Who pays for Uncle Sam’s deficits?
Free Banking in the Digital Age?
Introduction
A number of central banks are considering issuing digital currency either in place of the paper currency they now issue or in parallel with it. The advantages of central bank digital currency (CBDC) over paper currency for the issuer is the much lower cost of supplying and maintaining the currency (printing, storing, transporting, safekeeping and replacing old and damaged notes). For the users, there are the benefits of much greater speed and lower cost of making payments of currency across distances. The use of paper currency (cash) in economies with proliferating electronic means of payment (Visa, PayPal, Zella, popmoney, etc.) has been and will continue to fall. In addition, digital currencies can and do extend digital payment services to the unbanked. This note explores some of the policy issues raised by CBDC, by which I mean digital claims on the currency issued by the official monetary authority, whether directly or indirectly.
Payment with digital currency involves transferring ownership of a claim on the issuer without needing to or providing any information about the payer, in particular without providing information about the payer’s bank account if she has one. In this respect it mirrors the payment of traditional paper currency. A primary issue for a central bank when considering issuing a digital currency is whether it should be offered wholesale or retail, i.e., offered only to banks and maybe other financial firms, or offered to the general public. If a central bank offered CBDC directly to the general public it would transform and greatly expand the role of the central bank and could potentially end the role of commercial banks in the payment system.
Offering CBDC only to banks and other financial firms would offer little that is not already available via central banks’ acceptance of deposits from these entities, which of course are digital. In fact the distinction between digital currency and traditional deposits is not always clear or important.[2] Currently Fedwire settles payments between account holders, including government agencies, in domestic and foreign banks licensed in the U.S. It does not settle USD payments between accounts in non-resident banks and resident banks. Such payments could occur with CHIPS (Clearing House Interbank Payments System) correspondent banks, but could also potentially be made by the transfer of a central bank digital currency.
If a digital currency is issued to the general public by banks in the two-tier fashion of today’s bank money, in which banks maintain deposits of national money with their central bank to secure the deposits of national money held by banks for the general public, there is an issue of what assets banks should hold or be required to hold against their deposit or currency liabilities to the public. Digital currency issued to the public by the central bank would have no default risk, whereas digital currency issued by banks or other entities, being a liability of the issuing bank, would have default risks.
It is also possible to permit non-banks to issue digital currency as has been done very successfully in Kenya by a phone company.[3] Over half of Kenya’s population participates in this so-called mobile phone money service. Public acceptance of a digital currency requires that its claim on central bank money is credible. Safaricom, the issuer of Kenya’s digital currency, M-Pesa, backs the deposits of participants 100% with Kenyan shilling deposits with banks. While M-Pesa balances are generally paid from one person or firm to another, they can be withdrawn via an agent at their face value in shilling currency issued by the central bank at any time.
A study issued by the Bank of International Settlements explores issues raised by central bank digital currency (CBDC) more generally.[4]
Background
A review of the free banking era in the U.S. (1837 – 1913) provides a useful framework in which to analyze the options and implications of digital national currencies. Banks in that period could issue their own U.S. dollar denominated banknotes. Because banks lend some of the money deposited with them – so-called fractional reserve banking – issuing their own currency when their depositors wished to withdraw cash, was stabilizing as explained below. The issue of whether CBDC should use block chain (DLT) or centrally administered ledgers will not be considered here as DLT is too expensive and inefficient to take seriously as an option at this time.[5] Project Jasper of the Bank of Canada concluded that: “the versions of distributed ledger currently available may not provide an overall net benefit when compared with existing centralized systems for interbank payments. Core wholesale payment systems function quite efficiently.”[6]
The report does not exclude the possibility that future versions might overcome existing defects and have net advantages for some applications.
The feature of so called free banking that is relevant here was the ability of commercial banks to issue their own currency (banknotes). These banknotes did not represent private currencies in the way bitcoin does. In the case of the United States, all bank issued currency was denominated in US dollars and redeemable for gold (or silver) at its fixed price for the dollar. Historicallybanknotes were originally created by goldsmiths in post Medieval England – first as warehouse receipts to depositors of cash – and then as a form of lending as an alternative to having the borrower’s account credited. For an interesting account see the article by Benjamin Geva.[7]
Banks generate most of their income by lending at interest or investing the money deposited with them by the public. As a result, not all of the money deposited is available to pay out to the depositors should they all want their money back (as cash or by transfer to another bank) at the same time (a so-called bank run). Only a modest amount of depositors’ money (it is actually the bank’s money once it is deposited) is available in the bank in the form of cash or deposits at the central bank. These so called reserves must be, and virtually always are, sufficient to satisfy the cyclical (monthly and seasonally) variations in the public’s preferences for cash over deposits. This system is referred to as fractional reserve banking because the amount of bank “reserves” are less than the amount of their deposit liabilities. The difference in the amount of deposits and of reserves consists of bank loans and investments in less liquid assets.
In today’s banking systems all banknotes (cash) are issued by a central bank. Thus when a deposit is withdrawn for cash, the bank’s assets (cash) and deposit liabilities both fall by the same amount. If a bank does not hold sufficient cash or deposits with the central bank to satisfy these periodic demands, the bank is said to be illiquid. When banks were able to issue their own currencies (Citibank dollars and Chase dollars) only the mix of bank liabilities changed (from deposits to cash) with no change in their assets. Their total liabilities and assets remained the same. This was a very desirable feature of note issuing banks and eliminated the risk of illiquidity from cash withdrawals. These banks might still suffer illiquidity from deposit transfers/payments to entities with deposits in other banks.
In the free banking era when the public came to doubt the solvency of their bank (loan and investment losses that exceeded a bank’s capital—i.e., when the value of a bank’s assets falls below the value of its deposit and other liabilities) it was pointless to withdraw deposits as the bank’s own banknotes because the bank did not have sufficient assets to redeem them. Bank runs in such cases would take the form of converting deposit or cash claims on the bank into claims on another, hopefully sounder, bank. Those who failed to do so before the insolvent bank was closed and liquidated would lose part of their claim, i.e. they would be forced to absorb their share of the bank’s asset shortfall (its negative capital).
Thus a ten dollar bill issued by Citibank and one issued by Chase, being claims on two different banks, could have different values (even if redeemable in theory for the same amount of gold) if the public lost confidence in the solvency of one or the other. Merchants needed to pay attention to whose banknotes they were accepting.
When you pay someone by transferring some of your bank balance to the payee’s bank account (e.g. by writing a check), your bank and the receiving bank must both participate in the same clearinghouse (or have an account with a correspondent bank that participates) enabling their obligations with each other to be settled in central bank money.[8] This role is now generally performed by each country’s central bank and the deposits that banks keep there are called reserve deposits. In some countries a minimum amount is required (a reserve requirement) and in others it is fully voluntary but needs to be sufficient for net payments between banks.
While this fractional reserve system worked well most of the time, banks were occasionally hit with unusually large or panic withdrawals that they were not able to satisfy even when they were fully solvent (had positive capital). A key function of the central banks being established all over the world a century or more ago was to provide temporary liquidity to such illiquid but solvent banks (though it is difficult to evaluate the solvency of a bank in real time—i.e. the soundness of their loans and investments). Thus central banks were so-called Lenders of Last Resort.
In 1933, in the midst of America’s Great Depression, a group of University of Chicago economists proposed, among other things, that banks be required to hold reserves (cash and deposits with the Federal Reserve) of at least 100% of their demand deposit liabilities (checking accounts). This is often called “The Chicago Plan.” If banks’ demand deposit liabilities and their reserve assets are segregated from the rest of their balance sheet it removed any default risk to the public of holding demand deposits at any bank. Instead of the Chicago Plan, the U.S. Congress enacted deposit insurance to reduce the risk of bank runs.
To review:banknotes issued by banks in the free banking era eliminated the risk of a bank becoming illiquid when its depositors withdrew cash, but imposed on the public the need to judge the solvency of the note-issuing bank before accepting its currency. The risk of losses on demand deposits remained. While that risk could have been eliminated with a 100% reserve requirement (The Chicago Plan), it was eliminated for smaller deposits by deposit insurance.
Central banks around the world now have a monopoly on issuing legal tender currency. This eliminates the default risk of accepting such currency but reintroduces a liquidity risk for banks that promise to convert customer deposits into (central bank issued) cash on demand. This risk is substantially reduced by central banks’ lender of last resort function.
Structuring Digital Currency
The above considerations can help us evaluate options for central banks wishing to issue digital currencies. So-called “digital currencies” can take different forms. “Digital coins” are the closest digital counterpart to paper currency. Both have unique serial numbers for each unit. “Tokens” or “claim check centralized digital currency” pass from one owner to another P2P via block chain or central registry and can be redeemed for central bank base money at any time. “Deposits” function the same as tokens without pretending that they are not deposits. The distinctions between these are primarily technical and may be of little if any relevance to users. Thus I will use “digital currency” to refer to any and all of them.
