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Rising prices in a deflationary environment

SUMMARY Regarding the ongoing extremely loose monetary policy in the United States, Japan and Europe, some observers worry about inherent inflationary dangers. Those worries are ridiculed by others who point to the lasting tendency of declining prices everywhere as reflected in major price indices. Which side is right is difficult to decide:
-          Even in a deflationary environment there are constantly some prices rising, while others fall.
-          The current state of the economy and our economic knowledge does not allow deciding at an early stage, which would enable monetary policy to act adequately, whether the general level of prices has begun to rise persistently.
-          Official price indices are poor early-warning signs. In simply adding up weighted price changes of goods and services for special groups of economic actors they fail to capture the underlying price dynamics in an economy. Hidden price changes and people’s reactions to rising prices further complicate the diagnosis.
-          The calculation of the German consumer price index may serve to illustrate the way in which official statistics account for a changing environment as well as its shortcomings.

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The US debt drama – soap opera or Lehman quality?

Shortly after the US default had been averted on October 16, the S&P 500 closed at an all-time peak of 1,744.50. Alan Wheatley (Reuters) commented enthusiastically:

“If Wall Street’s record high is a signpost, the U.S. economy has every chance of pulling further ahead of a stuttering Europe despite new battles to come in Washington over the government’s budget and debt ceiling.”

Does this mean that all the worries of the past weeks about a “Lehman moment” were nothing but hot air? Is the debacle that we observed nothing more than an episode in an endless soap opera that long ceased to impress markets?

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US-Haushaltsstreit – der Worst Case ist längst Wirklichkeit

Die Welt ist noch einmal davongekommen, so scheint es, nachdem sich in dem US-Haushaltsstreit die Beteiligten auf einen Kompromiss geeinigt haben. Wobei das Ultimatum vom 17. Oktober insofern nie eine unmittelbare Gefahr dargestellt hat, als sich das US-Schatzamt, wie von Goldman Sachs angemerkt,  zwar von diesem Tag an nicht hätte neu verschulden können, aber immer noch zusätzlich zu den täglich hereinkommenden Steuereinnahmen über eine Barreserve von etwa 30 Milliarden Dollar verfügt hätte, die ihm eine weitere Atempause  gewährt hätte. Wie lange jene gereicht hätte, ist angesichts der folgenden Zahlen allerdings fraglich: Bereits am 31. Oktober muss die US-Regierung  60 Milliarden Dollar für Zinsen und Tilgungen aufbringen, am 29. und 30. November sind es zusammen weitere 87 Milliarden (NZZ).

Krise beendet also – wieder einmal. Oder auch nicht: In einem vielbeachteten Beitrag wies  Felix Salmon (Reuters) vor wenigen Tagen darauf hin, dass, unabhängig davon, ob es im US-Senat zu einer Einigung kommt, der Schaden für die Weltwirtschaft und die internationalen Finanzmärkte längst angerichtet ist. Nur werden die Auswirkungen des scheinbar abgewendeten Worst Case erst allmählich spürbar werden und sehr viel unauffälliger und weniger spektakulär daherkommen als in den zahlreichen Krisenszenarios, die jetzt beschworen wurden. Sie werden allerdings möglicherweise auch verhängnisvoller sein.

Mehr dazu auf CARTA …


Forex turnover results 2013 – or why you should worry

The BIS Triennial Central Bank Survey of foreign exchange turnover in April 2013 makes a fascinating read.

First of all, there is the rise in turnover volume: $5.3 trillion. Per day. By comparison: World exports in 2011 (the latest available number) were about $17.8 trillion. Per annum.

Second, there is the number of currencies traded which, as the following list shows, has increased markedly. The Mexican peso and Chinese renminbi are even found among the top 10 most traded currencies now.


Fascinating, but also deeply worrying. In contrast to other comments which emphasise recent changes, I would like to draw attention to some aspects of global foreign exchange trading which have not changed – and which, in a changed environment, should give more cause for concern than ever before.

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Neu auf CARTA: Bitcoin fasst in Europa Fuß

Zu behaupten, Deutschland sei ein Bitcoin-Land, wäre wohl übertrieben. Allerdings gibt es gerade hier in jüngster Zeit eine Reihe von Entwicklungen, die, sollte das Land in dieser Hinsicht jemals in Wettbewerb mit anderen Plätzen und Regionen treten, ihm eine besondere Stellung verschaffen.

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Bitcoin – one foot in the door to Europe

The German Ministry of Finance hit the headlines with an official statement recognizing Bitcoin as unit of account thereby giving it the legitimacy to be used as a settlement currency in one of the world’s largest economies. After the official opinion issued by the US Treasury Department that I mentioned elsewhere, this is the second time a country has taken an official stance on Bitcoin.

To quote Matt Clinch (CNBC):

“Bitcoins is not classified as e-money or a foreign currency, the Finance Ministry said in a statement, but is rather a financial instrument under German banking rules. It is more akin to “private money” that can be used in “multilateral clearing circles””.

