rojeee

Remember that an increase in M1 doesn't mean "more money for everyone"! It just means more reserves for banks.

I think the key thing here is to look at is increase of bank deposits (I.e. money for you and me). That is M2 MINUS central bank reserves and notes and coins in circulation. If you look at this you'll see that bank deposits have only increased modestly despite the large increase in M1. From this you can infer that the FED's "money printing" isn't really affecting Main Street very much. I.e. currently not causing much inflation.

What's happening? The FED is creating new reserves and using those to buy bonds. The reserves remain in financial institutions and should incentivise banks to lend - or at least that is the theory. Lending is how bank deposits (money for you and me) are created. The reserves which the FED creates to buy bonds (which are assets of commercial banks) doesn't end up in people's Bank accounts (which are liabilities of commercial banks). Instead, the reserves remain sloshing around in the banks.

My view is that money supply is endogenous. That is, new bank deposits are created when new loans are made. Currently, there is not a demand for loans so there won't be a huge increase in the M2 money supply as a result of these FED bond purchases. Perhaps demand might increase in the future, in which case the US will see inflation. I suspect once the economy recovers and inflation (as measured by the FED) increases then they'll start performing open market operations to sell the bonds they bought and thus remove the excess reserves from the financial system.

M1 can _only_ be held by commercial banks. The banks _only_ use this money to settle transactions between themselves and as eligible reserves. The money isn't used to buy stocks or bonds or whatever. The purpose of an increase in M1 money supply is to incentivise the commercial banks to lend more.

It's not the case that some person has more money because M1 has gone up! Instead, what happens is that as the banks are more willing to lend, people will be able to get credit easier, so more people borrow and that's how money that you and I can use (I assume hardly anyone uses notes and coins anymore) enters the economy. If the banks don't lend because there is no demand for credit, then the increase in M1 has little to no impact on the aggregate money supply. You can see that M1 increased by 25% over the year. Bank deposits only increased by 15% over the year, implying that the increase in M1 didn't have as much as an effect on bank credit as you might imagine.

> The monetary base grew by 25% and velocity of money is approaching 1.0. That isn't small, someone has an insane amount of money staring them in the face and they've done nothing to justify it.

Remember that when the FED conducts open market operations to buy securities, what they are doing is swapping central bank reserves for securities. Only banks can participate in this process because only banks can hold central bank reserves. That money doesn't necessarily filter down to us and if it does, it takes a while. I guess that's where the Cantillion effect comes in, apparently. But banks don't just take that money and buy stocks... That's not how it works. The reserves sit on their balance sheet and they are used to settle transactions between banks. The reserves are also make up part of the bank's eligible capital. It is expected that banks awash in central bank reserves are better placed to lend/create credit because of the more favourable financial position and in this chart [0] you can see that M2 money supply (central bank reserves + bank deposits) has increased since the FED start conducting open market operations, which is the desired effect. The M2 money supply has increased because more people like you and me (and companies) are borrowing money to finance purchases.

edit: Amusingly, just realised that I made a logic error in the last sentence above. M2 includes M1 so presumably much of the increase in that chart is an increase in M1. This link [1] better shows what is going on. You can see the increase in M1 but there is also an increase in M2 throughout 2020. You can calculate this yourself by subtracting the number in the M1 column from the number in the M2 column and observe a modest increase - about 15% from Jan 2020 to December 2020. Presumably this is because of the sustained low short term rates and the increase in the M1 money supply via quantitative easing.

[0] https://fred.stlouisfed.org/series/M2

[1] https://www.federalreserve.gov/releases/h6/current/default.h...

Well said. Indeed, there are many people who don't understand how inflation manifests. Just because the FED printed a bunch of dollars _doesn't_ mean there will be rampant inflation! Yes, increasing the outside/base money supply is a prerequisite to inflation but not an immediate cause. Reality is that most money is actually bank credit and if commercial/shadow banks don't significantly increase lending as a result of the FED's open market operations, then there won't be much impact on inflation. Indeed, US inflation as currently measured is around 1-2%. At the moment the dollar is _strengthening_ vs other fiat currencies which is the last thing we need. A weaker dollar would be in everyone's interest as it will help to reverse structural trade defecits.

Sure there might be some disagreements around the nature of the inflation measure (e.g. it doesn't include house prices) but that's another discussion.

