Chipping away at government’s currency monopoly status … and MMT does not help.

Modern monetary theory appears to convey on money the characteristics of a utility.  Under MMT, as monopoly issuers of money, governments and central banks can print as much money as they want without considering the implications from deficits or inflation, and if inflation is a concern, it can be offset with increases in taxes.

An unregulated, natural monopoly can get away with manipulating the supply of its product by freely changing the price for its output.  It can reduce the price of its output when it observes a competitive threat in the form of a new firm attempting to enter the utility’s market and when the new entrant is vanquished, it can then raise its prices to take advantage of customers captured in the emboldened single-provider market.

Bank trading desks input central bank overnight rates and discount window rates into their exchange rates for reselling currency and while they expend resources forecasting a central bank’s next policy rate move, they are apparently beholden to central bank decisions over which they have little to no say.

I can imagine that indirectly bank trading desks via their local reserve banks convey messages to the Federal Reserve that the current state of the economy may call for rates to move in a particular direction.  How much influence they may have I cannot provide any definitive answers to that question.

If anything, it does not appear that modern monetary theory is concerned about introducing a competitive component into the money monopoly held by the government and the central bank.  MMT is in part a tactic for buying votes from the electorate.  The more money that can be printed, the more goodies that government can purchase in order to sway votes to a particular party.  But going back to its utility component, the question how can we make the monopoly market on money more competitive could be raised.

For example, if cryptocurrency proponents were really serious about crypto being a technology that facilitates banking for the underserved, there would be as intense an effort to build an underlying political economy that networks the agricultural, transportation, electric/water/gas utilities, and service sectors such that there is significant use of crypto to buy and sell services. 

While this network is being established, crypto proponents should also work diligently on protecting the interchangeability of crypto with the current legal tender in order to maintain compliance with the tax payment requirements of the government.  While the federal government may be the sole collector of national taxes, the primary aim of crypto proponents should be to provide a viable alternative to the federal government as a national currency issuer.  

What could a viable alternative currency issuer look like? They could look like Archer Midland Daniels, Delta Air Lines, or Amazon.  They would be individual large suppliers of platforms that are already used to exchange goods, services, or ideas.  These individual platforms could interconnect in order to increase the value of their offerings and the currency (tokens) that ride on top of their platforms.  Their major issue would be to coordinate with government regarding a legal framework that allows for one-to-one interchangeability of their “currency” with that of the federal government.  

 Alton Drew

29.11.2021

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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Contracting out the circulation of the U.S. political economy’s currency … and the never-ending threat of intervention

Article I, Section 8 of the United States Constitution describes Congress’ duty to regulate money.  Specifically, Congress has the duty to:

“Coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…”

While the government has maintained the responsibility of minting coin and cash, the regulation of its value as well as that of foreign coin, is left up to the markets.  I am curious, though, as to how the law defines, “money”, “coin”, and “currency.”

A quick and dirty Black’s Law Dictionary definition of “currency’ is coined money and such banknotes or other paper money as are authorized by law and circulates as a medium of exchange.  31 CFR § 1010.100 defines currency as:

“The coin and paper money of the United States or of any other country that is designated as legal tender and that circulates and is customarily used and accepted as a medium of exchange in the country of issuance. Currency includes U.S. silver certificates, U.S. notes and Federal Reserve notes. Currency also includes official foreign bank notes that are customarily used and accepted as a medium of exchange in a foreign country.”

In the United States, the US Treasury and the Federal Reserve System source the currency.  They are the “farmers’ of the commodity we call currency.  According to Federal Reserve data, as of October 2021, there is approximately $2202.9 billion of currency in circulation.  When you factor in currency held in reserve at the Federal Reserve, the total monetary base of the United States as of October 2021 is approximately $6331 billion. 

The banks that the Treasury and the Federal Reserve charter and regulate participate in the interbank market, the market in which foreign exchange rates for currency is set.  I like to think of these banks as the wholesale/retail enterprises that are responsible for circulating currency, transmitting the value of the US political economy globally.  While I believe the US government could technically set these rates itself, the capitalist economic policy implemented by the US government prefers private institutions carry out this mission.

I would think that wholesale (bank) and retail traders and brokers prefer this model because they determine the share of income (profit) garnered via foreign exchange.  Because the Treasury and the Federal Reserve are the “farmers” of the currency and are primarily held responsible by the Congress for the day-to-day valuation of the currency, traders and brokers should stay mindful that the cloud of potential government intervention in the market always looms.