Our two-tiered system for supplying money to the public (central banks issue base money that is their own liability and commercial banks create deposit money fractionally backed by central bank base money) has the very considerable benefit of outsourcing the competitive creation and management of money to many banks. Banks develop and service their own relationships with their customers from tens of thousands of offices around the country (speaking now of the U.S.). However, this money creating and payment function performed by banks is also comingled with their lending activity intermediating between savers and borrowers. There are synergies as well as risks from providing both services under one roof.[9]
Should central bank digital currency be provided retail or wholesale? A central bank could issue its digital currency to anyone who signed up (registered, i.e. opened an account directly with the central bank). As all uses of this digital currency would be between participants in the system, transfer would be simple and instantaneous. It would be essentially the same as logging into your current bank account and transferring money to another depositor in the same bank.
In addition to the above advantages of speed and simplicity, this central bank retail approach carries the burden of an enormous expansion of central bank staff to interface with the general public in establishing and managing this new digital currency. Equally troublesome is the likelihood, if not certainty of a “digital run” from bank deposits to the central bank’s digital currency. This would be a permanent shift from banks to the central bank, which would force banks to liquidate a significant share of their assets in order to finance the outflow of their demand deposits into the central bank’s payment system. The transition would need to be carefully managed. The magnitude of the digital run could be limited by limiting the size of CBDC payments. This could leave most business payments with the banking system.
There are advantages to a single, monopoly provider of digital currency because payments would take the form of transfers between accounts/participants within the same system (in effect intra-bank). But there would be the usual disadvantages of monopolies as well (e.g. sluggish technical innovation).[10] Central banks generally have a monopoly in printing paper currency, but their sale to the public is done by competitive commercial banks.
Central banks could leave the provision of digital cash to banks and other qualifying financial firms. This would parallel the two-tier system now in place with central bank base money and commercial bank broad money (deposits of the public). Digital currency would be supplied only by banks, as was the case during the free banking era when individual banks supplied their own currency notes. Thus there would be many digital dollars (Citibank digital currency, Chase digital currency, etc.). As with free banking banknotes, each digital currency would be the liability of the issuing bank. The risk of default for each bank’s digital currency could be eliminated by requiring 100% reserves with the central bank against any digital currency issued and segregating these assets and liabilities from the rest of bank balance sheets. It would also be possible for commercial banks to sell and administer central bank digital currency on behalf of the central bank. Adoption of a full Chicago Plan (100% reserves for both currency and demand deposits and legal segregation from the rest of the bank’s activities) would fully protect all payment system assets (money) from bank failures. Policies would also be needed with regard to close substitutes for demand deposits such as time and savings deposits.[11] Alternatively the risk could be limited via the equivalent of deposit insurance.
Non Central Bank Digital Currency
Digital currencies issued by commercial banks would eliminate the risk of “digital runs” on bank deposits to the central bank’s digital currency flagged by the BIS in its report cited above. Non-national digital currencies (or deposits) fixed in value to a foreign currency, to SDRs, or to gold, for example, issued by an entity playing the role of a central bank for that currency (e.g. the BIS) would also minimize the risk of a “digital run” from bank deposits in national currencies. Such digital currencies could also adopt a traditional two-tier model by which commercial banks issue the digital currency to the retail public. In all cases of multiple, individual bank issued digital currencies, arrangements would be needed (as now) to settle payments from holders of digital currency issue by one bank to holders of digital currency issued by a different bank. The transfer of deposits from one issuing bank to another on the books of a common institution (the traditional central bank) is the most likely mechanism for settling such payments as is now the case for deposit payments.
In the digital world the distinction between a digital deposit and a digital currency is notional. Both are liabilities of and claims on the bank or other entity that issued them. Distinctions blur. In addition, digital currency need not necessarily be issued by a deposit-taking bank. M-Pesa is the digital mobile phone currency version of the Kenyan shilling issued by a trust operated by the Kenyan mobile phone operator Safaricom.[12] The trust is not licensed as a bank as it does not lend any of the money deposited with it. One hundred percent of the money deposited with M-Pesa is placed with commercial banks. If these deposits were with the central bank, they would be risk free—an example of the Chicago Plan.
Conclusion
My conclusion from the above considerations is that digital currency should be issued by banks or by entities adhering to the Chicago Plan if and when they prove superior to existing electronic means of payment. Commercial bank digital currency liabilities should be insured or should adhere to the Chicago Plan segregated from the rest of the bank and thus from any losses the bank’s other activities might suffer. If bank demand deposits were also 100% reserved, bank digital currency would feature the same stability benefit as was enjoyed in the free banking era by bank note issuing banks without the default risk of that era. Such digital currency can extend the benefits of digital payments to the non-banked as it has in Kenya and a growing number of other countries. It is a model also well suited to the issue of global, non-national currencies such as market SDRs or gold backed currency.
[1]Dr. Coats is retired from the International Monetary Fund, where he was Assistant Director of the Monetary and Capital Markets Department.
[2]Michael D. Bordo and Andrew T. Levin, “Central Bank Digital Currency and the Future of Monetary Policy” Economics Working Paper 17104, Hoover Institution, August 2017. https://www.hoover.org/sites/default/files/research/docs/17104-bordo-levin_updated.pdf
[3]Warren Coats, “The Technology of Money”Cayman Financial Review,January 18, 2012.
[4]“Central Bank Digital Currency,” Bank for International Settlements, March, 2018. https://www.bis.org/cpmi/publ/d174.pdf.
[5]Warren Coats, “Bitcoin, Cybercurrencies, and Blockchain” March 12, 2018. https://wcoats.blog/2018/03/12/bitcoin-cybercurrencies-and-blockchain/
[6]Project Jasper: Are Distributed Wholesale Payment Systems Feasible Yet?Bank Of Canada, Financial System Review, June 2017. https://www.bankofcanada.ca/wp-content/uploads/2017/05/fsr-june-2017-chapman.pdf
[7]Benjamin Geva, “Banking In The Digital Age – Who is Afraid of Payment Disintermediation?” EBI Working Paper Series, 2018 No 23, March 23, 2018. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3153760
[8]In the “good ol days” representatives of all local banks would meet in a room and exchange the physical checks that their customers had written to each other and settling the net differences between each bank via a common correspondent bank.
[9]Warren Coats, “Changing direction on bank regulation”Cayman Financial Review, April 2015.
[10]For an elaboration see Geva, op.cit.
[11]Warren Coats, “The Money Problem-Rethinking Financial Regulation” by Morgan Ricks, Cayman Financial Review April 26, 2017.
Review of John Tamny’s attack on Jack Kemp Foundation article
By Dr. Warren Coats
Dr. Coats is retired from the International Monetary Fund, where he was Assistant Director of the Monetary and Capital Markets Department.
In an article titled, “When the Ideas of Thinkers and Great Statesmen Are Perverted,” John Tamny offers what he calls “a semi-brief response” to a Wall Street Journal op-ed by Sean Rushton from the Jack Kemp Foundation, “Monetary reform would rebalance trade.”
Mr. Tamny wastes no time in launching his attack with the following: “Worse were the myriad factual inaccuracies, including a Bretton Woods monetary agreement that took place after World War II. Except that it took place in 1944.” This is his only valid criticism in his not so brief discussion. As we all know, the Bretton Woods conference was in anticipation of the end of WWII and did not actually take place “after” the war. Devastating, right?
Mr. Tamny launches his more substantive critic by noting that, “To be clear, all trade balances. Always.” Whether that balance is healthy or not, however, depends on its composition. Mr. Rushton’s article is about that composition. He discusses the implications of the fact that one of the ways in which we pay for what we import is by exporting U.S. dollars. The others are exporting U.S. debt (largely government) and the ownership of American firms and other private assets. Many countries wish to hold our dollars (it is the primary international reserve asset held by central banks) because so much of world trade is priced in and paid for with USDs.
Given all the many factors that determine what we import and export, the global demand for USD as a reserve asset makes our trade deficits larger than they would otherwise be in order to supply (export) those dollars. Tamny correctly notes that “the U.S. has run ‘trade deficits’ for longer than it’s been the United States.” Obviously such deficits were not the result of the world’s demand for U.S. currency. “The U.S. always ran trade deficits precisely because it’s long been an attractive destination for investment.” In other words, other countries sold us more than they purchased in goods and services (our trade deficit) in order to earn the dollars to invest in the U.S.
