crypto money laundering services are few in number and concentrated in certain areas, making them readily observable. Illicit crypto pseudonyms are easily observable and trackable. Regulatory and law enforcement authorities can crack down on illicit activities easily by focusing on the illicit IDs and the services; they really don’t need to regulate the whole market as Charles is suggesting.
Judy Shelton has got it basically right. Most of the demand for cryptocurrencies comes from the belief that they will evolve to be a legitimate monetary alternative that does not subject the user to banking systems nor central bank monetary policy. I’ll quote Paul Tudor Jones to give just one example:
“Bitcoin has a lot of the characteristics of being an early investor in a tech company … like investing with Steve Jobs and Apple, or investing in Google early.”
And also: “I came to the conclusion that bitcoin was going to be the best of inflation trades, the defensive trades that you would take.”
“Charles Engel is an excellent economist but I’m afraid the facts in this case are more consistent with Judy Shelton’s views”
Even when I’m half-sauced this makes me involuntarily emit a half-chuckle.
Signed, Moses the fool
“Judy Shelton has got it basically right.” She got nothing right. But many thanks for that long winded rant that added nothing to the conversation. After all – you just made Krugman’s case that there is no reason to have bitcoin. Just as there is no reason to take your rants seriously.
Rick,
I do not know what your sources are about there not being much illegal activity using cryptos, but I have seen one report (gathered I am not sure how) estimating that around a third of bitcoin transactions are illegal. While it is possible to track crypto transactions, it is quite difficult.
I would note you completely ignore the severe environmental costs of using cryptos, especially bitcoin, which is much worse than the main other ones.
As for Charlie Engel (whom I know quite well), he is a very capable economist, far above Shelton in competence. He is not only a colleague of Menzie Chinn’s at Wisconsin, and a longtime coeditor of the top journal in international economics, but also a former coauthor of Jim Hamilton. His analysis on all this looks correct.
https://www.nytimes.com/2021/05/20/technology/tech-antitrust-paul-romer.html
May 20, 2021
Once Tech’s Favorite Economist, Now a Thorn in Its Side
Paul Romer’s call for government activism, particularly toward the big tech companies, reflects “a profound change in my thinking.”
By Steve Lohr
Paul Romer was once Silicon Valley’s favorite economist. The theory that helped him win a Nobel prize — that ideas are the turbocharged fuel of the modern economy — resonated deeply in the global capital of wealth-generating ideas. In the 1990s, Wired magazine called him “an economist for the technological age.” The Wall Street Journal said the tech industry treated him “like a rock star.”
Not anymore.
Today, Mr. Romer, 65, remains a believer in science and technology as engines of progress. But he has also become a fierce critic of the tech industry’s largest companies, saying that they stifle the flow of new ideas. He has championed new state taxes on the digital ads sold by companies like Facebook and Google, an idea that Maryland adopted this year.
And he is hard on economists, including himself, for long supplying the intellectual cover for hands-off policies and court rulings that have led to what he calls the “collapse of competition” in tech and other industries.
“Economists taught, ‘It’s the market. There’s nothing we can do,’” Mr. Romer said. “That’s really just so wrong.”
Mr. Romer’s current call for government activism, he said, reflects “a profound change in my thinking” in recent years. It also fits into a broader re-evaluation about the tech industry and government regulation among prominent economists.
They see markets — search, social networks, online advertising, e-commerce — not behaving according to free-market theory. Monopoly or oligopoly seems to be the order of the day.
The relentless rise of the digital giants, they say, requires new thinking and new rules. Some were members of the tech-friendly Obama administration. In congressional testimony and research reports, they are contributing ideas and credibility to policymakers who want to rein in the big tech companies.
Their policy recommendations vary. They include stronger enforcement, giving people more control over their data and new legislation. Many economists support the bill introduced this year by Senator Amy Klobuchar, Democrat of Minnesota, that would tighten curbs on mergers. The bill would effectively “overrule a number of faulty, pro-defendant Supreme Court cases,” Carl Shapiro, an economist at the University of California, Berkeley, and a member of the Council of Economic Advisers in the Obama administration, wrote in a recent presentation to the American Bar Association.
Some economists, notably Jason Furman, a Harvard professor, chair of the Council of Economic Advisers in the Obama administration and adviser to the British government on digital markets, recommend a new regulatory authority to enforce a code of conduct on big tech companies that would include fair access to their platforms for rivals, open technical standards and data mobility.
Thomas Philippon, an economist at New York University’s Stern School of Business, has estimated that monopolies in industries across the economy cost American households $300 a month apiece.
“We’ve all changed because what’s really happened is an expansion of the evidence,” said Fiona Scott Morton, an official in the Justice Department’s antitrust division in the Obama administration, who is an economist at the Yale University School of Management.
Of all the economists now taking on big tech, though, Mr. Romer is perhaps the most unlikely. He earned his undergraduate and doctoral degrees from the University of Chicago, long the high church of free-market absolutism, whose ideology has guided antitrust court decisions for years….