Keeping the dark cloud of potential intervention into the foreign exchange market dispersed can only occur via constant monitoring and initiatives to keep government at bay.  That is the trader and broker’s daily call to action.

Alton Drew

24.11.2021  

European Central Bank sees growth moderating in 2022

The Interbank

The European Central Bank today released its update on economic, financial, and monetary developments. The ECB sees growth moderating into 2022 primarily due to supply bottlenecks.  Global supplier delivery times remain high as food and energy upward price pressure remains in place.  These pressures reflect a rebound from the low-price environment spawned by the pandemic.

While the ECB credits higher vaccination rates for the support of increased consumer spending, higher energy prices may be offsetting the increase in spending.  Shortages of materials, equipment, and labor is holding back manufacturing.  And on the labor front, the number of people in the workforce and hours worked still remain under pre-pandemic levels.

EUR/USD is currently trading at $1.1468.

Traders interested in the full report should go to https://www.ecb.europa.eu/pub/economic-bulletin/html/eb202107.en.html.

The Bank of Mexico maintained its overnight target rate at 4.75%.  No written statements by the Bank have been released at the time of this writing.

MXN/USD is currently trading at $20.5698.

Regulatory News

No major regulatory events impacting traders or broker-dealers this morning.

Traders should contact their brokers for more information on how foreign exchange rates may react to events described in the above blog post.

Alton Drew

11.11.2021

Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Interbank Market News Scan: Riksbank sees some clouds ahead …

Interbank, Riksbank.  Sveriges Riksbank, Sweden’s central bank, today reported that while the Swedish economy is on the mends, that investors should expect a slow down in growth in the second half of 2022.  The Riksbank noted that household debt was outpacing growth in gross domestic product; that investors were concerned about the uncertainty of interest rates and the effects on asset prices; and that real estate companies were heavily in debt.

Policy wise, the Riksbank believes that it may be time to phase out the temporary easing of bank regulations. 

Currently, the USD/SEK is trading at 8.5963.

Interbank, Bank of England, central bank digital currency.  Yesterday, the Bank of England announced efforts to further explore the creation of a central bank digital currency.  A consultation, starting in 2022, is expected to last several years, according to BOE, as the Bank considers specifications, design, and feasibility of a central bank digital currency.  Should a central bank digital currency meet criteria for deployment, the BOE estimates a launch sometime in the second half of the decade.  

Interbank, Federal Reserve, central bank digital currency.  Peter Morici, professor emeritus at the University of Maryland, lays out a case for a central bank digital currency. Rather than imposing on consumers a multi-layered, federal Reserve-commercial bank payment system with onerous fees and subject to fraud, Professor Morici advocates for a central bank digital currency supporting a payments system that gives consumers and businesses the option of having their accounts at the central bank.  Consumers and businesses would benefit because of the faster and more efficient exchange of payments between consumer and commercial accounts held by the central bank.

Professor Morici uses the topic to weigh in on a potential replacement of current Federal Reserve Board chairman Jerome Powell with Lael Brainard who, according to Professor Morici, has a better understanding of why a central bank digital currency is an imperative for the financial system.  

Traders should contact their brokers for more information on how foreign exchange rates may react to events described in the above blog post.

Interbank Market News Scan: The ECB philosophy behind a central bank digital currency …

Interbank, European Central Bank. Fabio Panetta, member of the executive board of the European Central Bank, presented on the feasibility and deployment of a central bank digital currency.  The main goal of a central bank digital currency, according to the presentation, should be to maintain “public access and full usability of central bank money in a world where consumers and firms are turning increasingly toward electronic payments.”

Of interest to foreign exchange traders in regards to a central bank digital currency is the central bank’s concern about maintaining the convertibility of private money to central bank cash, future cross-border, cross-currency possibilities including making cross-border payments easier.

Since central bank digital currencies are still in the nascent stage, especially in the United States, the concerns and possibilities are still a way off but should be on the minds of currency traders.

Traders should contact their brokers for more information on how foreign exchange rates may react to events described in the above blog post.

Interbank, Federal Reserve. Federal Reserve System governor Michelle Bowman warned of housing market generated inflation yesterday during remarks before a Women in Housing and Finance public policy luncheon.  Governor Bowman noted significant increases in home prices since 2020 as well as increased prices in the rental markets.

