Philip Lowe

In 1980, a 17 year old was accompanied by his parents from Wagga Wagga to a job interview. The story goes that the young man’s parents had another plan, they intended to interview the employer to ensure that they would provide suitable employment and circumstances for their son.

The interviewee in question was Dr Philip Lowe, who began his career as a member of clerical staff and is now the Governor of the Reserve Bank of Australia. Befitting his background and upbringing in a country town, Dr Lowe is extremely conservative and it must be said, very well respected.

On Tuesday night, the Governor gave a speech at the annual dinner of Australian Business Economists, the speech was flagged weeks in advance as Dr Lowe was going to be addressing unconventional monetary policy. Here’s what he said:

• That he does not believe negative interest rates are appropriate, the jury is out as to whether they work at all and he does not want them in Australia. Stated that the floor is 0.25%
• Confirmed that in a crisis the RBA would not be buying private assets like equities as the Bank of Japan has done as it may create asset price bubbles
• Confirmed that the bank has considered Quantitative Easing and would buy government securities in the secondary market if it were needed but only if the interest rate were already 0.25% and if the market were, as he put it, “stressed”

Perhaps more fascinating though were his criticisms of unconventional policies elsewhere, including that if the central bank always steps in and sorts out liquidity problems then all you ever get is liquidity problems because the market knows you will be there with unlimited liquidity (take the US and its repo operations as a good example). The best was this though:

“A third side effect is the possible blurring of the lines of fiscal and monetary policy. If the Central Bank is buying large amounts of government debt at zero interest rates, this could be seen as money-financed government spending. In some circumstances, this could damage the credibility of a country’s institutional arrangements and create political tensions. Political tensions can also arise if the central banks asset purchases are seen to disproportionately benefit banks and wealthy people, at the expense of people in the street”

Well said Dr Lowe, specifically:

1. It absolutely is money financed government spending
2. It absolutely is a giant fraud on the general public

I must say, of all the world’s central bankers, I like Phillip Lowe the most. He is measured, he actually called out the fraud going on in other countries pointing out the damage it can do and recommending it not be done in Australia.  In the post speech questions, he took the journalists to school with his grasp of the detail.

That’s who you want running the central bank, the bloke who started on the photocopier and actually understands how the whole system works, not some lawyer cum private equity baron like Jay Powell, who happens to be politically connected. Australia is lucky to have him.

 Benoît Cœuré

By contrast in Europe we had central banker Benoît Cœuré speaking this week on behalf of the European Central Bank. Benoit, for a whole host of reasons,  is what the Americans call an “assholes asshole”. A career bureaucrat from the Ecole Polytechnic in Paris.

Benoît was busy touting the ECBs new European payments plan which doesn’t exist other than in his head. Basically, he dreams of a digital coin that he and his colleagues can control and print at will. Some of the speech is worrying, some of it is actually quite amusing:

“A common brand and logo should be adopted (to the new digital money) to foster European identity. A European governance structure could enable European payment stakeholders to have a direct influence on the strategic direction and business models.”

Aside from the gobbledygook, imagine using money to define identity. It’s plain old weird and these guys are completely lost in their grand failed single currency project. They also played the game of “how many times can you say the word Europe or European in a short speech?”, yes I counted, and it’s 52.

Anyway, the speech got better with a great piece of head-in-the sand denial from Benoit, which was the opening paragraph of his conclusion. Square brackets are my own doodles which are just for fun and in no way reflect the state of the Euro.

Global payments markets are undergoing a transformation [We are getting murdered and don’t know what to do]. Rapid technological progress, regulatory reforms and rising cross-industry initiatives, in particular by large global digital firms [nasty Facebook, they want to compete with the Euro and will make us look really bad with what will be palpably superior money], have led to unprecedented dynamics [the Euro is falling apart] and are putting established banks and payment service providers under considerable pressure [we have zero interest rates and have monetised most of the region’s debts, our banks are technically bankrupt and we’re totally out of options].

You see the difference? Benoît does not know where the photocopier is and if he happened to stumble on it, he would think it dispensed foie gras.

Financial markets and the digital revolution

Let’s stick with the ECB, they can’t help themselves and neither can I. So, as if Benoît were not enough, on Tuesday they unleashed a man called Edouard Fernandez-Bollo to talk about the “digital revolution”. Edouard is also a member of the ECB Board, he was educated at the Sorbonne in Paris and is a career bureaucrat, a familiar sounding ‘skill set’ to his colleague Benoît, but no matter.

Edouard’s speech was incredibly dull, despite its fabulous and promising headline. He said nothing about a digital revolution at all, other than he wants to regulate fintech. He used the words AI and cloud computing, which was nice for everyone. I have visions of his colleagues nodding in approval.

Honestly, I truly believe the game is up for these guys – they have no idea what is being built around them. None.

Bitcoin dies

• Life jackets while on a cruise ship
• Doctors, indeed medicine in general
• Smoke alarms
• Umbrellas

Lightning

It’s been a while since we talked about the lightning network. Lightning was developed to take transactions off the bitcoin blockchain. Lightning nodes communicate off chain and allows users to transfer value with virtually zero fee, it is theoretically infinitely scaleable too.

According to one of the lead developers at Lightning Labs, the lower limit of Lightning payments was changed this week allowing for greater divisibility of bitcoin. The common misconception is that bitcoins must be acquired in single units, not so. This latest development allows divisibility on lightning such that transfers of 1/100,000 of 1 cent are now possible.

This might be trivial but actually the market for micro-payments is enormous. For example, perhaps you are a content writer, if people read your content you might want to charge a micro fee, say $0.0001 cents. Across 1 million pages views that is $1,000. Many people would be sufficiently incentivised to share or create something good for $1,000. Very few people would object to a $0.0001 cent fee.

The fact is that current payment rails don’t work for anything less than $10 really, that really stifles what you might call ‘micro-creation’. For example, many retailers will charge you a 2% fee for using a credit card if you spend less than a certain amount. All of that is changing.