That companies like Microsoft and Cisco stiffle innovation has been a theme of some economists for over a generation. Cisco did not do much original R&D but they certainly bought out starts ups that were coming up with breakthroughs.
For those hoping for the demise of crypto, you need to realize quite recently bitcoin total value was $1 trillion and ethereum was half a trillion dollars. That alot of value to wipe off the face of the earth. These are no longer penny stocks, valuation wise, even if they still maintain a similar level of volatility.
Tulips were worth quite the fortune back in the day too!
That is true. Nevertheless, as the valuation increases it becomes harder to discount the validity of an investment. That said, there is a peculiarity to crypto that could be problematic. Alot of that value is concentrated in the hands of a minority of holders. These folks have held there stash, impacting liquidity to some extent. This is offset by the fact crypto can be traded in small fractional shares. So liquidity may not be as big an issues as i have thought.
I find crypto interesting enough, but have considered putting real money into it for investment purposes-yet. But i dont think its a passing fad. But i do believe an optimum crypto has not been created yet-but it will exist soon.
“But i do believe an optimum crypto has not been created yet-but it will exist soon.”
Krugman noted the time to market for useful technologies such as Venmo as he asked the key question – what problem does crypto currency solve. None that I can see. The optimal much to do without nothing.
Baffling: “That alot of value to wipe off the face of the earth.”
Not hardly. The global stock market has a value of almost $100 trillion and the global bond market has a value of around another $100 trillion. So wiping out all of bitcoin and etherium would amount to less than a 1% dip in the financial markets. Dips much bigger than that in the global markets happen almost daily. Nobody would even blink — except the bitcoin holders.
Depending on the day, gold has a total value of around $9 trillion. That is within reach of crypto sooner than you think. If gold became worthless overnight, do you think nobody would blink?
Not trying to cheer on crypto, just pointing out it has become widespread and valuable, moreso every day. At this rate it becomes harder to eliminate with each passing day.
As for the question of what it solves-its a good question. That is a problem for bitcoin. But something like ethereum has a potential use with its blockchain technology. I think this is where the future value and utility exists. Just because that use is not widespread today doesnt mean there is no value. People thought an online bookstore with no physical presence was not a game changer either…but pay attention as the banks are playing with crypto now.
‘If gold became worthless overnight, do you think nobody would blink?’
Well the Glenn Beck fan club would go nuts but I would hardly care.
Even though its not tied to gold directly, you think if all the gold in ft knox became wothless, it would not impact the dollar? Just pointing out as crypto value begins to approach the total value of gold, it becomes harder to say one has a consequence and the other does not. The more valuable crypto becomes, the more consequential it becomes.
Yeah, lost about a half trillion $ in value last week, whoop de doo. Very impressive.
Baffling: “Depending on the day, gold has a total value of around $9 trillion. That is within reach of crypto sooner than you think. If gold became worthless overnight, do you think nobody would blink?”
Crypto is not gold. In just one week crypto lost over $1 trillion in value, almost half. Nobody blinked — except the crypto holders. Half was gone in one last week. I don’t think losing the other half would be such a big deal.
Above you said “For those hoping for the demise of crypto, you need to realize quite recently bitcoin total value was $1 trillion and ethereum was half a trillion dollars. That a lot of value to wipe off the face of the earth.”
Well, crypto just lost almost $1.5 trillion last week, wiped off the face of the earth — and nothing happened.
What you are seeing is volatility, and most folks in crypto have dealt with that. It is different from what you have implied, joseph, that the crypto is essentially worthless. After the significant runup since the new year, such a correction was anticipated. This is different than the asset simply disappearing. If bitcoin were to reduce to $100, then i am wrong and you are right. I just dont see that happening, because too many people see value in it.
I have a bunch of old baseball cards that are physically worthless, but because a hall of famer is on the picture somebody will always pay money for them. They will not become worthless.
“What you are seeing is volatility,”
That’s putting it mildly. You have cryptocurrency losing half it’s value, over a trillion dollars, in a matter of hours. Which makes it pretty useless as currency. Anyone doing business or making deals to transact in bitcoin would have to be crazy. The value of the transaction could change dramatically between the time you shake hands and hand over the currency.
The only people willing to make risky transactions like that are deals involving extremely high margins where large exchange value swings are not as much of a concern, like illegal drugs or ramsom.
that does not make it worthless.
https://www.cnbc.com/2021/05/24/feds-lael-brainard-pushes-digital-dollar-as-central-bank-currency-race-heats-up.html
brainard and the fed seem to think that a cryptocurrency is in their future. as i said, the perfect crypto has not been invented yet. does not mean the category is worthless.
as for the volatility over the past week, that was the direct result of the chinese government attacking crypto. you should be less interested in the the resulting volatility, and more interestested in the fact the crypto currencies appear to have won that battle. They are still here. Even with this volatility, most cryptos today are worth more than they were at the beginning of the year.
“brainard and the fed seem to think that a cryptocurrency is in their future.”
Brainard mentioned digital currency, not crytptocurrency. The first does not require the second.
Brainard also noted the dangers of private money as opposed to government fiat money. She does not seem to be a fan of crypto coins.