But times have changed. Today, and since the U.S. left the gold standard in early 1970, most of the dollars earn abroad from our trade deficits (their surpluses) are invested in U.S. treasury securities. In short, dollars earn abroad via our trade deficits (in addition to accumulating dollars in foreign exchange reserves) are now largely invested in financing our government’s deficit spending. Even Mr. Tamny would not argue that this inflow of investment in the U.S. is contributing to our increased growth and productivity.
On the contrary, Tamny seems to be arguing exactly that. He says that: “we have a so-called “trade deficit” as a country precisely because the U.S. is a magnet for investors the world over. When we “export” shares in American companies that are routinely the most valuable in the world.” He seems to applaud selling our firms to foreigners when our government crowds out the domestic financing of our industries in order to finance our irresponsible government deficits.
Mr. Tamny is not content to label Mr. Rushton’s analysis false. He calls it “obnoxiously false” and “comically false.” Unfortunately these labels apply more accurately to Mr. Tamny.
Rushton claims and provides evidence that U.S. fiscal discipline weakened when Nixon closed the gold window. “No longer bound by fixed exchange rates and dollar convertibility, the U.S. government’s fiscal discipline broke down.” Obviously other political and demographic factors have also contributed to the alarming increases in U.S. deficits, but no longer needed to defend the dollars exchange rate removed an important constraint. To rebut Rushton’s claim and data, Tamny notes that our deficits were even higher during WWII. Truly. I am not making this up.
Turning to the dollar’s role as an international reserve asset, Mr. Tamny notes that Mr. Rushton “argues that thanks to ’high global demand,’ the ’dollar’s international position is always stronger and U.S. interest rates are lower than they would be otherwise.’” Added to all of the other factors influencing the composition of our external financial flows (our balance of payments), the world’s demand for dollars in their foreign exchange reserve holdings must increase their trade surplus (our trade deficits) or their investments in the U.S., either of which will appreciate the dollar’s exchange rate and lower interest rates in the U.S. relative to what they would other wise be. Mr. Tamny doesn’t get this. He says that Mr. Rushton “wants us to believe that a devaluation of the income streams paid out by the U.S. Treasury actually made them more attractive to investors.” I don’t really know what he means by that either.
Another of Mr. Tamny’s “obnoxiously and comically false,” or perhaps merely nonsensical statements is that: “if we ignore the obvious, that the sole purpose of production is to import as much as possible….” If he is relating production to imports, he presumably means producing for export. What we import must be paid for one way or another, i. e., by exports of goods and services, U.S. dollars for reserves, U.S. government debt, or ownership of U.S. firms.
I leave it to the reader to sort out what Mr. Tamny might mean by: “the path to a lower ’trade deficit’ is only possible if we’re willing to accept being much poorer.”
As a parting shot, Tamny mischaracterizes the views of the late Jack Kemp. Here’s what Kemp actually said, speaking in 1987:
“Why do we keep having these cycles? I believe it has to do with the burdens and privileges of the dollar’s unique international role. First, the extra demand for dollars puts a premium on their value that makes American exports less competitive. And on world markets, only a few cents means the difference between a sale and a loss. This increases our merchandise trade deficit.
“Second, the dollar’s role helps fuel Congress’s deficit spending. Foreign central banks buy U.S. Treasury securities to hold as reserves and to keep their currencies from rising—almost $100 billion in the last year and a half. This amounts to a special ‘line of credit’ that lets Congress spend resources that would otherwise be used to farm or manufacture for export. President Reagan used to say that to get Congress to spend less you have to reduce its allowance. Well, we may have reduced its allowance but we haven’t taken away its charge card. That’s one reason why every tax dollar is spent without cutting the deficit.
“Trying to compete in world markets under these conditions is like trying to run a race with a ball and chain around your ankle. We face a constant choice between giving in to pressure to let the dollar fall at the risk of inflation, or keeping interest rates high at the expense of a trade deficit and growing pressure for protectionism. This dilemma will continue until we stabilize the dollar, end the inflation/deflation cycle, and bring down interest rates with the right kind of monetary reform.”
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The Future of Israel and Palestine
At an otherwise friendly dinner conversation at the home of Israeli friends, our host explained that Israel having taken over the West Bank and Gaza Strip (WBGS) in the 6 day war in 1967, i.e. having won the war fair and square, so to speak, the Palestinians and the rest of the world should accept that reality and move on. He was articulating the one state solution to the Israeli-Palestinian problem. The WBGS now belongs to and is part of Israel (though Israel did withdraw later from and gave up Gaza).
The Zionist movement’s goal of establishing a Jewish homeland, a Jewish nation, seemed fulfilled with the U.N.’s recognition of the new state of Israel in 1048. The commitment of its Jewish residents to building a democratic state required achieving and maintaining a Jewish majority in the population. Absorbing the West Bank into Israel presents some obvious challenges. If you are not familiar with the history of Israel, I urge you to read my summary of it: “View from the West Bank–A History of the Conflict”
One state for Israel and the West Bank would have a majority of Palestinians. The Jews around the world willing to move to Israel (the earlier strategy for obtaining a Jewish majority) have pretty much already done so and birth rates among the Palestinians are higher than among the Jews. Thus a consolidated, democratic, and Jewish state would require second-class citizenship for its Palestinian residence. A British journalist living in Nazareth, Israel explains this in more detail: “With-more-palestinians-than-jews-israel-waging-war-of-attrition”
Former President Jimmy Carter described this potential outcome in his 2006 book, “Palestine: Peace Not Apartheid,” where he wrote: “The bottom line is this: Peace will come to Israel and the Middle East only when the Israeli government is willing to comply with international law, with the Roadmap for Peace, with official American policy, with the wishes of a majority of its own citizens — and honor its own previous commitments — by accepting its legal borders.” This reality is recognized by many Israeli and even endorsed by some: “Israeli minister-endorses-apartheid.”
An apartheid regime for Israel would be an affront to liberal democratic values not easily swallowed by the Jewish diaspora. In fact, it would not be acceptable at all. That argues for continued effort to agree on a two state solution. In the following article Ronald Lauder, President of the World Jewish Congress, makes the case for the two state solution that the U.S. and U.N have worked for until now (or perhaps until last year) as the only morally and practically acceptable solution to this problem: “Israel’s Self-Inflicted Wounds”.
What we are seeing now, however, is something much uglier. The third option to two states, or one apartheid state, is one state that has ethnically cleansed the unwanted Palestinians in order to preserve Jewish control in a democratic state. The increasingly corrupt regime of Bibi Netanyahu seems to be moving in this direction and uncritical U.S. support of whatever his government does is putting the U.S. at odds with the rest of the world. For a similar review, see: “The-strange-catharsis-of-hopelessness-in-Israel”
U.S. tacit support of continued construction of illegal Israeli settlements on Palestinian land was resoundingly rejected by the U.N. When President Trump moved the U.S. Embassy to Jerusalem “The United Nations General Assembly voted… 128-9, with 35 abstentions, on a non-binding resolution condemning President Trump’s new policy recognizing Jerusalem as the capital of Israel…. U.S. Ambassador to the United Nations Nikki Haley told an emergency meeting of the General Assembly [that] ‘the United States will remember this day in which it was singled out for attack in the General Assembly for the very right of exercising our right as a sovereign nation.’” This is the language of a bully, not a world leader, and I was appalled and embarrassed for my country. “UN-votes-to-reject-US-decision-on-Jerusalem-despite-threats”
More worrying are increasing signs that Netanyahu’s government is indeed pursuing the ethnic cleansing option. In addition to stealing Palestinian land in the West Bank for Israeli expansion, Israel has increasingly isolated and stifled the Palestinian economy. “Israel-Jewish-nation-state-bill”
Israel has occupied the West Bank for fifty years. Some of its treatment of its wards would be seen as human rights violations if committed by any other country. “Alabama-Israel-apartheid.” Recent Israeli laws are escalating such abusive treatment, allowing “the minister of interior to revoke the residency rights of any Palestinian in Jerusalem on grounds of a “breach of loyalty” to Israel.” “Israel-passes-law-strip-residency-Jerusalem’s-Palestinians”
Last December you may have watched the video of 17 year old Ahed Tamimi attacking two Israeli soldiers who had just shot her 15-year-old cousin Mohammed Tamimi in the head at close range with a rubber-coated steel bullet. https://www.youtube.com/watch?v=8YFen2KdqbU. The Israeli soldiers get points for staying cool. Ahed is now servicing eight months in prison after agreeing to a plea bargain. More recently (March 30, 2018) Israeli soldiers shot and killed 16 Palestinians on the Gaza Israeli border and wounded hundreds. http://www.bbc.com/news/world-middle-east-43593594 “Both UN Secretary-General Antonio Guterres and EU diplomatic chief Federica Mogherini have called for an independent investigation. On Saturday, the United States blocked a draft UN Security Council statement urging restraint and calling for an investigation of the violence.” Such blind obedience to Netanyahu’s government does not service the U.S. or Israel well (not to mention the Palestinians). Israel rejected the call. “Israel-rejects-calls-independent-probe-Gaza-violence.”
