Never knew “… but I’m Irish … and we love to talk…” ☘️ 👏 ☘️ (Also of Irish descent ☘️)
So you asked about New Engagement Features. I’m perhaps too new as a full subscriber, so apologies if this is something you already cover, but I’d love to get your macro take on “money” and sovereign debt.
Of course, it’s already all about money - Bitcoin, CBDCs, tokenisation (tokenised deposits), stablecoins (esp fiat-backed and/or bank issued), new payment rails, etc.
I’m not too deep down the rabbit holes, so by way of a starter, here are some themes to possibly explore …
Commercial bank money creation. ~97% of the total money supply (M4) has been created by banks (when they lend they create corresponding deposit entries on balance sheets creating brand new money out of thin air); the remaining 3% is central bank money. So what?
Why is this not better understood (when NIM or fractional reserve banking models are still widely, but incorrectly, touted)?
retail CBDCs are central banks replacement for cash. But cash may have reached its floor level (won’t decline further in practice) and won’t be easily replaced by rCBDCs. If cash is only 3% of overall supply what, realistically, is the relevance of rCBDCs if the available share for rCBDCs is so small? I get wCBDCs (wholesale reserves for interbank transactions, but what’s the real agenda for rCBDCs when they’ll make little difference to the relevance of central banks?
Moreover, will banks allow even a small proportion of their profitable bank-money to be replaced by rCBDCs? If rCBDCs are forced, Banks have the upper hand - they’ll be needed to manage customer wallets, onboarding, AML, etc. - so with this power influence, will banks restrict rCBDC balances, eg insist on small individual holding limits? (Small Holding limits are already being touted as needed for systemic prudential stability purposes to prevent bank runs). Other considerations may be bank hesitancy because rCBDCs deposits will need separate treatment (to the way existing deposits are lent out, after 10% reserves set aside) so even less reason?
Will this mean banks will focus far more on bank-issued fiat-backed stablecoins, and/or fiat-backed tokenised deposits instead of rCBDCs? Banks will be in control of these, so more scope for furthering their profits, despite the need for keeping reserves aside (which will not be custodial fiat balances but likely only more of their own created bank money on balance sheets)? Will this magnify the probabilty and economic impact of any run on a bank?
The industry still talks about NII income and the importance of customer deposits (even brokered deposits) but customer deposits don’t contribute much to profit. Is this the real reason why regulators fail when banks give near-zero or zero rates to demand savings and PCA accounts? How might rCBDCs, stablecoins, tokenised deposits actually be better for customers?
Prof. Richard Werner’s work on bank money suggests there is good and bad lending linked to money creation - good when lending goes to GDP growth impacting areas (manufacturing), bad when it doesn’t (flows around FS and markets creating polarised wealth). Apologies for oversimplifying. Is there a macro lens on global money creation vs GDP growth or FS market growth (derivatives, securitisation, equity value of firms perhaps)?
Commercial bank-minted fiat money has been growing since the gold standard was dropped, particularly boosted since nearly all central banks were made independent. There is much speculation about a global fiat money bubble, but hard data can be contradictory. A partial bubble burst is suggested as the reason for the 2008 GFC. Since then, QE stimulus (misnamed “money printing” but actually bond issuance) has further added to the money bubble. At the same time sovereign debt has increased, and commentators link these. The impending failure of fiat is also touted as a foundation of bitcoin and its fixed supply. So what?
Is there a macro-level, global fiat money bubble? If so what are the chances of the mother-of-all bubble bursts?
What would the likely outcome if fiat crashed on alternate stores of wealth such as gold, bitcoin or key commodities?
Central banks deny any statistical causal link between QE and inflation, but is there a potential link if this could be modelled differently using the ‘twin valves’ of money supply (bank money & QE) considered together?
Sovereign debt is higher than WW2 levels in many countries. Governments and central banks seem to have no answer other than further QE, with the amount of interest on debt alone increasing let alone actual debt being addressed (QT). Is there a way out of the sovereign debt crisis?
Central banks. So what?
(I’m not an economist, so struggle to understand) why central bankers are so wed to Keynesian and MMT ideas while so dismissive of other thinking. For instance, they seem control-freakishly obsessed with policies such as the shared-global 2% Base Rate target when it has no substantive basis (made as an accidental quip to NZ journalists, subsequently made policy in NZ and then copied globally) while alternate approaches and research that underpin money creation are swept aside because they are from opposing schools of thinking. Are central banks flawed?
