Lost in amongst this week’s geopolitical ructions concerning Russia and Donald Trump were two notable pieces of commentary released by the Bank for International Settlements.
The first was publication of their March Quarterly Review, in which Claudio Borio (Head of the Monetary and Economic Department) declared ‘Volatility is Back‘ in the wake of February’s equity market drop.
- We do not know how long it will stay. But it is back, and some volatility is healthy. There are few things more insidious in markets than the illusion of permanent calm. As experience indicates, that illusion can set the stage for some of the largest and most damaging losses.
Borio went on to comment that the volatility witnessed a month ago would likely not be an isolated occurrence.
- Financial markets and the global economy are sailing in uncharted waters. After an unusually long period of unusually low interest rates and accommodating monetary conditions, it would be unrealistic to expect no further market ructions.
As with other prominent central bankers, Borio gave no indication that the current ‘normalisation of policy‘ would relent at the sign of sustained market turbulence. Instead, the focus was on the ‘delicate task‘ facing banks in balancing monetary policy with an increase in overall debt levels since the introduction of stimulus measures a decade ago. A troubling factor, according to Borio, was the strengthening of Donald Trump’s protectionist outlook. But even this does not appear to be a deterrent from ‘normalising‘ policy:
- The most recent protectionist rhetoric complicates matters further. But policymakers need not fear volatility as such. Along the normalisation path, some volatility can be their friend.
It should be noted that in the BIS’ December Quarterly Review, they actively questioned the future sustainability of equity and bond markets amidst rising interest rates and the use of stock buybacks as a vehicle for corporations to artificially inflate the price of their own stock. Two months on from that report, the Dow Jones in New York suffered two record point losses which were largely put down to rising bond yields and worries over heightened inflation. This downturn came as the Federal Reserve were offloading billions of dollars worth of treasury securities from their balance sheet.
By declaring volatility to be back, the BIS appears to be preparing traders and the public alike for further imminent bouts of economic instability.
The Second significant commentary released by the bank was a report from the Committee on Payments and Market Infrastructures (CPMI) and the Markets Committee titled, ‘Central bank digital currencies‘. In a press release, the BIS said that,
- central banks must carefully weigh the implications for financial stability and monetary policy of issuing digital currencies available to the general public, although the underlying technologies might hold more promise for wholesale payments, clearing and settlements.
The report was released prior to a G20 meeting in Buenos Aires on March 19th and 20th, and centered on two primary types of prospective digital central bank currency: a wholesale currency specially for financial institutions, and a general purpose currency designed for the public. The overall consensus was that such an evolution in how money is provided still requires ‘careful consideration‘. Benoit Coeure, who is chair of the CPMI, said:
- Central bank digital currencies could help make settling trades of securities and foreign exchange more efficient in the future. But more work and experimentation would be needed to explore these benefits.
As previously communicated by central bankers such as Mark Carney and Jens Weidmann, concerns were raised over the dangers of money laundering and terrorism in relation to the introduction of a digital form of currency. Bitcoin is regularly cited as an example of an unregulated asset that could be used for nefarious purposes.
In the Executive Summary of the report, this was expanded on further:
- An anonymous general purpose CBDC (central bank digital currency) would raise further concerns and challenges. Although it is unlikely that such a CBDC would be considered, it would not necessarily be limited to retail payments and it could become widely used globally, including for illegal transactions.
- That said, compared with the current situation, a non-anonymous CBDC could allow for digital records and traces, which could improve the application of rules aimed at AML (anti-money laundering)/ CFT (counter terrorism financing).
The traceability of a central bank issued digital currency has obvious advantages to global banking institutions in that they would be able to track how the currency is being used and by whom. As cash transactions cannot be directly traced, it is perhaps little coincidence that there is a gradual move afoot to eliminate specific denominations of physical money.
In 2016 the ECB announced the end of production and issuance of the €500 banknote over concerns that it could ‘facilitate illicit activities‘. Elsewhere, Canada, Australia, Brazil and Sweden have been discontinuing low denomination coins.
