The Duality of Money, Report

By Keith Weiner

This is a pair of photographs taken by Keith Weiner, for a high school project. It seemed a fitting picture for the dual nature of money, the dual nature of wood both as logs to be consumed and dimensional lumber to be used to construct buildings.

Last week, in Is Capital Creation Beating Capital Consumption, we asked an important question which is not asked nearly often enough. Perhaps that’s because few even acknowledge that capital is being consumed, and fewer tie it to the falling interest rate (perhaps that is because the fact of the falling interest rate is, itself, controversial). At any rate, we showed a graph of Marginal Productivity of Debt.

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Modern Monetary Theory: A Cargo Cult, Report

By Keith Weiner

Newly elected Representative Alexandria Ocasio-Cortez recently said that Modern Monetary Theory (MMT) absolutely needed to be “a larger part of our conversation.” Her comment shines a spotlight on MMT. So what is it? According to Wikipedia, it is:

“a macroeconomic theory that describes the currency as a public monopoly and unemployment as the evidence that a currency monopolist is restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.”

It is uncontroversial to say that the Federal Reserve has a monopoly on the dollar. So let’s look at the second proposition. Unemployment, MMT holds, is evidence that the supply of dollars is restricted.

In other words, more money causes more employment!

This does not sound very different from what the New Keynesians say. Keith analyzed former Fed Chair Janet Yellen’s seminal paper on the economics of labor for Forbes:

“Here is their [Yellen and co-author Ackerloff] tenuous chain of logic:

Continue reading Modern Monetary Theory: A Cargo Cult, Report

What Can Kill a Useless Currency

By Keith Weiner

There is a popular notion, at least among American libertarians and gold bugs. The idea is that people will one day “get woke”, and suddenly realize that the dollar is bad / unbacked / fiat / unsound / Ponzi / other countries don’t like it / <insert favorite bugaboo here>. When they do, they will repudiate it. That is, sell all their dollars to buy consumer goods (i.e. hyperinflation), gold, and/or whatever other currency.

Redemptions Balanced With Deposits

No national currency is gold-backed today. In a gold backed currency, each currency unit begins life with someone who chooses to deposit his gold coin in exchange for the paper currency. And it ends life with someone redeeming the paper to get back the gold coin. A good analogy is bone in the human body. One process is constantly removing bone material. And another process is growing more. What seems to be a static bone, with fixed length and mass, is constantly being torn down and rebuilt. The seemingly stable bone is actually in equilibrium between two opposing forces.

So it is with the gold standard. Some people are redeeming paper to get the gold coin. Others are depositing gold coins to get paper. The seemingly stable gold standard is actually in equilibrium between two opposing processes.

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USDCNY – It’s Going to 7

By Callum Thomas

Here’s a couple of charts on a topical and divisive subject – the outlook for the Chinese yuan.  This is something I’ve spent a lot of time looking at, and have been bearish Renminbi vs US dollar for a few good reasons.  Before we look at the charts let’s talk about why.  It’s basically 3 reasons, and it’s mostly about the fundamentals: 1. Economic divergence (China’s economy is slowing vs US accelerating); 2. Policy divergence (Fed hiking rates + QT vs PBOC cutting RRR, easing liquidity); 3. Politics (CNY weakness provides a timely offset against tariffs, and eases domestic pressure).

1. Interest Rate Differentials: The first chart maps the USDCNY against monetary policy rate differentials. Interest rate differentials are a fairly well established indicator for exchange rates because they reflect incentives e.g. borrowing in one currency (lower interest rate) and investing in the other (higher interest rate), and also reflect divergences in economic developments and monetary policy cycles. If you take this chart literally the USDCNY could end up going well beyond 7 …on that note, this is basic economics, not competitive devaluation.

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Why the Fed Denied the Narrow Bank

By Keith Weiner

It’s not every day that a clear example showing the horrors of central planning comes along—the doublethink, the distortions, and the perverse incentives. It’s not every year that such an example occurs for monetary central planning. One came to the national attention this week.

A company called TNB applied for a Master Account with the Federal Reserve Bank of New York. Their application was denied. They have sued.