Why are central banks so arrogant about fiat money and only fiat money fulfilling the criteria for the singularity of money, whilst ignoring bitcoin or other new forms?
Have commercial banks become too powerful (tail wagging the dog of central banks, in turn wagging the tail of the BIS)?
Should government take back control when central banks deny or deflect the causes of debt, perhaps to also ensure bank lending aligns to real GDP growth, rather than waste taxpayer receipts on debt repayments?
I don’t expect answers directly of course, but it would be great to see some of this included as and when relevant.
Hey RB! Thanks so much for your comment, and wow, that’s a pretty good essay on money right there. You raise some EXCELLENT points (loved your riffs on rCBDC, totally agree, and that’s a very important question on the power of commercial banks).
And thank you, seriously, for seeing just how important and how interesting the impact of crypto on “money” can become. It affects the very definition of what even IS money – if it can be programmable, that’s not fungible, so can it be money?
All this – the changing role of central and commercial banks, the new characteristics of “money”, the impact on markets when money and assets are on the same rails, the potential structural repercussions – is a big part of the focus of my research. I’m especially fascinated by the intertwining of concepts: political (who decides what money is? therein lies economic power), technological (manipulation resistance, data storage resilience, speed, cost), even philosophical (is privacy a right? to what extent should a state control its citizens’ ability to transact?). And there’s the geopolitical angle, with SWIFT alternatives launching, Russia legalizing the use of cryptocurrencies for cross-border trade, and even Trump saying all the bitcoin has to be mined in the US (bewildering).
So, yes, there’ll be more of this in the newsletter!
I’m not familiar with Professor Werner’s work, will look into it, thanks for the tip!
And thanks again for being a thinker on this. I’ve heard so many times from “tradfi” executives that “finance won’t change”, when it is always changing – arguably, what’s ahead is more drastic than what we’ve seen in recent decades.
Thanks for this reply - interesting and helpful. I very much look forward to the journey ahead!
If you want to sample Richard Werner’s work this video is a great place - he initially comes across as almost a parody of an establishment figure but his message is, paradoxically, entirely contradictory and anti-establishment. (Sadly, in recent years he seems to have been shut out, though - he was lined up for a key post at Cambridge only to have the opportunity cruelly destroyed. Seems many aren’t open to his messages). Incidentally, Werner is famed for first inventing the phrase (but not the mechanism which is over a century old) of ‘Quantitative Easing’ in the mid-‘90s in Japan!
My favourite of Werner’s insight is on good and bad bank lending in terms of GDP impact. It helps explains why countries with regional banks (US community banks or Germany’s Sparkassen system) have thrived economically, especially post-GFC, with GDP growth leaving the UK and other relatively behind.
This month for the very first time I’ve seen both bank money creation and QE/QT analysed together in another fairly concealed BoE paper, but it’s based on US data. I suspect UK data isn’t available.
My interest is on UK sovereign debt as a consequence of QE, particularly because after 2008 Gordon Brown implemented QE slightly differently, not just in name (APF), but with an indemnity agreement to pay the BOE for any losses from Treasury (tax payer) funds - the government profited when base rates were <1.5% but have paid out when >1.5% (bear in mind the 2% target rate - it was always a flawed idea!). APF (“money printing”) continued under the Conservatives, particularly as a Covid era response. The BoE’s Andrew Bailey supercharged it’s use. Now, the UK government currently pay circa £37bn in annual indemnity repayment (it dwarfs most government spend items). Again, hidden from the public because the UK ONS reports this repayment as “investment”!
Here’s this months paper … it might just, perhaps just, be the start of wider research that to date has been woefully lacking:
Finally, on a personal note (the Irish in me going on still), I’ve built and launched licenced UK challenger banks (3 great successes, a few non-starters and a couple of failures to provide the best ever lessons), but I’ve now realised the models we built (regulatory business plans, and capital and liquidity detail) used principles that were totally wrong!
Never knew “… but I’m Irish … and we love to talk…” ☘️ 👏 ☘️ (Also of Irish descent ☘️)
So you asked about New Engagement Features. I’m perhaps too new as a full subscriber, so apologies if this is something you already cover, but I’d love to get your macro take on “money” and sovereign debt.
Of course, it’s already all about money - Bitcoin, CBDCs, tokenisation (tokenised deposits), stablecoins (esp fiat-backed and/or bank issued), new payment rails, etc.