Foreign exchange traders should take note of the temporal nature of inflation overall.  Governor Bowman notes that shortages in labor, land lots, and materials have been fueling housing supply and likely supporting the higher prices being seen in the markets.  Because housing is a large component of the American economy, higher housing prices are fueling inflationary pressures.  But while Governor Boman did not use the term “transitory”, her remarks did introduce at least two factors that may limit the duration of higher prices: the aforementioned supply issues and the expiration of forbearance on mortgage payments.  Traders should be aware that as supply constraint on labor and material evaporate, increases in housing supply may drive down prices in the longer run.  Also, the expiration of forbearance and other stimulative measures may result in lower housing prices as well.

Traders should contact their brokers for more information on how foreign exchange rates may react to events described in the above blog post.

Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Alton Drew

9.11.2021

Interbank Market News Scan: All’s quiet on the central bank front …

Interbank, Bank of EnglandBen Broadbent, Deputy Governor of the Bank of England for Monetary Policy, will provide testimony before Parliament’s Environment, Food, and Rural Affairs Committee on 9 November 2021 at 3:30 pm, London time.  Dr Broadband has specific responsibility for the BOE’s monetary policy, including monetary analysis, banknotes, and data and analytics transformation.

Interbank, European Central Bank. Philip Lane, a member of the executive committee of the European Central Bank reiterates expectation of inflation slowing in the middle of 2022 and that patience is needed during this temporary inflationary period. Signals no rush in tightening financing costs, tapering asset purchases, or raising interest rates. https://www.ecb.europa.eu/press/inter/date/2021/html/ecb.in211108~c270ad5bc6.en.html

Interbank, Reserve Bank of New Zealand.  In its latest news release (3 November 2021), the Reserve bank of New Zealand provides insights into monetary policy during a pandemic and impact of inflation on asset prices.

Interbank, Federal Reserve.  Richard Clarida, vice-chair of the Board of Governors of the Federal Reserve, today will participate in a panel discussion on the Fed’s flexible average inflation targeting policy at 9:00 am EDT. Under FAIT, the Federal Reserve seeks inflation that averages 2% over a time frame that is not formally defined.  FAIT aims at avoiding dampening economic growth via a premature increase in the federal funds rate, the rate banks charge each other for overnight loans.    

Traders should contact their brokers for more information on how foreign exchange rates may react to events described in the above blog post.

Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Alton Drew

8.11.2021

Interbank Market News Scan: Will today’s U.S. jobs situation report provide traders with insights on the economy’s growth?

Interbank, People’s Bank of China.  Today, the People’s Bank of China (PBOC) announced open market operations in the form of reverse repo operations totaling RMB 100 billion at a rate of 2.20% with a maturity of seven days. 

A reverse repurchase agreement or repo is the purchase of securities with the agreement to sell them back at a higher price at a specific future date.  For the party selling the security and agreeing to repurchase the security at some time in the future (in this case seven days), it is a repurchase agreement.  For the party buying the securities, it is a reverse repurchase agreement.

What foreign exchange traders may find interesting is the difference between the PBOC’s pledged repo rate of 2.1238% and the 2.20% rate on the RRP.  Inflation is the buzz word from central banks around the world.  Should China be considered an exception? And while China’s economy is still experiencing positive growth, rate of growth has been decreasing.

The PBOC currently reports an exchange rate of USD-CNY=6.3980.

Traders should contact their brokers for more information on how the PBOC’s open market operations via reverse repurchase agreements may move foreign exchange rates.  

Interbank, Federal Reserve, Jobs Report.  Today, the Board of Governors of the Federal Reserve System (Federal Reserve) will be keeping a keen eye on the U.S. Department of Labor’s Jobs Situation Report. The Federal Reserve has made clear that it will maintain its fed funds policy target rate at 0 to .25% until it sees labor market conditions consistent with maximum employment.

In theory, maximum or full employment is a condition where an economy is making optimal use of its skilled and unskilled labor.  There is no magic unemployment rate number that indicates a voila moment on maximum employment.  

The unemployment rate, which currently stands at 4.8%, tends to get a lot of play in the business media.  Traders should bear in mind that the unemployment rate is a lagging indicator with not much bearing on the future performance of the U.S. economy.  While a lagging indicator itself, data describing trends in productivity and the costs of acquiring employees along with changes in producer and consumer price indices are more important especially in a post-pandemic era where changes in the structure of the labor force have accelerated.

Traders should contact their brokers for more information on how foreign exchange rates may react to today’s Jobs Situation Report.

Alton Drew

5.11.2021

 Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Interbank Market News Scan: Bank of England to announce interest rate targets today

Interbank, central bank, Bank of England. At 12 pm GMT (8:00 am EST), the Bank of England (BOE) releases its monetary policy report today including its target interest rates.  The current bank rate is set at 0.1%.  The bank rate determines the interest rates the BOE pays to commercial banks which in turn impacts rates paid by commercial bank borrowing customers.  This rate is important to traders because it provides valuable information that can be used to determine changes in inflation and yields on government bonds which in turn provides the trader with insights as to where foreign exchange rates will move.  