To ours and Israel’s shame, ethnic cleansing seems to be winning out. During my many visits to Israel and the West Bank and Gaza I marveled at the open debate among Israelis of these issues and praised their free press. I wrote the following from Jerusalem 12 years ago and again praised the importance of a free journalism. “Jerusalem-in-august-2006″. I am now waiting for today’s tweet attacks from Mr. Fake News, and wondering if we are in danger of letting it slip away.
As a bonus, I recommend the following video discussion of these issues at the New America: “Ultimate-deal-or-ultimate-demise”
Econ 101: Trade Deficits, another Bite
Some years ago my friend Moritz Schularick and I were walking down a street in what is now called midtown Berlin (the former Eastern zone). Moritz asked me if I could explain why capital was flowing into the U.S. from developing countries when economic theory suggested it should flow in the other direction. At the time I didn’t have a very good answer. This note offers a better one.
We expect investors to put their money where the risk adjusted return is highest because that would maximize their profits. Wealthy countries like the United States have large capital stocks as a result of many decades of investment. Poor countries—especially the emerging economies—have much smaller capital stocks. Under those circumstances, the return to investing in more capital where it is relatively scarce is normally higher than where large investments have already been made. Economists call this the declining marginal return to capital. So the capital intensive, wealthier countries should have a lower return on investing in still more capital than would the poorer capital scarce countries. If the return to capital (interest rate) in emerging market economies is higher than in the U.S., capital should flow from the U.S. to promising developing countries.
I told Moritz that it must be that because of stronger institutions and property rights (rule of law) in the U.S. compared to many developing economies, investment in them was riskier to such an extent that the risk adjusted return was actually lower in developing economies. That may explain part of the reverse flow of capital into the U.S.
But two other factors might be even more important.
First we need to understand how capital flows from the U.S. to another economy. Consider American investments in Chile, a rapidly growing emerging economy with relatively good institutions and rule of law. American investors must buy Chilean pesos in the amounts to be invested. This will appreciate the peso some (one peso will be more dollars than before making American goods cheaper). Those pesos might be used to buy shares in a growing Chilean company. The purchase of these shares by an American might simply be a change in ownership (portfolio investment) or might finance new investment (Foreign direct investment—an actual increase in capital).
But what does the Chilean who sold her pesos for dollars do with those dollars? It simplifies without fundamentally changing the story to assume that the Chilean firm selling its share to an American acquired those dollars. The firm might buy U.S. treasury securities with these dollars (this is the simple swap of asset ownership of portfolio investments). But more likely it buys American machinery and equipment for its new investment. The U.S. “enjoys” a trade surplus as a result of these capital outflows. This is the traditional relationship assumed between the developed and undeveloped world. Capital flows from the U.S. to Chile.
Two additional very important factors have changed this story causing capital to flow backward from the Chiles of the world to the U.S. In my previous blog “Econ-101-trade-deficits” I explained the following relationship:
(M – X) = (I – S) + (G – T),
which says that the trade deficit (imports-M- less exports-X) is equal to the savings deficit (investment-I- less saving-S) plus the government’s fiscal deficit (government spending-G- less its tax revenue-T). Uncle Sam has had a fiscal deficit every year since the Clinton administration surpluses (even currently when the economy is fully employed!) The rest of the world has helped finance our fiscal profligacy thus keeping US interest rates lower than they otherwise would have been and crowding out less of our private investment than such fiscal deficits would otherwise have caused. The rest of the world acquires the dollars to invest in the U.S. by selling more to us than they buy from us (i.e., via our trade deficit). So other things equal a smaller fiscal deficit or, god forbid, a fiscal surplus will reduce our trade deficit.
The other, often overlooked, cause of our trade deficits arises from the use of the U.S. dollar as the world’s primary reserve asset and thus the demand from foreign central banks to hold them in their foreign exchange reserves. They acquire these dollars via our trade deficit (and their trade surplus). Their demand for U.S. dollars appreciates the exchange rate of the dollar relative to foreign currencies making foreign goods cheaper in the U.S. and American exports more expensive abroad, thus creating our trade deficits and their surpluses (see my blog from last week linked above and/or this more extensive treatment; “Why the world needs a reserve asset with a hard anchor” Frontiers of Economics in China 2017, Vol 12 Issue 4, http://journal.hep.com.cn/fec/EN/10.3868/s060-006-017-0023-7).
It would be in our interest to replace the dollar’s use in foreign reserves with an internationally issued reserve currency, something I have been advocating for many years. The details for what this might look like and how it could be done are provided here: “Real SDR Currency Board”
Econ 101: Trade deficits
Responding to critics of the administration’s proposed steel and aluminum tariffs, Commerce Secretary Wilbur Ross stated on CNBC: “I think this is scare tactics by the people who want the status quo, the people who have given away jobs in this country, who’ve left us with an enormous trade deficit and one that’s growing. [The trade deficit] grew again last year, and if we don’t do something, it will keep growing and keep destroying American jobs.” “Wilbur-Ross’s-star-rises-as-trump-imposes-tariffs”
Though the forces determining our trade deficits have many moving parts, it is not that complicated to explain why everything in the above statement is wrong. In this note I explain why:
- Our trade deficits are caused more by U.S. government fiscal deficits than by the mercantilist export promotion policies of China, Japan, and Germany;
- Mercantilist policies that subsidize exports and restrict imports don’t cost American jobs but rather reallocate workers and capital to less productive jobs that lower our standard of living; and
- Challenging mercantilist policies using the tools and provisions of the WTO and other trade agreements better serves our long run interests than unilaterally imposing tariffs and inciting trade wars.
To understand the relationship between our fiscal deficit and trade balance, it is essential to understand the macro level relationship of our trade deficit to the other broad categories of our national income and expenditures. So take a deep breath as I explain the national income identities through which I will explore that relationship.
The economy’s total domestic output, known as Gross Domestic Product (GDP), can be broken into the broad components of our output/income that reflect how that income is spent. I understand how a little math can discourage some from reading further, but this is necessary and I hope you will indulge me. Starting with the components of expenditures:
GDP = C –M + I + G + X, or GDP = C + I + G + (X-M)
Where:
C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services
C-M is household consumption of domestically made goods and services, while M is household consumption of foreign made goods and services. If we subtract M from X (foreign expenditures on domestically made goods and services) we have the famous trade balance. When we buy more foreign goods and services than foreigners buy of our output, i.e., when X-M is negative, we have a trade deficit. As discussed further below, it is important to note that the trade balance (deficit or surplus) is between the U.S. and the rest of the world. Bilateral deficits or surpluses with individual countries are irrelevant.
But another way of breaking up total output (and thus income) is into how households allocate it:
GDP = C + T + S
Where:
T = household tax payments (personal and corporate income taxes plus sales taxes)
S = household saving
These two equations each provide definitions of the same quantity (GDP) and thus can be set equal to each other. This enables us to arrive at a useful formulation of the trade deficit:
C + I + G + (X-M) = C + T + S, or M-X = I-S + G-T;
The relationships in the identity can be described in several ways. Our fiscal deficit (G-T) must be financed by domestic net saving, i.e. a negative I-S, or by foreigners (M-X), i.e. a trade deficit or a mix of the two. Government finances its deficits by selling treasury securities domestically or abroad. If they are purchased domestically, residents must save more for that purpose or investors must borrow less from existing saving. If a fiscal deficit doesn’t crowd out private investment or increase private domestic saving (e.g., if I-S = 0) then it must be financed by foreigners who get the dollars with which to buy U.S. treasure securities by selling their goods and services to us in excess of what they buy from us, i.e., a trade deficit.
The above relationships are derived from definitions. They are tautologies. If the government’s spending exceeds its tax revenue it must borrow the difference from someone: a diversion of spending that would have financed investment (crowding out), a reduction in consumption (i.e., increase in saving), or an increase in the share of consumption spent abroad (increase in imports) giving foreigners the dollars they lend to the U.S. government. The interesting part—the underlying economics—is how markets bring about these results (usually a mix of all three).
When the government increases its need to borrow, other things equal, the increase in the supply of treasury securities relative to the existing demand for them increases the interest rate the government must pay. Higher interest rates generally encourage more saving and discourage investment. If we have no trade deficit (X-M = 0 so that G-T = S-T), the government’s deficit (G-T) must be financed by net saving (S-T). Depending on how much of the net saving comes from an increase in saving and how much from a decrease in investment, government deficits are bad for investment and economic growth in the long run (abstracting from countercyclical budget deficits and surpluses meant to offset cyclical swings in aggregate demand).