I’m not too deep down the rabbit holes, so by way of a starter, here are some themes to possibly explore …
Commercial bank money creation. ~97% of the total money supply (M4) has been created by banks (when they lend they create corresponding deposit entries on balance sheets creating brand new money out of thin air); the remaining 3% is central bank money. So what?
Why is this not better understood (when NIM or fractional reserve banking models are still widely, but incorrectly, touted)?
retail CBDCs are central banks replacement for cash. But cash may have reached its floor level (won’t decline further in practice) and won’t be easily replaced by rCBDCs. If cash is only 3% of overall supply what, realistically, is the relevance of rCBDCs if the available share for rCBDCs is so small? I get wCBDCs (wholesale reserves for interbank transactions, but what’s the real agenda for rCBDCs when they’ll make little difference to the relevance of central banks?
Moreover, will banks allow even a small proportion of their profitable bank-money to be replaced by rCBDCs? If rCBDCs are forced, Banks have the upper hand - they’ll be needed to manage customer wallets, onboarding, AML, etc. - so with this power influence, will banks restrict rCBDC balances, eg insist on small individual holding limits? (Small Holding limits are already being touted as needed for systemic prudential stability purposes to prevent bank runs). Other considerations may be bank hesitancy because rCBDCs deposits will need separate treatment (to the way existing deposits are lent out, after 10% reserves set aside) so even less reason?
Will this mean banks will focus far more on bank-issued fiat-backed stablecoins, and/or fiat-backed tokenised deposits instead of rCBDCs? Banks will be in control of these, so more scope for furthering their profits, despite the need for keeping reserves aside (which will not be custodial fiat balances but likely only more of their own created bank money on balance sheets)? Will this magnify the probabilty and economic impact of any run on a bank?
The industry still talks about NII income and the importance of customer deposits (even brokered deposits) but customer deposits don’t contribute much to profit. Is this the real reason why regulators fail when banks give near-zero or zero rates to demand savings and PCA accounts? How might rCBDCs, stablecoins, tokenised deposits actually be better for customers?
Prof. Richard Werner’s work on bank money suggests there is good and bad lending linked to money creation - good when lending goes to GDP growth impacting areas (manufacturing), bad when it doesn’t (flows around FS and markets creating polarised wealth). Apologies for oversimplifying. Is there a macro lens on global money creation vs GDP growth or FS market growth (derivatives, securitisation, equity value of firms perhaps)?
Commercial bank-minted fiat money has been growing since the gold standard was dropped, particularly boosted since nearly all central banks were made independent. There is much speculation about a global fiat money bubble, but hard data can be contradictory. A partial bubble burst is suggested as the reason for the 2008 GFC. Since then, QE stimulus (misnamed “money printing” but actually bond issuance) has further added to the money bubble. At the same time sovereign debt has increased, and commentators link these. The impending failure of fiat is also touted as a foundation of bitcoin and its fixed supply. So what?
Is there a macro-level, global fiat money bubble? If so what are the chances of the mother-of-all bubble bursts?
What would the likely outcome if fiat crashed on alternate stores of wealth such as gold, bitcoin or key commodities?
Central banks deny any statistical causal link between QE and inflation, but is there a potential link if this could be modelled differently using the ‘twin valves’ of money supply (bank money & QE) considered together?
Sovereign debt is higher than WW2 levels in many countries. Governments and central banks seem to have no answer other than further QE, with the amount of interest on debt alone increasing let alone actual debt being addressed (QT). Is there a way out of the sovereign debt crisis?
Central banks. So what?
(I’m not an economist, so struggle to understand) why central bankers are so wed to Keynesian and MMT ideas while so dismissive of other thinking. For instance, they seem control-freakishly obsessed with policies such as the shared-global 2% Base Rate target when it has no substantive basis (made as an accidental quip to NZ journalists, subsequently made policy in NZ and then copied globally) while alternate approaches and research that underpin money creation are swept aside because they are from opposing schools of thinking. Are central banks flawed?
Why are central banks so arrogant about fiat money and only fiat money fulfilling the criteria for the singularity of money, whilst ignoring bitcoin or other new forms?
Have commercial banks become too powerful (tail wagging the dog of central banks, in turn wagging the tail of the BIS)?
Should government take back control when central banks deny or deflect the causes of debt, perhaps to also ensure bank lending aligns to real GDP growth, rather than waste taxpayer receipts on debt repayments?