At the Government’s Spring Statement presentation this week, it was announced that the treasury would be undertaking a consultation on whether to phase out 1p and 2p coins. As the BBC reported:
- It also questions the validity of the £50 note.
The government have since backed down on eliminating copper coinage from circulation after a negative reaction in the media. But so far there is no indication that they will be doing the same in regards to the £50 note. It is highly likely that the UK will now follow the ECB in abolishing it’s largest denomination, citing the risks of money laundering, illicit usage and cost savings as prime motivators in their decision.
With consumers favouring the convenience of cashless forms of payment over physical money, eliminating a denomination that has been in circulation since 1725 will be met with little to no resistance. As people become less attached to holding cash, how long before a consensus begins to form on eliminating other denominations?
- The prime minister’s spokesman said there were “no proposals to scrap 1 or 2p coins”.
- The Treasury has been consulting on the mix of coins in circulation as card and digital payments gain popularity.
- Theresa May’s spokesman said: “The consultation’s call for evidence was simply intended to help the government better understand the role of cash and digital payments.
- “One of the elements was whether the denominational mix of coins meets the public need. From the early reaction it looks as if it does.”
- Many countries including Australia, Brazil, Canada and Sweden have ditched their low denomination coins.
- All 3,000 staff at Toys R US are set to lose their jobs after administrators for the stricken toy chain admitted defeat in their efforts to find a buyer.
- Moorfields, appointed to oversee the UK business after its collapse a fortnight ago, will wind down all 100 stores over the next six weeks though it did not rule out the possibility of bid interest for some of the sites.
- The White House reportedly is looking at imposing up to $60 billion in tariffs in Chinese goods, according to Reuters. The tariffs would be targeted at technology, telecommunications and other products. President Trump has stepped up efforts to reduce the large U.S. trade deficit by targeting what he calls unfair practices of other countries. The administration recently announced broad tariffs on imported steel.
CNBC: Japan will urge G20 to step up on preventing cryptocurrencies for money laundering, says government official
- Japan will urge its G20 counterparts at a meeting next week to beef up efforts to prevent cryptocurrencies from being used for money laundering, a government official with direct knowledge of the matter said.
- But the prospects for the G20 finance leaders to agree on specific global rules and mention them in a joint communique are low, given differences in each country’s approach, the official said, a view echoed by another official involved in G20 talks.
- China, Canada and Hong Kong are among the economies most at risk of a banking crisis, according to early-warning indicators compiled by the Bank for International Settlements.
- Canada — whose economy grew last year at the fastest pace since 2011 — was flagged thanks to its households’ maxed-out credit cards and high debt levels in the wider economy. Household borrowing is also seen as a risk factor for China and Hong Kong, according to the study.
- When calculated as a percentage of GDP, the total debt of America’s non-financial corporations reached 73.3% in the second quarter of 2017 (the latest available data). This is a record high.
- How quickly debt levels turn into a problem depends on monetary policy and how the economy fares. In a benign scenario, in which corporate earnings rise across the board, and the Federal Reserve raises interest rates at a slow and predictable pace, companies’ debt ratios may even fall, for now. But if more worrying scenarios—say, a trade war, or significantly faster-than-expected monetary tightening—come to pass, more indebted companies may find their luck running out. A binge, after all, never lasts forever.
- “We currently see inflation converging towards our aim over the medium term, and we are more confident than in the past this convergence will come to pass,” Draghi said at an event in Frankfurt.
- “But we still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.”
- U.S. consumer prices continued to firm in February, indicating inflation is creeping up toward the Federal Reserve’s target without the kind of breakout that would warrant a faster pace of interest-rate hikes.
- Both the main consumer price index and the core gauge, which excludes food and energy, rose 0.2 percent from January, matching the median estimates of economists, a Labor Department report showed Tuesday. The CPI was up 2.2 percent in the 12 months through February, compared with 2.1 percent in January, while the core index increased 1.8 percent from a year earlier for a third month.