However, much of our fiscal deficits have been financed by foreigners (predominantly China and Germany) through their trade surpluses and our trade deficits. The market produces this result because the higher interest rates on U.S. treasury securities (and until now their perceived low risk of default) attracts foreign investors. The foreign demand for dollars in order to buy these treasury securities increases (appreciates) the exchange rate of the dollar for other currencies. An appreciated dollar makes American exports more expensive to foreigners and foreign imports cheaper for Americans. The resulting increase in imports and reduction in exports increases the trade deficit, which then finances our fiscal deficit.
As Alan Blinder put it: “Nations that invest more than they save must borrow the difference from abroad. Happily, the U.S. can do that because foreign countries have confidence in American securities. When we import more than we export, foreigners get IOUs in return for goods and services Americans want. That sounds more like winning than losing: We get German cars, French wines, and Chinese solar panels, while the Germans, French and Chinese get paper assets. America’s tremendous ability to export IOUs has been called our “exorbitant privilege.” Yes, privilege.” “This-is-exactly-how-trade-wars-begin”
If you have made it this far, you will be better able to understand the errors of Secretary Ross’s statement above: “if we don’t do something, it [the trade deficit] will keep growing and keep destroying American jobs.” If the United States government wants to reduce our trade deficit, it should reduce, rather than further increase, our fiscal deficit.
As noted above, however, our trade deficits reflect many moving parts. In the above example, foreigners want to increase their holdings of U.S. dollars (and dollar assets) in part because the dollar is a widely used international reserve asset. Our trade deficit is the primary way in which we supply our dollars to the rest of the world (and its central banks). However, what if our trading partners were manipulating their exchange rates in order to produce trade surpluses for themselves?
In the past, China followed such a mercantilist policy of promoting its exports over imports as part of its economic development strategy. In that case our trade deficit would result in foreign investments in the US with the net dollars accumulated abroad even without U.S. fiscal deficits. If they are not soaked up financing government debt they will be invested in private securities or other assets (such as Trump Hotels). Just to keep it complicated, these foreign investments would either add financing to increased domestic investment (if they lowered U.S. interest rates) or would buy existing American assets freeing up funds of the sellers to help finance government deficits or new investment. As I said, there are many moving parts, which adjust depending on prices (interest rates) and the public’s buying and investing propensities.
Tariffs don’t violate the above national income identities. Rather they potentially change the allocation of resources toward or away from traded goods. The Better Way tax reform proposals of Congressman Kevin Brady in 2016 included a so-called border adjustment tax, which taxed all imports equally and exempted all exports from the domestic expenditure tax. The tax on imports would have been, in effect, a tariff on all imports. Interestingly Brady’s border adjustment tax would not have affected our trade balance nor distorted resource allocation. The dollar’s exchange rate would have adjusted to nullify the impact of the tariff/tax on the prices we would pay domestically on imports.
Contrast this with the tariffs proposed by President Trump on steel and aluminum imports. These tariffs were meant to prop up inefficient American steel and aluminum firms by increasing the cost of their imported competition. As such it would reallocate our workers and capital to activities that are less productive than they would otherwise be used for (i.e., to the increased production of steel and aluminum). Once all of the adjustments were made we would be poorer, though still fully employed. “Econ-101-trade-in-very-simple-terms.”
It turns out, however, that Trump’s tariff threats were probably a negotiating ploy (He has temporarily exempted Canada and Mexico from the tariffs and is making deals with other suppliers in exchange for suspending the tariff). China is already paying special tariffs on these products to counter Chinese government subsidies and only sells the U.S. 2% of its steel imports. Thus the tariff is largely irrelevant for China. The net short-term affect of Trump’s ploy may well result in almost no tariff revenue and no protection for U.S. steel and aluminum producers and some improvements in other trade deals with our trading partners (or at least what the President considers improvements). In short, Trump’s tariff threat could turn out to be helpful. However, given Trump’s generally negative and/or ill-informed views on trade, this may be an overly generous interpretation.
As The Economist magazine put it: “If this were the extent of Mr. Trump’s protectionism, it would simply be an act of senseless self-harm. In fact, it is a potential disaster—both for America and for the world economy.” “Trumps-tariffs-steel-and-aluminum-could undermine-rules-based-system” Why? Even if the tariffs are waved sufficiently to avoid the retaliatory trade war Europe and others are threatening, Trump’s use of the national security justification for his steel and aluminum tariffs can’t be taken seriously. “That excuse is self-evidently spurious. Most of America’s imports of steel come from Canada, the European Union, Mexico and South Korea, America’s allies.” The Economist My long time friend Jim Roumasset noted that “Wilber Ross did indeed make such a finding [of a national security threat], but then declared that the tariffs are “no big deal.” In other words, the tariffs won’t improve national security. Unfortunately, there is neither check nor balance against the ignorance of commerce secretaries.”
The large expansion of international trade made possible by removing trade barriers, including lowering tariffs, has enormously benefited us (the U.S. and the rest of the world). In 1980 60% of the world’s population earned less than $2.00 a day (inflation and purchasing power parity adjusted). Because of economic growth, significantly spurred by expanding world trade, this number as plummeted to 13% by 2012 (latest figure available). This incredible feat was made possible by the collective agreements of virtually all of the world’s countries to increasingly lower tariffs and other trade barriers and to agree on global rules for fair competition. These trade rules were developed under the General Agreement on Trade and Tariffs (GATT) created after WWII as one of the three Bretton Woods institutions (the International Monetary Fund, the World Bank, and the GATT), which became the World Trade Organization (WTO) in 1995.
With its large and diverse membership of 164 rich and poor countries, the GATT/WTO has not been able to conclude new global trade agreements since 1995. Thus attention shifted to regional, multilateral agreements such as the 11 country Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) successor to the Trans-Pacific Partnership (TPP) from which Trump very foolishly withdrew the U.S. last year. “The-shriveling-of-U.S.-influence”
When China was admitted to the WTO in 2001 we expected that it would continue to liberalize and privatize its economy in accordance with the requirements of the WTO’s rules. The expectation was that China’s membership in the WTO would draw it into the liberal international rule based trading system.
In 2002, the IMF sent me to China to discuss these requirements in the banking sector with the Peoples Bank of China. We had high expectations. Unfortunately, China’s liberalization has gone into reverse in recent years. While not a trade issue, China’s recent launch of its centralized rating of the good behavior of its citizens, drawing on its extensive surveillance capacities, and its just announced intension to bar people with low “social credit” scores from airplanes and trains is certainly not an example of the more bottom up civil liberties, human rights views and approaches of most other countries. “China-to-bar-people-with-bad-social-credit-from-planes-trains.”
China’s behavior has been a disappointment. From its accession into the WTO, China began flooding the world with its “cheap” exports while continuing to restrict its imports from the rest of the world. The normal market reaction and adjustment to the inflow of dollars to China from its resulting trade surplus would be an appreciation of the Chinese currency (renminbi), which would increase the cost of China’s exports to the rest of the world (and lower the cost of its foreign import). However, China intervened in foreign currency markets to prevent its currency from appreciating and as a result China accumulated huge foreign exchange reserves (peaking at 4 trillion U.S. dollars in 2014). Not only did China intervene to prevent the nominal appreciation of its currency, but it also sterilized the domestic increase in its money supply that would normally result from the currency intervention, thus preventing the domestic inflation that would also have increased the cost of its exports to the rest of the world.
China’s currency manipulation was not seriously challenged at that time. Economic conditions in China have more recently changed and since 2014 market forces have tended to depreciate the renminbi, which China resisted by drawing down its large FX reserves (all the way to 3 trillion USD by the end of 2016—they have risen modestly since then). China is no longer a currency manipulator as part of an export promotion (mercantilist) policy.
