Global Recession ahead....

Check out this article on the indicators implying that a global recession is happening sooner or later.

Have the lessons from the Great Recession been incorporated. I don't think so because it is business as usual with big capital.

1st US rate cut in a decade.

On 31 July 2018 the US Fed cut interest rates for the first time in a decade. Federal Reserve Chairman Jerome Powell said the first interest rate cut since the financial crisis was to “insure against downside risks.” The rate cut was a quarter basis points.

This year the Fed's interest rate expectations have changed from a steady tightening path to a holding pattern and now with this interest rate cut decision more cuts are expected before the year ends. Indeed the US interest rate futures have priced in three rate cuts this year - in July, September and December.

A lot of confounding signals are beneath the Fed's decision. The Fed's Independence recently has been under a lot of spotlight because of the political pressure from the Trump adminstration to cut rates. The Independence of the Fed has been the corner stone of the recent mainstream monetary economic thinking. The former Fed Chairs of the Board of Governor's including the likes of Bernanke, Yellen, Greenspan and Volker have penned an opinion piece in the Wall Street Journal articulating the importance of maintaining the Independence of the Fed. The Independence interpreted as the absence of political interference in the operation of monetary policy.

Normally an interest rate cut is initiated to stimulate a slackening economic environment. With the lowest US unemployment in 50 years and Wall Street at a record high, one wouldn't expect a rate cut at this stage but a counter argument can be made when considering some forward-looking economic indicators of the US which have recently dipped indicating that maybe a recession is imminent now than ever. In some OECD countries such as Germany, the GDP growth is now approaching the negative territory signally that a downturn is catching up on the industrially developed countries. The interest rate yield curve inversion is also indicating that a recession is imminent. An inverted yield curve means that investors expect interest rates to fall, which typically happens in an economic downturn. It usually tends to take some time for example 12 to 18 months.  Therefore the downside risks to future growth rather than the economy being already weak as indicated above influenced the Fed's decision.

An interest rate cut will raise the prices of various financial assets. This impact is noticeable especially when there is a policy transmission channel which impacts on the pricing of these assets. Therefore it is important for there to be a convergence between policy rates and the market rates. The US government can use the occurrence of low interest rates to raise cheap debt as they would be able to lock in these rates into the debt. The impact of the Fed decision on emerging countries and Africa could be long term investment portfolio reallocation in most cases to their detriment together with cutbacks in grants and aid in anticipation of a recession. It's been over a decade since the last global recession. On average recessions occur roughly after every 7 years hence this cycle post the last recession has been comparatively longer. This line of thinking assumes that the phenomena of boom and bust is still in existence.

The severity of the last Great Recession should inspire policy makers the world over to answer the question of whether lessons learnt of that crisis have been incorporated in how they manage macroeconomic cycles. It is important that macroeconomic policy making is not riddled with the politics and intellectual flaws of yester years.

Monetary Standard and Monetary System Part 2

This article follows from this post which compared the workable definitions of Monetary Standard and Monetary System. My post was based on another post by Mirza Saab. My post is shown below:

Are the words Monetary Standard and Monetary System similar? Its actually a good question I often asked myself until not longer ago I came to a conclusion that they are synonyms but after reading thisarticleby Mirza Saab, I have to a different conclusion to the fact that they are slightly different.
This is important for me because it is a topic I am very much interested in and the analysis proffered by Saab is quite logical. While in common parlance monetary standard is associated by using an object as a unit of account. In most uses of the word, its meaning ends there. With the word monetary system, the regulatorial aspect of the government or other agency comes in, in its definition. Such an approach is logical for me.

The post by Saab is as follows:

MONETARY STANDARD :-
Monetary standard is the unit of accountby which we measure the value of all kinds goods and services. The monetary standard or standard money can be gold, silver or paper. If the unit of account is gold we will say that it is a gold standard.

MONETARY SYSTEM :-
Monetary system includes in its scope the designation of the unit of account plus the whole Govt. Mechanism established to regulate the creation of money and to control its quality in circulation. The monetary system is designed in every country according thedomesticand international requirements.

1. COMMODITY STANDARD :-
A commodity standard is that monetary unit which has its standard value equal to the value of a designated quantity of a particular commodity or of a group of commodities. The commodity standard can be established in gold or silver or in both.

2. FIAT STANDARD :-
According to Kent, "A monetary system in which the value or purchasing power of the monetary unit is not kept equal to the value of a specified quantity particular commodity or of a group of a commodities".It has three distinguished features.
i. It has little or no value within itself as a commodity.
ii. It is not redeemable in any commodity in quantity substantially equal value to its own stated value.
iii. Its purchasing power per unit is not maintained at par with that of any other commodity unit.
Fiat money is usually a paper money or credit money.

3. MONO METALLISM :-
When the value of monetary unit is fixed and maintained in terms of one standard metal only, it is called monometallism. If the standard of money unit is gold the country is said to have a gold standard. If the unit of money is silver then it will be called silver standard.

4. SILVER STANDARD :-
Under silver standard the monetary unit is given fixed quantity of silver and all other forms of money are maintained at par by making it convertible into silver at the fixed rate. Silver is allowed to move freely inside and outside the country.

I "promise" to pay the bearer on demand!

The statement on Zimbabwe (and many other countries) paper money which says "I promise to pay the bearer on demand" is actually a paradox. This is so, because if you present paper money (and or coins) to the bank expecting to be paid on demand you actually receive another set of paper money in return (if not the same type of notes) of equal value.

Don't expect to be paid in gold, foreign currency or some type of commodity, even if the country is operating on the gold standard or under a currency board. So then why put such a statement on paper money? In my opinion, I suspect the statement acts as a device enhancing the "legal tender" aspect of the money in question (moreso because it is signed by the Central Bank Governor).

Let's assume you get paid "on demand" by the central bank. Will the statement also apply on coins also considering that the statement appears on notes only? It's a tricky question. Because paying "on demand" is not practiced in reality, it is speculative to infer whether coins will also be paid "on demand." Maybe from the outset the statement wasn't intended to mean literally being paid "on demand" hence placing it on coins was not necessary at all.

Central Bank independence

Monetary Standard and Monetary System

Are the words Monetary Standard and Monetary System similar? Its actually a good question I often asked myself until not longer ago I came to a conclusion that they are synonyms but after reading this article by Mirza Saab, I have to a different conclusion to the fact that they are slightly different.

This is important for me because it is a topic I am very much interested in and the analysis proffered by Saab is quite logical. While in common parlance monetary standard is associated by using an object as a unit of account. In most uses of the word, its meaning ends there. With the word monetary system, the regulatorial aspect of the government or other agency comes in, in its definition. Such an approach is logical for me.