Edit: It's worth noting that money supply is believed to be mostly endogenous these days. The monetary system we currently have is a credit based system in that all money is someone's liability and the supply of this money is mostly based upon the demand for credit. The system is quite complicated. The FED uses short term interest rates to influence the demand for credit. Low rates rates make credit creation more likely (stimulates demand). Whereas high rates decrease the amount of credit creation (curtails demand). Furthermore, if people pay back loans then we experience deflation. If there is not enough credit then we experience deflation. If there is too much credit, we get inflation. Here I'm assuming that the credit is spent. I.e. velocity increases. Indeed, people don't borrow and leave the money in their accounts. Instead, they use it to make purchases! General inflation or inflation in a particular market becomes particularly acute if credit is not allocated appropriately. For example during the housing bubble which popped in 2008. The issue here was underwriting standards were not fit for purpose.

This is true! Sorry, I’m a bit of a nerd about this stuff. I was just making the point that, in accounting terms, the banks don’t invest money... they create and destroy it! Loan creation goes hand in hand with deposit creation and is a “grossing up” of the bank’s balance sheet. When the bank grants a loan, it also creates a deposit. So whilst I know it’s nice to think of “my money at the bank”, the reality is that your “money at the bank” is actually an IOU/deposit/debt that the bank previously created (when they granted a loan) and will, at some point, be destroyed when you or someone else pays back loan capital.

Reason being is that I somewhat take issue with economists of the Austrian school or “full reserve bankers” (eg author of OPs article) who fundamentally don’t understand what banks are and how they work. It’s incredible really, because if they took the time to write out the accounting journals for loan creation and destruction then they would, in a single moment, realise that much of what they advocate is in fact complete nonsense. Because, ultimately, banks don’t lend out base money... so they can’t possibly counterfeit it (as Mises claims). Banks also don’t have a special privilege to create “money”/IOUs - we can all do it and we do it all the time, It’s just that the bank’s money is widely accepted and ours is not.

Not to be pedantic but central banks can and do become insolvent! E.g. developing nations with dollar denominated debts. Central bankers will tell you they can’t go bankrupt but of course they have to say this as the whole system is based upon confidence and trust.

Indeed, there have been certain periods of time where privately issued money / bank deposits were “safer” than central bank or government issued currency. Also keep in mind that bank deposits are not a promise to pay base money as people mistakenly believe. It’s just that commercial banks are a market maker between their money and the government/base money and it just so happens that the exchange rate is 1:1 unless the solvency of the bank, central bank or government is brought into question. Commercial banks also don’t “invest money”. Instead, they are in the business of swapping IOUs. When you get a loan, you swap your IOU (a debt from you to the bank - the bank’s asset) for the bank’s IOU (debt from the bank to you - bank’s liability). You do this because the bank IOU is readily accepted by everyone and yours isn’t. If you just have a deposit, you get it by swapping the IOU from another bank or an IOU from the government (notes and coins) for an IOU with the bank you hold a deposit with. Note that the deposit is not your money either.

That’s good to hear! How do you envision it working?

Thanks for that - very interesting. I think it is possible to create a pure credit/IOU monetary system and I’m working on it at the moment. Though reality is that I spend most of the time reading economics journals... The key is to track reputation and enable the minimum necessary amount of transparency. Eg instead of a single currency like BTC or ETH, everyone becomes an issuer and then the problem then becomes how to efficiently make a market in these currencies by swapping IOUs - essentially what banks do today but in a decentralised way. Furthermore, I think it can be done without a blockchain... Simple tech will do. For one who currently works in the blockchain space - I really like the idea of not using blockchain :)

If you are interested, it’s worth reading the articles “what is money” and “the credit theory of money” by Alfred Mitchell-Innes. He maintained that “credit and credit alone is money” and I mostly agree with him. Another good paper to read is “money is memory”. Oh and Knut Wisksell “interest and prices” is also very good. A lot of literature has been written on pure credit economies but it is difficult to find as it wasn’t ever a popular school of thought. I’m hoping for a revival though!

Interesting. Do you have any links to some of the new IOU market maker projects? Cheers

Indeed, I'm surprised that large corporations are buying in at this point. I wonder what their corporate social responsibility departments think about it...?

Tether's market cap is the largest of all the stable coins and it's unclear that Tether's liabilities are sufficiently collateralised and they can't/won't prove that they are. That's a problem for a product where the unique selling point is "stability".