I don’t expect answers directly of course, but it would be great to see some of this included as and when relevant.
Thanks
Richard
Hey RB! Thanks so much for your comment, and wow, that’s a pretty good essay on money right there. You raise some EXCELLENT points (loved your riffs on rCBDC, totally agree, and that’s a very important question on the power of commercial banks).
And thank you, seriously, for seeing just how important and how interesting the impact of crypto on “money” can become. It affects the very definition of what even IS money – if it can be programmable, that’s not fungible, so can it be money?
All this – the changing role of central and commercial banks, the new characteristics of “money”, the impact on markets when money and assets are on the same rails, the potential structural repercussions – is a big part of the focus of my research. I’m especially fascinated by the intertwining of concepts: political (who decides what money is? therein lies economic power), technological (manipulation resistance, data storage resilience, speed, cost), even philosophical (is privacy a right? to what extent should a state control its citizens’ ability to transact?). And there’s the geopolitical angle, with SWIFT alternatives launching, Russia legalizing the use of cryptocurrencies for cross-border trade, and even Trump saying all the bitcoin has to be mined in the US (bewildering).
So, yes, there’ll be more of this in the newsletter!
I’m not familiar with Professor Werner’s work, will look into it, thanks for the tip!
And thanks again for being a thinker on this. I’ve heard so many times from “tradfi” executives that “finance won’t change”, when it is always changing – arguably, what’s ahead is more drastic than what we’ve seen in recent decades.
So much to talk about.
Thanks for this reply - interesting and helpful. I very much look forward to the journey ahead!
If you want to sample Richard Werner’s work this video is a great place - he initially comes across as almost a parody of an establishment figure but his message is, paradoxically, entirely contradictory and anti-establishment. (Sadly, in recent years he seems to have been shut out, though - he was lined up for a key post at Cambridge only to have the opportunity cruelly destroyed. Seems many aren’t open to his messages). Incidentally, Werner is famed for first inventing the phrase (but not the mechanism which is over a century old) of ‘Quantitative Easing’ in the mid-‘90s in Japan!
Video clip:
https://m.youtube.com/watch?v=EC0G7pY4wRE
He wrote a book in 2014, “Where Does Money Come From?” But if you want to get to the core of his work, try these two papers.
Suggested Starter paper, 2016:
https://eprints.soton.ac.uk/384540/1/IRFA%25202015%2520Werner%2520Lost%2520Century%2520in%2520Economics%2520-%2520Banking.pdf
And:
https://eprints.soton.ac.uk/372868/1/1-s2.0-S1057521914001434-main.pdf__tid%253D40217dc4-87d0-11e4-81c4-00000aacb362%2526acdnat%253D1419029102_157a344d703ba373924278a2fe39c20d
Meanwhile, by way of verifying Werner’s insights, in an almost hidden paper in 2014 the BoE also conceded this reality - see:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
My favourite of Werner’s insight is on good and bad bank lending in terms of GDP impact. It helps explains why countries with regional banks (US community banks or Germany’s Sparkassen system) have thrived economically, especially post-GFC, with GDP growth leaving the UK and other relatively behind.
This month for the very first time I’ve seen both bank money creation and QE/QT analysed together in another fairly concealed BoE paper, but it’s based on US data. I suspect UK data isn’t available.
My interest is on UK sovereign debt as a consequence of QE, particularly because after 2008 Gordon Brown implemented QE slightly differently, not just in name (APF), but with an indemnity agreement to pay the BOE for any losses from Treasury (tax payer) funds - the government profited when base rates were <1.5% but have paid out when >1.5% (bear in mind the 2% target rate - it was always a flawed idea!). APF (“money printing”) continued under the Conservatives, particularly as a Covid era response. The BoE’s Andrew Bailey supercharged it’s use. Now, the UK government currently pay circa £37bn in annual indemnity repayment (it dwarfs most government spend items). Again, hidden from the public because the UK ONS reports this repayment as “investment”!
Here’s this months paper … it might just, perhaps just, be the start of wider research that to date has been woefully lacking:
https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2024/quantitative-easing-and-quantitative-tightening-the-money-channel.pdf
Finally, on a personal note (the Irish in me going on still), I’ve built and launched licenced UK challenger banks (3 great successes, a few non-starters and a couple of failures to provide the best ever lessons), but I’ve now realised the models we built (regulatory business plans, and capital and liquidity detail) used principles that were totally wrong!
super interesting, thank you!