The decision will increase legal certainty and strengthen the role of the currency.  Furthermore, together with another development it may have far-reaching EU-wide consequences:

One German bank, Fidor Bank, has applied for a license from the German BaFin to operate a Bitcoin exchange in Germany. Fidor is an online bank which with its use of social media and its business model of “Banking with Friends” differs from traditional banks. As Dawn Cowie of FS magazine wrote:

Founded in 2009 in the middle of the financial crisis, Fidor has built an online banking community with about 160,000 users who offer peer-to-peer advice on saving, investment and everyday financial problems. What’s more, online users are also encouraged to come up with innovative ideas to develop and improve the bank’s products and services.”

In July 2013, Fidor formed a large-scale partnership with the German marketplace operator of It agreed to provide a ‘liability umbrella’ to Bitcoin Deutschland GmbH thereby enabling the marketplace to prove it is officially following financial market regulations, such as anti-money laundering legislation (CoinDesk).

At first glance, the Fidor application does not make sense. As Franz Nestler (FAZ) emphasizes, operating a Bitcoin exchange in Germany would require only registration. But, the move is not necessarily aimed at merely “being on the safe side”, as Nestler presumes. As Adrianne Jeffries (The Verge) rightly states, a BaFin license would allow the exchange to operate anywhere in the EU.

In this context, Adrianne Jeffries draws attention to an interesting article by Karl-Friedrich Lenz who compares the European and US systems:

“I have not studied American law on the point in detail, but I understand that you need to get a license as a “money transmitter” in 48 States to start a Bitcoin exchange. That is a significant regulatory burden. Essentially you need to tell 48 times the same story, and pay some lawyers to do that. This recent article at FoxNews titled “Could Bitcoin go legal” gives some interesting background on the cost involved for getting those licenses in the United States.

In contrast, if someone gets a “regulated market” licensed under the EU MIFID Directive, they need to deal only with the regulator of their own Member State. You don’t need to run around all the 27 Member States applying for licenses.”

The thought may be far-fetched that with the latest German Ministry of Finance decision Bitcoin could become an alternative to the euro if it ever ceased to exist, as Kathleen Brooks of is quoted by CNBC’s Matt Clinch.

However, with recent developments in Germany, Bitcoin’s importance is growing and its door to Europe is opening a little wider.


Related articles

Safe haven Germany? – Limits to deposit guarantees

One concomitant of the euro crisis is capital flight from European periphery countries such as Greece, Ireland and Portugal to Germany which erroneously is widely considered as the last safe haven in the euro area.  As a rule, German citizens, too, would regard their country as stronghold of financial safety which refers not only to a presumed comparable strength of their banks but to the country’s state-backed system of deposit guarantees.  

The question is what is meant by “state-backed”.

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Neither muppets nor cows

After some people read my latest article on CARTA in German language about savers, interest rates and inflation , there were some lively discussions, and maybe a little confusion, on Twitter, and in what follows I would like to briefly clarify my view.

When Mark Carney, the new Governor of the Bank of England (BOE), announced that the Bank would not raise its base rate until unemployment is below a 7% threshold, savers were outraged. They accused the Bank to “steal” their money as interest rates are below the current rate of inflation.

In a blog post Frances Coppola defended the BOE decision against the “unreasonable expectations of savers”, and in my CARTA article I summarize the various scenarios she described arguing that savers “have no right whatsoever to expect to receive a higher rate of return than the ability of the economy to generate that return”, whereby return is defined as the real rate of economic growth.

In my view, the merit of Frances Coppola’s article is that it is drawing the attention to the fact that in an economy nothing can be spent that is not earned. Several authors took up the idea. Two examples, an article by Tomas Hirst on Pieria on “The symbolic importance of not raising rates”, and another by Dizzynomics on “Savers are not sacred cows, redux”, may give you an impression of the reasoning.

I don’t want to go into detail here. Instead, I want to ask why savers are getting interest at all and who is paying the rising prices in an inflationary economy.

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Neu auf CARTA: Haben Sparer Anrecht auf Inflationsausgleich?*

* Ich danke Wolfgang Gierls (FORAIM) für eine anregende Diskussion zum Thema Inflation und Einlagensicherheit, von der sich einiges hier wiederfindet.

Was wird geschehen, wenn die Ära sinkender Zinsen einmal zu Ende geht? Einen kleinen Vorgeschmack erhielt die Welt bereits Ende Mai, als die Andeutung des Präsidenten der US Federal Reserve Ben Bernanke, den expansiven geldpolitischen Kurs mit sinkenden Arbeitslosenzahlen allmählich zurückfahren zu wollen (to taper), der Volatilität der Märkte unvorhergesehene Nahrung gab. Obwohl Bernanke schnell zurückruderte, war der Schaden erst einmal angerichtet.