I've been in the Bitcoin/crypto space since 2009 and been through it all. My opinion now is that Bitcoin is an accidental Ponzi scheme - it started out with good intentions but got hijacked by tw*ts. Most of the discourse in the crypto community now looks like a carbon copy of any spread betting / gambling / day trading community. However, instead of a centralised market, there is a Rube Goldberg machine that provides the market infrastructure.

I signed up to the mailing list (blogging for developers) and it's really been helpful for me over the past week or so! Would definitely recommend it.

I used to be a data analyst in a fraud investigation team and we would often use Benford’s Law to figure out whether a nominal account in a general ledger contained dodgy transactions. It’s a useful tool but needs to be used in the context of a wider investigation. If the graphs in the image are accurate then that’s a pretty big red flag that warrants investigation but I don’t know exactly the context of the graphs or how they were created - that’s pretty important to ascertain. But yes... definitely worth further further investigation!

Have you looked at revenue based finance? Basically: you can sell your receivables at a discount for upfront cash. No dilution. Plug: I'm a founder of www.foldcap.com - UK based and looking to do our first deal in the next couple of months. Good luck!

Where I work it the software doesn’t interfere with development tools but still, I don’t like the idea of it. Luckily they only have such monitoring software for Mac OS and Windows, so the solution is to use Linux (for now). If your company allows you to use any OS then I would recommend switching away from Mac OS/Windows... I guess there are trade-offs though, most Linux distros are not as polished as Mac OS, for instance.

Sorry about the slow reply here.

With the virtual credit cards, you also need a billing address in most cases. I guess that can be the same for all customers. Perhaps they also get an email address with it and that handles all the receipts/invoices. Alternatively they can all be sent to some service/app where they can be sorted/managed.

I would like to use something like this if I'm not keen to share my card details with a company e.g. because I know they've had a data breach in the past or something. How much would I be willing to pay for it? Probably not much to be honest, maybe a few quid?

Must admit, I like the acquiring idea more.

On the merchant acquiring stuff I can see the attraction for merchants but what's the incentive for customers? I guess there has to be some other benefit... e.g. offering credit on decent terms to customers but here you are competing with credit cards? Or maybe offer discounts for paying using this service. Maybe you can offer a discount AND credit. I guess you'd need to find out how price sensitive the merchants and customers are. Experience suggests that small merchants are price sensitive to acquiring fees as they have minimum spend limits etc. Large retailers e.g. Tesco don't care so much.... though I was buying a car at the weekend and the dealer stopped accepting AMEX due to the acquiring fees... I guess they were cutting costs in the face of Corona Virus recession.

As you note, perhaps the app could collate all your receipts and warranties - could be useful. Itemised receipts would be particularly useful for some.

I imagine a company which offers this service (in the EU/UK) would be an open banking payment services provider. That is, customers add their bank account details and permit the service to "push" payments directly to retailers when they buy something via an API. Of course, customers would manually approve each payment via the app or whathaveyou.

Challenges: 1) how do you handle off-line payments? 2) how do you handle disputes?

On the history of merchant acquiring: maybe this helps: https://blog.thesharmas.org/2020/06/05/history-merchant-acqu...

Nice list. In particular, I think consolidation of payments infrastructure and the anonymous credit card ideas are great though both are some what opposed to each other! Merchant acquiring doesn’t need to exist anymore... Just look at the amount of small shops who refuse to accept AMEX or small card payments - they are price sensitive to acquiring fees and some of the savings could be offered to customers an incentives. As you note, network effect is the hard part but I’m sure there’s a way. On anonymous payments, I think a credit or debit card like thing that offered anonymity online when buying things would be quite attractive. I would use it. In the EU, you could implement it with open banking and there are various services which already provide virtual card numbers. Problem would be dealing with all the payments regulations.

I think this is a great idea and economists have been looking at this for nearly a century now, for example, there is Knut Wicksell's "Pure Credit Economy" from 1919 but not much progress has been made.

There's a nice paper you can read called "money is memory" which argues that keeping track of past transactions is actually a more effective way of allocating resources than using money/tokens. I've been figuring out how such a system would work in practice.

I believe that when we can more effectively and fairly manage reputation in the context of transactions (I'm not advocating some horrid "social credit" system that the Chinese government foisted on the country), then we won't need money anymore. That means no central banks as monopoly issuer of currency and I think the World will be a better place because of it.