The BOE’s current inflation target is 2.0%, but actual inflation is running at 3.1%.  Since November 2009, the BOE has purchased £895 million in corporate and government bonds as part of its quantitative easing program.  QE is intended to help lower interest rates and stimulate growth in the British economy.

Traders should contact their brokers for more information on how BOE’s interest rates decision may move foreign exchange rates.

Interbank, central bank, Federal Reserve.  Yesterday, the Board of Governors of the Federal Reserve System announced that its federal fund and discount window rate target would remain between 0-.25%. In addition, the Federal Reserve will begin to reduce later this month its monthly purchases of US Treasury bonds and agency mortgage-backed securities.  It will reduce its monthly purchase of US Treasurys from $80 billion to $70 billion.  It will reduce its monthly agency mortgage-backed securities from $40 billion to $35 billion.

The Federal Reserve asset purchases were designed primarily to keep interest rates and stimulate the economy during the COVID pandemic.  As more Americans are vaccinated and the negative impact of the supply chain congestion wanes, the Federal Reserve is seeing more reasons to trim its asset purchases.

The Federal Reserve has made it clear that the decision to taper asset purchases and the decision to raise the federal funds rate are separate issues.  If, however, the taper policy was implemented to stimulate the economy by keeping interest rates low, traders should expect upward movement in interest rates as a result.  Increased interest rates may have an impact on the direction of foreign exchange rates regardless of a Federal Reserve decision to increase the fed funds rate.

Traders should contact their brokers for more information on how the Federal Reserve’s fed funds rate and tapering decisions may move foreign exchange rates.

Alton Drew

4.11.2021

Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Interbank Market News Scan: The world waits for the Fed’s decision on tapering …

Interbank, China. The following are the parity rates for the Chinese renminbi. https://www.bignewsnetwork.com/news/271640484/market-exchange-rates-in-china—-nov-3

Interbank, India. The rupee appreciated by 22 paise to close at 74.46 (provisional) against the US dollar on Wednesday on the back of easing crude oil prices and foreign fund flows into domestic IPOs. https://www.business-standard.com/article/markets/rupee-appreciates-22-paise-to-close-at-74-46-against-the-us-dollar-121110301094_1.html

Interbank, foreign currencies, Afghanistan. Taliban bans foreign currencies in Afghanistan. https://www.bbc.com/news/business-59129470

Interbank, central bank digital currencies. A network among multiple central bank digital currencies could create efficiencies in the tens of billions of dollars and benefit all participants, according to a new report. https://www.bloomberg.com/news/articles/2021-11-03/what-a-global-central-bank-digital-currency-network-might-do?sref=oriheOus

Interbank. There is a disconnect between exchange rates and the classical variables that explain them. https://insight.kellogg.northwestern.edu/article/why-currency-exchange-rates-fluctuate

My Morning Takeaway: The trader should seek out best information sources on the future …

The Bloomberg article I note above has me thinking about how currency trade will look in the near future.  I am not surprised about the discussions being held regarding how a central bank digital currency will be distributed globally.  If efficiencies are created by a network of central bank digital currencies, especially where banks can save on settlement costs, then the trader, in my opinion, should get as much insight into the degree of volatility spawned by an increasingly efficient network.

If we assume efficiency involves an increase in data that can be analyzed at a faster rate, then a broker should be able to convey this information to a trader using her broker network.  Again, the ability of a broker to provide this type of information thus giving the trader insights on how volatility may impact price movements will prove invaluable to both the trader and broker.

Another side-note thought on the future: the role of the bank in a central bank digital currency future.  I don’t see the banks being cut out of the payment system per se.  The banks’ strategic and tactical position in the payments system makes them too valuable for central banks to kick to the curb.  Credit creates money and the banks will continue their role as the retail distributors of the currency whether that currency is a central bank distributed coin or not.

Alton Drew 3.11.2021

A quick thesis statement on trade and currency …

Man engages for the sole purpose of exchanging value. The carry trade is the movement of value from a place of low returns to a place of higher returns. A payment system is the conduit for extracting value where that value is captured in a currency. Labor and capital are the forces that combine to extract value. An optimal exchange of value is a function of a transparent, quick, efficient payment system, untaxed, with no leakage. Public policy should be in line with this philosophy of a payment system.