But China does continue to violate other WTO rules with many state subsidies to export industries and limits and conditions for imports and foreign investment (such as requiring U.S. companies to share their patents as a condition for investing in or operating in China). A government subsidy of exports distorts resource allocation and thus lowers overall output in the same way but in the opposite direction as do tariffs. Both reduce the benefits and gains from trade and are to be resisted. The WTO exists to help remove such barriers and distortions in mutually agreed, rule based ways. A tariff that balances a state subsidy helps restore the efficient allocation of resources upon which maximum economic growth depends. These are allowed by WTO rules when it is established that a country’s exports violate WTO rules. President Trump is considering such targeted tariffs (his steel and aluminum are certainly not an example of this type of tariff) and hopefully they will conform to WTO requirements. “Trump-eyes-tariffs-on-up-to-60-billion-chinese-goods-tech-telecoms-apparel-targeted”
Trump’s bypass of WTO rules for his steel and aluminum tariffs, undermine the WTO and the international standards that have contributed so much to lifting the standard of living around the world. Despite its many weaknesses and shortcomings our interests are better serviced by strengthening the WTO rather than weakening it. “Trumps-tariffs-aren’t-killing-the-world-trade-organ”
“Whatever the WTO’s problems, it would be a tragedy to undermine it. If America pursues a mercantilist trade policy in defiance of the global trading system, other countries are bound to follow. That might not lead to an immediate collapse of the WTO, but it would gradually erode one of the foundations of the globalised economy. Everyone would suffer.” The Economist
As an aside, our bilateral trade deficits (e.g., with China) and surpluses (e.g., with Canada) are totally irrelevant and any policy designed to achieve trade balance country by country would damage the extent and efficiency of our international trade and thus lower our standard of living. See my earlier discussion of this issue in: “The-balance-of-trade”
“Even though trade policies are unlikely to change the long-run trade balance, they are not unimportant. Americans will be better off if the United States can use trade negotiations to open foreign markets for its exports, not because more exports will increase the US trade surplus, but rather because US incomes will be higher if more US workers can be employed in the most efficient US firms that pay high wages, and if those firms can sell more exports at higher prices. Similarly, US living standards will be higher if the United States reduces its trade barriers at home because this will give consumers access to cheaper imports and make the economy more efficient. Ultimately, therefore, the goal of US trade policies should not be focused on trade balances but instead on eliminating trade barriers at home and abroad.” This is quoted from the excellent and more detailed discussion of many of these issues that can be found here: “Five reasons why the focus on trade deficits is misleading”
There is another, very important negative byproduct of Trump’s transactional, confrontational, zero sum approach to getting better trade agreements. Mutually beneficial trade relations strengthen political and security relations and cooperation. These have been important non-economic benefits, for example, of NAFTA. Trump’s confrontational approach undermines these benefits. Pew Research Center surveys in 37 countries found that: “In the closing years of the Obama presidency, a median of 64% had a positive view of the U.S. Today, just 49% are favorably inclined toward America. Again, some of the steepest declines in U.S. image are found among long-standing allies.” Senator Ben Sasse delivered an exceptional speech on this subject followed by an outstanding panel discussion of the NAFTA negotiations at the Heritage Foundation. I urge you to watch the following video of that event: “The-national-security-implications-of withdrawing from-NAFTA”
Bitcoin, Cybercurrencies and Blockchain
What would we do without money/currency? Money is the unit in which we express prices (making it easer to compare the relative cost of things) and the asset with which we pay for our purchases and debts. A good currency has a stable value relative to goods and services (low or zero inflation) and is universally (or very widely) accepted in payment. The U.S. dollar receives high marks by these criteria. Bitcoin, however, fails miserably in all of these respects.
Why would anyone want to hold a highly volatile “currency” whose value one year ago was $1,230, then rose to $19,343 on December 16, 2017, dropped to $6,915 February 5 of this year and is now $9,364 (March 10, 2018). In addition, bitcoin is not accepted in payment almost anywhere? See my earlier explanation of bitcoin: “Cryptocurrencies-the bitcoin phenomena”
Bitcoin is better characterized as a security – an investment asset. It’s sort of like an option on a lottery, except that a lottery promises to pay something to the lucky person(s) holding the ticket. Bitcoin doesn’t promise to pay out anything to anyone. Its value is simply what you can get someone else to pay you for a bitcoin you want to sell. Buying bitcoin is a bet that its value will rise for some reason while you own it. Its ideological appeal for some is that it exists and functions totally independent of government; and its economic appeal is that it allows the transfer of funds (illegally gained or not) without much chance of being detected. For an excellent review of these points see Peter Morici’s: “Bitcoin-investors-have-reason-to-worry”.
Even if bitcoin had a well-behaved value and was widely accepted, the engine for maintaining and delivering it, a permissionless distributed public ledger of all bitcoin transactions linked together in blocks attached to an ever growing chain (blockchain), is deeply flawed. Records of who owns bitcoins and all transactions involving them are maintained in a database (ledger) copied to everyone with a bitcoin address (account). The system is open to everyone (permissionless) and not dependent on trusting any participants. Each bitcoin transaction is directly between the seller (or payer) and the buyer (payee) peer-to-peer without passing through a central registry such as would be maintained by a bank. Given the ease with which electronic data can be copied, preventing the spending of the same money multiple times when it openly exists in thousands of copies one as official as the other (the so-called double spending problem) in an environment where no one is trusted by design is the main challenge that blockchain ledgers need to overcome.
The majority of payments today are made by digitally transferring the ownership of digital records of money, i.e. electronic transfers of bank deposits. Our deposits of money with banks, which are a bit over half of so-called narrow money in the U.S. (M1= Currency outside of banks + demand deposits in banks), exist as digital records in each bank’s central deposit registry. Banks are so called trusted third parties responsible for insuring that our deposits are not touched and moved without our permission and are responsible for resolving any disputes or problems with regard to our deposits.
If we are paying money to someone who has their account in the same bank, we can go on line and transfer the money from our account to theirs in a millisecond without a service charge. These central registries are fortified with very robust protocols that insure their safety. The process is a bit more complicated if we are making a payment to someone whose account is in a different bank and there is scope for the speed, efficiency and cost of such interbank payments to be improved.
Blockchain’s claim to eliminate the need for trusted third parties by transferring ownership (e.g. of bank balances) directly peer to peer and publishing copies of the ledger containing the record of our transactions and resulting ownership in hundreds of nodes (our computers) around the world. The objective of a system that eliminates the need to trust anyone to safeguard your money from double spending necessitates some very complex and costly operations to substitute for a trusted third party.
For bitcoin, so called, miners are given increasingly difficult mathematical problems to solve to establish that the latest blockchain transaction is unique rather than a copy. The first miner to solve the problem cryptographically stamps the digital transaction record as genuine (in effect notarizes it) adding a new block of transactions to the chain and distributes it publically to all nodes. The winning miner is rewarded with new bitcoin (for as long as they continue to be created). Not only is the manpower and computer capacity required for this competition enormous, but the electricity consumed in bitcoin mining is now greater than is consumed in all of Ireland. https://powercompare.co.uk/bitcoin/
It takes around ten minutes to confirm the authenticity of a bitcoin transaction on average. Ten minutes standing at the check out counter waiting for your payment to be confirmed is an unacceptable eternity. “A familiar critique of Bitcoin is that “it does not scale” in the sense that, as it is currently implemented, the network is not capable of supporting a global payments system that requires many thousands of transactions per second. At the moment, this is true; Bitcoin can support up to 7 transactions per second as compared to the 2,000 transactions per second typically processed by Visa (with the potential to scale to an estimated 56,000 per second).” “The-bitcoin-scaling-debate”
Moreover, most bitcoin users don’t have the IT sophistication to operate and manage their own copy of the blockchain and thus deposit their bitcoins (or other cyptocurrencies) with exchanges that manage transactions for them. These trusted third parties in all but name are in effect banks (though they do not lend your bitcoins to others while waiting for you to use them). “Every-disadvantage-has-its-advantage-reviewing-blockchain”
To participate in the bitcoin system (to buy, use or sell bitcoin, to take the example of the best known cybercurrency) you must register to obtain an address (account). It is a closed system in that you can only deal in bitcoin with other registrants (account holders). If a central bank, for example, issued a digital version of its currency, it would also be a closed system in the same way. Participants would need to be registered with it (i.e. open accounts with it) in order to participate and could only use this Central Bank Digital Currency (CBDC) with other account holders.
When problems arise or views differ on whether and what changes might be desirable in the permissionless blockchain world, there is no one responsible to address it. There is no trusted third party to take responsibility. The bitter disputes among bitcoin “leaders” and its several hard forks (breaking off different versions of bitcoins) illustrate the seriousness of this problem.