Nice intuition because it already exists in the UK for freelancers. Combined banking, accounting, auto tax return: https://getcoconut.com

This is normal and doesn’t shed any light on the matter. Companies/individuals routinely hold cash in accounts they don’t control. For example; Client money accounts and collateral/margin accounts. Either way, the auditors would have known what the arrangements were and factored it into their opinion. Even the credit risk of the bank holding the nostro accounts is taken into consideration.

Seems to me like Wirecard were running a large scale accounting fraud and EY were not “professionally sceptical” enough to see it.

What’s not clear to me is whether any of the missing cash is client money or not. If it is then that’s a bit of a disaster.

Unfortunately, it actually takes _months_ to send bank confirmations and receive all the replies. Mad, I know but that’s the way it worked when I used to do it. The process involves sending snail mail to the banks who take ages to respond with the confirm response. Especially so because all auditors are sending them at the same time because it’s year end.

There are some web platforms to help speed things up but most were and maybe still are rubbish.

I used to work at EY in banking & capital markets audit - before I went into engineering - and everyone learns that if there is one thing, ONE THING!!! that the auditor should always do, it is to send bank confirmation letters. You get a list of all the banks where accounts are held and send them a letter asking for confirmation of the balance. This proves existence of the balances and helps with completeness as sometimes they send back balances you didn’t know about from the accounts! If the letters don’t come back, you chase them because, in my experience, the partner would not sign off unless all cash was accounted for. There was always a significant risk associated with cash so providing a clear audit opinion in the absence of cash confirms is not a very smart move. Other procedures include checking reconciliations and “cut off” to make sure cash swept from one account to another is counted and / or not double counted. We would also get literally all the bank statements too and some poor graduate would have to “substantively audit” them. So yes... We used to do a lot of work in this area.

What happened with Wirecard? Who knows?! Seems like the team didn’t do their job properly because in my experience, it’s fairly easy to spot missing cash. And 1.9 billion of it...! The article states that EY didn’t “verify cash balances”... I’m not sure what that means - “verify” is a dirty word in audit because it’s not specific enough. I find it hard to believe they didn’t send bank confirms but if they didn’t then that’s an unforgivable mistake.

It’s also worth noting that auditors are not responsible for detecting fraud but clearly if something odd is going on and they find it, then it will be raised. In my experience most wrong things that we asked our clients to adjust were due to incompetence or over valuing illiquid securities.

Sounds like you made the right decision! When we started the project four years ago, coroutines were still quite experimental so wasn't a feasible option for us. If I were to consider all the trade-offs, moving to coroutines not something we should do now as I believe it would yield only marginal benefits but would break compatibility for customers.

One of the main problems with the Quasar/coroutine based model is that the semantics are quite hard to undersand for developers who are not very familiar with concurrency. They write code that _looks_ synchronous but is actually async. We get a lot of support tickets claiming there's a bug in the platform when the reality is that they don't understand what's going on. I sympathise with them and we probably need to do a better job of hiding the complexities. As you note, the bytecode instrumentation is a bit of a pain but not only that... It also has quite a big impact on performance!

There has been talk of doing some experiments with Akka and that's something I'm interested in exploring. But I think, hypothetically, that writing parts of the platform again in Erlang/OTP would yield huge productivity benefits... gen_fsm offers exactly what we need out of the box. From the little playing around I've done with Erlang, it feels like you can get a small, competent team, up to speed fairly quickly.

Fair point - all this is true.

As a counter-point, I've been working on a platform for the last few years which uses Kotlin and Quasar in production. Quasar was cool at first but now it's just a nightmare and I wish we never opted to use it. It leaks abstractions all over the place with @Suspendable annotations and users of the platform find the quasar related errors super confusing. Debugging is also very difficult because of Quasar. On the other hand, Kotlin is great!

If I could turn back the time, I'd build the messaging/async workflow part of the platform using Erlang. I've mentioned this to a few people but they all think I'm mad... "Erlang... are you on drugs?!", which is disappointing because it's literally perfect for our use case.

Perry Mehrling - The Money View. He has a course on coursera [1]. It’s the best explanation I’ve seen of how the economy works. It’s a bank centric view and focuses on balance sheets for analysis. Highly recommend it.

[1] https://www.coursera.org/lecture/money-banking/a-money-view-...