First, let’s consider TNB. It’s an acronym for The Narrow Bank. A so called narrow bank is a bank that does not engage in most of the activities of a regular bank. It simply takes in deposits and puts them in an account at the Fed. The Fed pays 1.95%, and a narrow bank would have low costs, so it could pass most of this to its depositors. This is pretty attractive, and without the real estate and commercial lending risks—not to mention derivatives exposure—it’s less risky than a regular bank. According to Bloomberg’s Matt Levine, saving accounts for large depositors average only 0.08% interest.
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Chart: US Dollar, EMFX, Asian FX, and the USDCNY

By Callum Thomas

Well it’s a mouthful of a title, but sometimes you just have to say exactly what’s in the post and today we’re looking at 4 charts-in-one… and they are about as topical as it comes.  The charts come from our weekly Global Cross Asset Market Monitor: the top left is the US dollar index, the top right is an equal weighted emerging market currency index (25 currencies vs USD), the bottom left is an equal weighted index of 10 Asian currencies vs the USD, and the bottom right of course is the Renminbi against the US dollar (USDCNY).  Bottom line is there is a big move underway across global foreign exchange markets right now, and it’s quite likely there’s more to come.

What’s driving this, aside from a few idiosyncratic issues (e.g. Turkey – which I believe is simply a symptom of a wider issue), is monetary policy divergence, a subtle desynchronization of global growth, and softening macro picture in China.  Fed tightening (rate hikes and QT) is a key catalyst, and the trade war just adds fuel to the fire.  I talked previously about how Fed tightening and a stronger dollar is going to put stress on emerging markets, and the charts above show basically this thesis in action.  The biggest risk is that you get a feedback loop of stronger dollar >> EM stress >> stronger dollar >> and so on.  As previously noted, the USDCNY going through 7 could be a critical test (aka nail in the coffin) for the low volatility environment, and as I write the USDCNY is trading just over 6.933, so this test may come sooner than you expect…

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Monetary Consequence of Tariffs, Report

By Keith Weiner

Last week in Monetary Paradigm Reset, we talked about the challenge of explaining a new paradigm. We said:

“The hard part of accepting this paradigm shift, was that people had to rethink their entire view of cosmology, theology, and philosophy. In the best case, people take time to grapple with these challenges to their idea of man’s place in the universe. Some never accept the new idea.”

We were talking about the fact that money is the unit of account, and the assertion that irredeemable paper currencies are money.

Monetary Relativity

This week, Turkey provides an opportunity to discuss this in a way most people can relate to. Their currency, the lira, has been falling for years, but the rate of its plunge accelerated dramatically this week. It closed last week at 19.6 cents, but on Friday it was 15.5. This may not seem like a lot, but those 3.1 pennies are about 21 percent. In a week!

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Crying Wolf, Report 22 July 2018

By Keith Weiner

Quantity Theory Revisited

The price of gold fell another ten bucks and that of silver another 28 cents. Perspective: if you’re waiting for the right moment to buy, the market is offering you a better deal than it did last week (literally, the price of gold is a 7.2% discount to the fundamental vs. 4.6% last week). If you wanted to sell, this wasn’t a good week to wait. Which is your intention, and why?

We have written many times that the quantity of dollars does not cause the price of gold to rise. Two weeks ago, we showed a graph of M2 overlaid with the gold price. While the price of gold has generally been rising over the long term, there are long periods of rising quantity of what most call money, with flat or falling gold price. How can this be? If an increase in the quantity of money does not make prices go up, what does?

A price goes up if and only if a buyer takes a seller’s offer. If buyers repeatedly take the offer, then the offer will keep moving up, and not stop moving up, until buyers stop taking the offer. OK, the theory of price formation is nice, but what makes buyers keep taking the offer, while the price relentlessly moves up?

Continue reading Crying Wolf, Report 22 July 2018

The Big Dollar Question: Is This The Turning Point?

By Heisenberg

As noted on Wednesday afternoon, the dollar managed its first monthly gain in four in February, leading some to wonder if we’ve seen a turning point for a greenback that’s been more “beleaguered” than Jeff Sessions after a Trump Twitter tirade.


Of course the dollar story is complicated these days. On one hand, you’ve got a ballooning deficit in the U.S. and worries that the Trump administration is still angling for a weak dollar policy to bolster U.S. trade. On the other hand, you’ve got rising U.S. yields and a Fed chair who delivered a hawkish surprise earlier this week during his first public testimony on Capitol Hill.

Continue reading The Big Dollar Question: Is This The Turning Point?