Finance Basic To Advance Level Knowledge

  My latest Macro Musings podcast is with Will Luther , assistant professor of economics at Kenyon College and an adjunct scholar with Cato's Center for Monetary and Financial Alternatives. Will joins me to discuss the origins of money and its implications for new cryptocurrencies today. It was a fascinating conversation throughout on a very important topic.  There are two theories for the origin of money. The first theory, the state theory of money, posits governments are needed to provide credibility for money as a medium of exchange. The second theory, the spontaneous order theory, argues market actors will arrive at an acceptable medium of exchange on their own. Drawing on historical examples--including unofficial dollarization, the Somalia Shilling, and Russian Vodka--Will argues that both theories can be useful in explaining the emergence of money depending on place and time. We then turn to how these theories shed light on the rise of cryptocurrencies and bl...

Scott Sumner is right. Brexit is the biggest global monetary shock since 2008. This could be the tipping point that turns the existing global slowdown of 2016 into a global recession. Here is why. First, Brexit is adding further strength to an already overvalued dollar. The trade weighted dollar had appreciated roughly 25 percent between mid-2015 and early-2016. That is a very sharp increase in so short a time. It has come down some, but not much as seen in the figure below (red line): The figure also shows that this sudden increase in the dollar is closely tied to the policy divergence between the Fed and the ECB (blue line). That is, as the Fed began talking up interest rate hikes in mid-2014 the ECB was talking up the easing of monetary policy. The rise in the blue line shows this policy divergence 1 Brexit is now adding fuel to this dollar fire. The dollar has appreciated almost 4 percent since the Brexit fate became clear last evening, as seen in the figure ...

The Brexit vote is upon us and most polls show a race that is too close to call. Much ink has been spilled debating this historic vote as well as trying to explain why it emerged in the first place. Most of the analysis on the latter point has been good, but I do think there is something that has been missing in these discussions. And that is the role the ECB's monetary policy played in helping bring about this referendum on Great Britain's future in the European Union (EU).    Most discussions on the causes of the Brexit vote point to concerns over immigration, burdensome EU regulations, and a general desire for more British sovereignty. These issues are important and confirmed by polling , but I see them as a proximate cause rather than the ultimate reason for the Brexit referendum. For, as The Economist notes, the UK has always been a "semi-detached member of the EU" and never has fully bought into it. This tendency was seen way back in the 1950s when the U...

My latest Macro Musing podcast is with Bob Hetzel. Bob is a senior economist and research advisor at the Richmond Federal Reserve Bank where he has worked since 1975. He joined me to discuss the rise of monetarism and how Milton Friedman, his dissertation advisor, shaped his thinking on macroeconomics. Monetarism challenged the conventional Keynesian consensus in the 1970s and caused Keynesians to reformulate their views into a new doctrine called, “New Keynesianism.” However, in the wake of the Great Recession, “Old Keynesianism” has made a comeback and Bob shares his thoughts on it. Bob also holds that the standard explanations of the Great Recession--household deleveraging and  the financial crisis--are lacking. He has argued in a published paper and in a  book that poor Fed policy in 2008 turned what would have been an ordinary recession into the Great Recession. That is a remarkable view for a Fed economist! We discuss this view of the Great Recession. You c...

So yields on Germany's 10-year government bonds have gone negative. Put differently, investors are now paying the German government to take and hold their funds for ten years!   Many are blaming this development on Brexit fears and the ECB's bond buying program. While this is a reasonable proximate explanation, the recent decline is part of a far bigger story: interest rates on safe assets across the world have been declining since 2008. This can be seen in the figure below. This downward march of safe yields is a consequence of the safe asset shortage problem . What we are seeing in Germany is just the latest manifestation of it. What the above figure should make clear is that this safe asset shortage problem has been going on outside of QE programs and before central banks started doing negative interest rates. So don't blame central banks for the low interest rates. 1 This downward march of safe yields across the globe is a big deal. It indicates the globa...

It is 'recession watch' time again. The May jobs report seems to have awakened the dormant recession concerns that emerged earlier in the year. See, for example,  Josh Zumbrun , Jeff Spros , Edward Harrison , and  Sam Ro . I was one of those observers who was concerned about a recession in early 2016. But unlike some, I never stopped worrying about it for one big reason: the global reach of Fed policy. It's tightening cycle, which began in mid-2014, has been  putting a choke hold on the global economy and this, in turn, has been straining the U.S. economy. This is something the FOMC should keep in mind as it meets this week. Here is how this has unfolded. First, the Fed began talking up interest rate hikes in earnest in mid-2014. We know this from the 1-year ahead fed fund future rate, which start rising in June 2014 . One can also see this by looking to the 1-year treasury yield, which provides as an approximate guide to where interest rates are expected, on av...

My latest Macro Musings podcast is with Lars Christensen, an internationally renowned Danish economist and Senior Fellow at London’s Adam Smith Institute. Lars joined me to discuss the Eurozone crisis and the current challenges facing the international money system. One of the key questions we covered is whether Europe was an optimal currency region to begin with and whether it can survive in its current form. We also spent time considering the role the ECB played in making the crisis worse with its tightening of monetary policy in 2008 and 2011. Finally, we examine the role the Fed plays internationally through its influence on the “dollar bloc” countries--those countries that either use explicitly or implicitly peg to the U.S. dollar--and global monetary conditions more generally. It was a great conversation and readers can learn more about Lars and some of the topics by looking at the links below. You can listen to the podcast via iTunes or Sound Cloud , or throug...

  My latest Macro Musings podcast is with Josh Hendrickson, assistant professor of economics at the University of Mississippi. Josh and I sit down for a wonky and fascinating discussion of the role of money in monetary economics.  The standard New Keynesian view is that money does not matter for monetary policy. Josh pushes back against this view by making the case that money does still matter, both empirically and theoretically. Empirically, he points to the run on the shadow banking system and studies using the Divisia monetary measures that show money still matters. On the theoretical side, he notes that the latest innovations with monetary search models put money's transaction role front and central in the business cycle. He sees this approach as a much more promising way to understand money than the standard New Keynesian view.  You can listen to the podcast via iTunes or Sound Cloud , or through the embedded player. And remember to subscribe since more g...