Die Fortsetzung drohte für einen kurzen Moment in Europa. Hier war in den letzten Tagen der Blick vieler Beobachter nach London gerichtet, wo der seit Juli amtierende neue Gouverneur der Bank von England (BOE), Mark Carney, seine erste Pressekonferenz abhielt. Carney aber schwenkte in einem Bruch mit der BOE-Tradition auf die Linie der Federal Reserve ein und verkündete, die Zinsen in Großbritannien würden so lange nicht angehoben, bis ein bestimmter Schwellenwert für die Erwerbslosenquote unterschritten wäre. Damit aber sei in den kommenden Jahren vorerst nicht zu rechnen.

Carney löste mit seinen Äußerungen bei britischen Sparern einen Sturm der Entrüstung aus. Sie warfen der Bank von England vor, sie mit den niedrigen Zinsen zu bestehlen, da sie mit den meisten Anlageformen nicht einmal einen Ausgleich für den jährlichen Kaufkraftschwund erhielten.

Verteidigt wurde Carney’s Entscheidung vehement von der  bekannten britischen Bloggerin, ehemaligen Bankerin und stellvertretenden Herausgeberin des Online-Magazins Pieria Frances Coppola. Deren Ausführungen erregten nach einem BBC-Auftritt im Internet einiges Aufsehen. Da das Thema nicht nur für britische Bürger von Interesse sein dürfte, werden hier die wichtigsten Argumente kurz vorgestellt.

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German bad banks – links

First reactions to my last blog post on German bad banks gave me the idea that the following little link list with background information might be a useful addition.

In December 2011, the IMF published a detailed Technical Note on Crisis Management Arrangements in Germany including the establishment of two public bad banks, EAA and FMSW, under the general oversight of the Financial Market Stabilisation Authority (Bundesanstalt für Finanzmarktstabilisierung) FMSA.

In contrast to its peers, WestLB was described as keen to be one of the first German banks to use the country’s bad-bank scheme.  In several articles, the Financial Times commented on the transition from WestLB to Portigon and EAA which was quite a challenge. As James Wilson wrote: “The multiple separation of WestLB’s assets and risk positions is one of the largest efforts made in Germany to implement an orderly winding down of a bank.”

Tracy Alloway illuminated the role of HRE in the covered bond market and of its two subsidiaries Deutsche Pfandbriefbank and Depfa. Her article includes a chart illustrating the Pfandbriefbank collateral switch involved. The chart is part of an analyst/investor presentation of Pfandbriefbank which can be found here.

Tracy Alloway also quoted financial consultant Achim Dübel. He is the author of a detailed comment, with many annotations and links, on the reform of financial regulation in Germany including the bad bank concept, which was prepared for a hearing of the German parliamentary finance committee.

From the beginning of the euro crisis, exposures of German bad banks to periphery countries and other risks limited the scope for policy crisis management. In German exposure to Greece, a bad bank tale, Joseph Cotterill pointed to shifts of Greek debt from the private HRE to FMS Wertmanagement, the sovereign agency, and its implications.

Chris Bryant described how German banks were resisting political pressure to take a bigger writedown on their Greek bondholdings so that Athens could get past a financing crunch. He wrote:

 “It is no small irony … that if German banks are ultimately required to take a larger writedown, the German state could end up being one of the biggest losers.

This is because some €10bn of Germany’s roughly €18bn exposure to Greece is held by two state-backed “bad bank” agencies set up during the crisis to deal with legacy assets belonging to troubled lenders Hypo Real Estate and WestLB.”

Bad banks’ activities are not limited to unwinding and searching for buyers for “toxic” assets. They may include considerable “hedging” activities as became apparent from reports by Spiegel Online and others about a “computational error” of €55 billion in FMS derivatives accounting. The FTD mentioned about 7,000 derivative positions at FMS with a default risk of almost €20 billion. In this context, drew attention to the following table of cumulated debt which was part of the answer to a parliamentary inquiry (p. 12).  There, the discrepancy had been documented, but without noticing the “error”. BörsenZeitung emphasized that this was not the only case, pointing to the overall poor data quality of  FMS.

Finanzmarktkrise_SchuldenstandSource: Deutscher Bundestag, Drucksache 17/6995

Among the internal bad bank solutions I mentioned in the text, Deutsche Bank’s establishment of a Non-Core Operations Unit (NCOU) was widely noticed. There is a presentation by Stefan Krause, Deutsche Bank Chief Financial Officer, with many details.

Commerzbank announced the establishment of its Non Core Assets (NCA) segment in this press release.

Information about the Restructuring Unit (RU) of HSH Nordbank can be found here.

And here are some further links:

Deutsche Pfandbriefbank (PBB), the “healthy” remainder of HRE

FMS Wertmanagement


Erste Abwicklungsanstalt (EAA)

Federal Agency for Financial Market Stabilisation (FMSA)

See also:

Black box German bank

Japan’s bad bank experience


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