The claim is often made that even if blockchain-DLT systems are fatally flawed as the vehicle for making payments, the blockchain technology may have revolutionizing uses for other public records such as property ownership and its transfers. However, the blockchain has so many serious disadvantages that even this more limited claim is very doubtful. “Blockchain Demystified”
To address or minimize these serious drawbacks of Distributed Ledger Technology, cryptocurrencies (there haven’t been any other applications of blockchain after ten years talking about it) have been rapidly moving away from the purer, permissionless, Proof of Work version used by bitcoin to more restricted and limited permissioned, Proof of Stake approaches. None of these to date are as efficient and secure as centralized ledges of the sort used by our banks. “What-if-blockchain-is-useless?” “Ten-years-in-nobody-has-come-up-with-a-use-case-for-blockchain”
This is not to say that exciting things aren’t happening in the ownership registry area. Digitizing ownership records introduces dramatic economies in tracking ownership and transfers of ownership. Automating many or all of the steps involved in real estate sales with the use of digitized smart contracts can significantly shorten the time and cost of the many steps (mortgage loan agreement and disbursement, collateral confirmation, settlement, title transfer, etc.). “A-pioneer-in-real-estate-blockchain-emerges-in-Europe.” In addition, a number of central banks are considering issuing digital versions of their currencies. These will probably use central registries rather than blockchains. “Central Bank Digital Currency: Bordo-Levin.” But does blockchain technology have any advantages to outweigh the many disadvantages that can’t be achieved quicker, cheaper and more securely with central registries operated by trusted third parties. Probably not. Project Jasper of the Bank of Canada concluded that: “the versions of distributed ledger currently available may not provide an overall net benefit when compared with existing centralized systems for interbank payments. Core wholesale payment systems function quite efficiently.” https://www.bankofcanada.ca/wp-content/uploads/2017/05/fsr-june-2017-chapman.pdf “SWIFT says blockchain not ready”
The shriveling of U.S. influence
Today in Chile 11 of the original 12 countries that had signed the Trans-Pacific Partnership (TPP) multilateral trade agreement on February 4, 2016 are signing the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP-11 for short, i.e., the TPP minus the U.S.). Upon taking office President Trump promptly withdrew the United States from the agreement saying that it was “a bad deal”. In fact it modernized and raised the level toward U.S. standards in the areas of e-commerce, intellectual property protection, and dispute resolution. Though the agreement provided significant benefits to the U.S. and despite the U.S. withdrawal, the remaining participants (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) preserved the basic provisions of the original agreement while freezing 22 provisions of particular interest to the United State to facilitate its rejoining at a latter time should it return to its senses. China and other Pacific Rim countries are also welcome to join if and when they meet the agreement’s high standards. This will not be easy for China should it chose to return to its earlier efforts to integrate into the rules of the world trading system.
The U.S. Congressional Research Service summarized the key provisions of the TPP as follows:
“The TPP would provide several principal trade liberalization and rules based outcomes for the United States. These include the following:
- lower tariff and non tariff barriers on U.S. goods through eventual elimination of all tariffs on industrial products and most tariffs and quotas on agricultural products;
- greater service sector liberalization with enhanced disciplines, such as nondiscriminatory and minimum standard of treatment, along with certain exceptions;
- additional intellectual property rights protections in patent, copyrights, trademarks, and trade secrets; first specific data protection provisions for biologic drugs and new criminal penalties for cybertheft of trade secrets;
- investment protections that guarantee nondiscriminatory treatment, minimum standard of treatment and other provisions to protect foreign investment, balanced by provisions to protect a state’s right to regulate in the public interest;
- enforceable provisions designed to provide minimum standards of labor and environmental protection in TPP countries;
- commitments, without an enforcement mechanism, to avoid currency manipulation, provide transparency and reporting concerning monetary policy, and engage in regulatory dialogue among TPP parties;
- digital trade commitments to promote the free flow of data and to prevent data localization, except for data localization in financial services, alongside commitments on privacy and exceptions for legitimate public policy purposes;
- enhanced regulatory transparency and due process provisions in standards setting; and
- the most expansive disciplines on state owned enterprises ever in a U.S. FTA or the WTO, albeit with exceptions, to advance fair competition with private firms based on commercial considerations.”
No trade agreement (yet) is perfect and the TPP represented a significant improvement for the U.S. and its trading partners of existing agreements.
The 11 signers, in addition to embracing standards that will promote economic growth in their own countries in the long run also sought originally to enhance America’s role and leadership in the Asian Pacific area (i.e., as a counterbalance to the rising strength of China). With or without the U.S. more countries are expected to join the CPTPP after the governments of the current 11 have ratified it. At the top of this list are Taiwan, Thailand, South Korea, the Philippines, and Sri Lanka.
President Trump has chosen to retreat from American leadership in setting and helping to oversee the rules of international cooperation and trade. It seems unlikely that Wilbur Ross and Peter Navarro will give up their fixation on protecting a hand full of inefficient, uncompetitive American industries, so Congress should take back its constitutionally given authority over trade policy delegated to the President in the Trade Act of 1974. https://fas.org/sgp/crs/misc/R44707.pdf
China’s misbehavior can be better addressed using the rules and provision of the WTO in ways that would strengthen the rule based international order rather than weakening it as Trump is now doing with the use of the national security provision. If China is selling its aluminum below cost, i.e., dumping it, we should impose a tariff on China under WTO rules against dumping. The use of the national security provision of the WTO is laughable on the face of it and would weaken rather than strengthen the rule of law in the trade area.
Econ 101—Trade in very simple terms
Trade allows people and firms to specialize in what they produce. This enables them to be more productive. This raises the income (standard of living) of both the seller and the buyer (who must also sell something in order to buy something)—i.e. both the exporter and importer. https://wcoats.blog/2017/09/15/a-basic-human-right/ https://wcoats.blog/2016/12/22/save-trade/
So what does Trump’s steel and aluminum tariff do?
The American economy is now fully employed (ok, maybe some of those who left the labor market in recent years, not all of whom are old, can be coaxed to return). Thus if high tariffs on steel and aluminum make previously non competitive and inefficient American steel and aluminum producers competitive again, where will the workers come from to do that work? They must be attracted away from what ever they are producing now—lets call it good A. So we will produce less of good A, which was competitive without taxpayer subsidies or regulatory favoritism, in order to produce more steel and aluminum, which was not competitive before given tariff protection. Add it up and our overall income goes down. The economy over all will be less efficient, less productive, and our overall incomes and standard of living will be reduced.
This reallocation of our resources from more productive to less productive products will make owners of steel and aluminum companies and property owners around closed foundries happy. Trump-may-prosper-from-tariffs-even-if-this-faded-port-town-doesnt/2018/03/02/. But what about those who buy steel and aluminum made more expensive by the tariffs? What about Boeing and other aircraft manufacturers who are the fourth largest American exporters, whose products will now be more expensive and less competitive with Airbus, etc.? When steel tariffs were imposed in the year 2002, 200,000 Americans in steel using industries lost their jobs. That is more than the total of around 150,000 workers in the steel industry! “If-the-US-steel-industry-employs-150000-people-then-how-can-imports-threaten-500,000-jobs?”
Subsidizing inefficient industries with tariffs hurts consumers, who will have to pay the higher prices of aluminum beer cans, etc., as well as exporters like Boeing. We will all (except steel and aluminum producers) pay the cost of this increased inefficiency. Commerce secretary Wilbur Ross thinks we should just get over these modest increases in the costs of our purchase of goods that include steel and aluminum for the greater good of American steel and aluminum producers and the 150,000 people who work for them. In case there are children listening I am withholding what I would like to say to Mr. Ross.
Only 2.2% of our steel and aluminum imports come from China while Canada (hardly a security threat to the U.S.) provides 16.1% of our imports of these products: https://www.washingtonpost.com/world/the_americas/canada-top-exporter-of-steel-and-aluminum-to-us-flabbergasted-by-trumps-tariff-proposals/2018/03/02/7c906c2a-1e22-11e8-98f5-ceecfa8741b6_story.html?undefined=&utm_term=.294884487749&wpisrc=nl_headlines&wpmm=1. The rest of the world will not roll over and play dead. The EU is already preparing counter measures to punish American exporters to Europe. “EU-vows-to-hit-back-against-trump-in-trade-war”
Following the end of WWII the world, lead by the U.S., has built up mechanisms for promoting fair trade (first the General Agreement on Trade and Tariffs—GATT—now called the World Trade Organization—WTO). Where countries violate these rules, and China frequently does, they should be addressed via the WTO. American interests, and the world’s interests more generally, are served by strengthening the WTO not weakening it. Trump’s unilateral tariffs do not serve our interests. Not only has he persistently undermined free markets with his misplaced attack on bilateral trade deficits https://wcoats.blog/2017/07/23/the-balance-of-trade/ but he has systematically undermined the WTO and the international rule of law. Please, Mr. President, stop this nonsense before it gets even worse.
Trade wars are never good, and no one wins in the end. Instead we should be enforcing and improving the rules of trade via the WTO, which has helped lift millions of people out of poverty and raised the standard of living of the average person.
Better Gun Control?
The nation morns the senseless murder of 17 mostly young students at Marjory Stoneman Douglas High School in Florida. Everyone would like to find ways to make such attacks less likely in the future. Though we can understand the sentiments of the surviving students demanding “never again”, we know that that is impossible, just as we know that we cannot end death on our highways. In 2016 37,461 people died in the United States in car accidents while 15,094 died from guns, of which over 60% were suicides and 383 were from mass shootings.
Many things have been done to make automobiles and roads safer (car deaths per 100,000 dropped from 26.4 in 1969 to between 10 and 11 in recent years) but no one has proposed outlawing cars. What can be done to make America safer from guns?
David Hogg, one of the student survivors of the shooting said on CBS’s Face the Nation: “We’ve seen a government shutdown, we’ve seen tax reform, but nothing to save our children’s lives,…’’ Michael Udine, a county commissioner in Broward County, stated that: “Any politician who is coming to just talk or just to give their thoughts and prayers, that’s not needed,” Udine said. “Thoughts and prayers are not good enough anymore.” “The student activists repeatedly expressed optimism and hope for constructive conversations and changes to U.S. gun laws, “ but at this point the newspapers are not reporting the specifics of what those changes in gun laws should be. “Florida-students-plea-with-congress-its-about-the-guns
“Teenage survivors of the shooting, propelled by their haunting experience, announced the creation of “March For Our Lives” and what they hope will be a huge demonstration in Washington on March 24. On its new website, the group’s mission statement says: ‘Not one more. We cannot allow one more child to be shot at school.’ The more adult Priti Kothari, a child and adolescent psychiatrist based in nearby Boca Raton, stated that “The adolescent brain is searching for meaning, and these funerals offer a way for them to ask, ‘How can I be of service?’ ” Kothari said. “How does this anger turn into something that’s productive?” “Funeral after funeral…” Washington Post. This is the serious, non-partisan question that we are all asking.
E. J. Dione, Jr., presumable an adult, stated that: “ it’s a mark of political corruption when unaccountable cliques block solutions that enjoy broad support and force their selfish interests to prevail over the common good. On gun violence, the United States has become a corrupt failed state.” Mr. Dione’s rant illustrates just who difficult it is to have a serious discussion of this issue. “On-gun-violence-we-are-a-failed-state”
Gun laws must respect the second amendment of our constitution and should actually contribute to reducing gun violence. Thus we should start by examining the evidence on what actually has or might work to reduce gun violence.
Serious studies of the effectiveness of popular control measure have found little evidence that they would or have helped. “Gun-control-solutions-supported-by-experts”. Dan Mitchell has provided a series of articles summarizing some of these studies under the title “another honest liberal debunks gun control.” “Now-there-are-four-another-honest-liberal-debunks-gun-control”
Dan’s most recent in that series (linked above) quotes passages from Leah Libresco’s must-read column in the Washington Post.
“Before I started researching gun deaths, gun-control policy used to frustrate me. I wished the National Rifle Association would stop blocking common-sense gun-control reforms such as banning assault weapons, restricting silencers, shrinking magazine sizes and all the other measures that could make guns less deadly….
My colleagues and I at FiveThirtyEight spent three months analyzing all 33,000 lives ended by guns each year in the United States, and I wound up frustrated in a whole new way. We looked at what interventions might have saved those people, and the case for the policies I’d lobbied for crumbled when I examined the evidence.” “A-cure-for-mass-shootings-doesn’t-exist”
Part of the problem is that most of us don’t understand what differences between weapons are important and what are not. The term “assault weapon” is a meaningless one invented by gun control advocates. There is no coherent definition of such a weapon. The AR-15 used in Florida by Nikolas Cruz is a semi-automatic rifle (it shots one bullet every time you pull the trigger) with pretty much the same fire capacity as most any other hunting rifle. “An-assault-weapon-ban-won’t-stop-mass-shootings”
Maybe more stringent background checks of those wanting to buy guns would reduce the number of dangerous people getting them? Maybe, but will enforcement be rigorous enough? The FBI failed to follow up on trouble signs reported to it about Nikolas Cruz. The Florida mass shooter passed his background check. A waiting period would have made no difference as he bought his AR-15 semiautomatic rifle a year before his attack. “Florida-shooter-Nikolas-Cruz-bought-AR-15-legally” However, most gun deaths in the U.S. are suicides and restricting ownership is correlated with fewer suicides.
It also doesn’t help when politicians lie about the facts. The Washington Post’s fact checker gave Sen. Bernie Sanders four Pinocchios for repeating the lie that because guns can be sold at gun shows without background checks (not true) “Forty percent of the guns in this country are sold without any background checks.” “Though Sanders referred to the “gun show loophole,” not a single person surveyed said they obtained a weapon at a gun show without a background check.” “Bernie-sanders-resurrects-a-zombie-claim-on-gun-sales-without-background-checks” Nor is it true as claimed by former President Obama after the November 27, 2015 Planned Parenthood attack that the U.S. has the worst record of mass shootings. Obama claimed: “I say this every time we’ve got one of these mass shootings: This just doesn’t happen in other countries.” The ten countries with a significantly worse record than the U.S. include Norway, France, Switzerland, Belgium, and Finland. “Comparing-death-rates-from-mass-public-shootings-in-the-us-and-europe”
If none of the restrictions on gun ownership or the types of guns that may be owned have demonstrated effectiveness in reducing gun deaths, especially mass shootings, what can be done that might be more effective? As with medical doctors, the first principle should be DO NO HARM.
One proposition, explored by Jeff Goldberg in the Dec. 2012 issue of The Atlantic, is to encourage a better-armed public to counter shooters. “Today, the number of concealed-carry permits is the highest it’s ever been, at 8 million, and the homicide rate is the lowest it’s been in four decades—less than half what it was 20 years ago.
“It is also illogical for campuses to advertise themselves as “gun-free.” Someone bent on murder is not usually dissuaded by posted anti-gun regulations. Quite the opposite—publicly describing your property as gun-free is analogous to posting a notice on your front door saying your home has no burglar alarm. As it happens, the company that owns the Century 16 Cineplex in Aurora in which 12 people were killed and 70 were injured by one gunman in 2012 had declared the property a gun-free zone.” “The-case-for-more-guns”
A powerful statement was made to a congressional committee by Suzanna Gratia Hupp who watched her parents shot to death by a madman and was angry that the law in Texas had required her to leave her hand gun in her car: https://www.youtube.com/watch?v=M1u0Byq5Qis
We still do not know the specific motive of Nikolas Cruz. But he was clearly emotionally “challenged” for which he had been receiving care. It is not possible to predict when one of the millions of American suffering emotional problems of one sort or another might turn mass murderer. When someone does, the only “remedy” at that moment is to shoot back as Goldberg and Ms. Hupp argue. Dan Mitchell has an excellent discussion and another real life example of this point. “Law-abiding-texans-gun-ownership-and-saving-lives”
What besides self-defense (confronting shooters with a gun) might be done that might offer some prospect of effectiveness?
David French in National Review presents the case for Gun Violence Restraining Orders (GVRO) that can be sought by members of the family or those close to the targeted individual on the bases of evidence (seeing or hearing something). “As with Felons, the dangerously mentally ill, perpetrators of domestic violence — these people have not only demonstrated their unfitness to own a weapon, they’ve been granted due process to contest the charges or claims against them. There is no arbitrary state action. There is no collective punishment. There is, rather, an individual, constitutional state process….” “Gun-control-republicans-consider-GVRO”
Another measure that builds on the same legal foundation of due process has been introduced by Republican Senator Jeff Flack and Democratic Senator Martin Heinrich. The bill would ensure that anyone convicted of domestic violence in military court couldn’t legally purchase a firearm, thus matching the existing prohibition for anyone so convicted in a civil court. “Flake-heinrich-introduce-bill-to-permanently-close-gun-loophole-used-by-texas-shooter” If neither of these measure make much of a positive contribution to reducing gun violence, at least they DO NO HARM.
Those who grow up in gun homes normally are taught to respect and use guns carefully. But are there other messages that might go in the other direction that we should be concerned about?
Mass shootings by young adults or children have a quite remarkable common theme that began appearing in the late 1980’s. Children shooting other children began to increase and it was almost always in the head. Columbine was the first schoolyard mass shooting. Almost all of the victims were shot in the head. Shootings by children at schools or anywhere else were exceedingly rare until the introduction of first-person shooter video games. “Video-games-desensitize-to-real-violence”
The above and subsequent studies argued that the first person shooter video games greatly desensitized the player to violence. While that, in and of itself is a problem, the effect is more profound on those with a spectrum of mental disorders. The impact is especially profound in those children with disassociative disorders as they are mentally able to disconnect their actions from the consequences.
The same studies on what creates or nurtures addictive behavior are being used by the scientists behind game makers to create just such experiences in video games. Those with some forms of mental disorders, such as disassociative disorders, can lose themselves in a video gaming world.
It is note worthy that in most first person shooter video games you earn the most points with headshots. As we all know guns do not cause violence – people do. And creating games that foster and nurture violent dissociative behavior in people and especially children can have real, quite undesirable consequences. Parents beware.
In many respects our problem with mass murderers is similar to our problem with highway deaths. It is not practical to ban cars any more than to ban guns for both legal and practical reasons. We are left looking for practical ways to diminish or mitigate the risks without throwing out the baby with the bath water. “Yes-this-is-a-good-time-to-talk-about-gun violence”
Warren's space 