by Alex Chafuen
Before jumps in inflation I used to see articles like this in Argentina. This piece by Steve Conover appearing in the AEI magazine argues that the “[l]ack of sufficient economic growth is behind most if not all of our fiscal and monetary problems,” and so printing money is not so bad. The current manipulation of money and credit is very dangerous. No doubt that an increase in the demand for cash holdings (what some call “velocity of circulation,” as if money would have an engine. . .) can off-set the printing of money, but there is a limit.
Related Articles – Sound Money Project
Retail sales and food services spending fell 0.3 percent in September following a 0.6 percent gain in August. Over the past year, total retail sales and food services were up 4.1 percent through September. For the third quarter, total retail sales were up at 1.5 from the second quarter and 4.0 percent from the third quarter of 2018.
Excluding the volatile auto and energy categories, core retail sales and food services were unchanged in September after a gain of 0.4 percent in August. Core retail sales had posted six straight monthly gains through August, helping drive a year-over-year gain of 4.5 percent. For the third quarter, core retail sales rose 1.7 percent versus the second quarter and were up 4.3 percent from 2018 (see top chart).
Details of the September retail sales report were mixed with declines in seven retail-spending categories, while five categories posted gains and one was essentially unchanged. Declines were led by a 1.0 percent drop in building-material, garden-equipment, and garden-supplies dealers and a 0.9 percent drop in motor vehicles. Despite the drop in the dollar measure of motor vehicle and parts sales, unit-auto sales rose to 17.2 million at an annual rate in September versus 17.0 in August (see bottom chart). The gain in unit sales was driven by increases in both light-truck sales (12.54 million in September versus 12.42 million in August) and car sales (4.65 million versus 4.59 million). However, over the past six and a half years, car sales have sharply trailed light truck sales. For September, light trucks accounted for 73 percent of vehicle sales, a record high, while cars were just 27 percent.
Gasoline station sales fell 0.7 percent. The drop in gas station sales station sales reflects a 0.8 percent drop in average retail prices of gasoline.
Posting gains were clothing and accessories stores, up 1.3 percent for the month, furniture stores, up 0.6 percent, and health and personal care stores, also up 0.6 percent. Over the past year, those categories have gains of 1.5 percent, 1.1 percent, and 2.9 percent, respectively.
Surprisingly, nonstore retailers, predominantly on line shopping, had a 0.3 percent decline for the month. This category has been growing very robustly for years, posting a gain of 12.9 percent over the last 12 months. It’s highly likely this category will continue to post strong gains in the future.
The weak data for September adds to the uncertainty about future economic growth. Turmoil in policy, including trade policy and monetary policy, is starting to impact business and consumer confidence. If the softening in confidence translates into significant restraint in hiring, business investment and consumer spending, the probability of recession increases dramatically. For now, economic expansion is the most likely path, but caution is warranted.
Related Articles – Business-Cycle Conditions, Daily Economy
Much has been written about the struggles that Libra, spearheaded by Facebook, has been facing since the original white paper was launched in June. The testimony provided by the head of the program, David Marcus, did very little to take the heat off the project and may have actually increased the level of scrutiny brought to bear on the Libra Association.
In the midst of this continued criticism, with several founding members dropping out — and members of the U.S. Senate actively encouraging some of those members to leave the association — there have been numerous headlines bemoaning the demise of Libra. Whether or not Libra eventually gets off the ground (and if so, what form it ultimately takes) is uncertain, but there is one connection seemingly flying under the radar.
Controlling Emerging Technologies
5G, and the potential benefits and applications of 5G tech, arguably represents one of the hottest areas of investment and development in the contemporary technology marketplace. In order for other emerging technologies such as the Internet of Things and autonomous vehicles to function as expected, spectrum capacity and capabilities need to be increased. With the deluge of data produced by every organization (and individual), expanding the capabilities of digital infrastructure is an imperative for organizations seeking to leverage this information.
With organizations both in the U.S. and overseas committing funds and personnel toward an array of 5G projects, this might seem like a boon for advocates of private sector involvement in the infrastructure of the future. Taking a second look, however, uncovers an underlying force that is having an outsized impact on the development of 5G and related technologies: the government auction process over spectrum. In order for telecommunication organizations to gain access to the spectrum necessary to develop 5G services, there is only one supplier in the marketplace: spectrum auctions conducted by the Federal Communication Commission.
The auction process is certainly superior to the FCC simply allocating spectrum via an opaque process, but nevertheless the control over this valuable resource by a single political entity distorts the market. As a result, mergers and acquisitions in the telecom space are not always driven by business realities, but rather a desire to access the spectrum possessed by other organizations. This convoluted logic behind mergers and acquisitions also leads to antitrust motions being leveled at organizations, increasing costs without leading to much in the way of consumer or competitive benefits. Owing to these perverse incentives, the goal of much telecommunication M&A activity is not customer acquisition, but spectrum acquisition.
In other words, the lack of competition in spectrum development and strict control over the acquisition process can both distort current operations in the private sector and make developing new applications more costly than necessary.
So what does this have to do with Libra?
The Libra Connection
Spectrum is a clear example of how singular government control over the supply of an asset can influence and distort the actions taken by market participants, but currency is the example of this concept played out in practice. Governments rely on their singular control of currency for fiscal, monetary, and tax sovereignty, yet monopolistic control is hardly a guarantee of effective stewardship. Dozens of examples in just the last few decades illustrate the damage that can be wrought when this singular point of control is abused — not to mention the corrosive effect of inflationary policies on both purchasing power and the propensity to save.
Competition and consumer choice are universally good for consumers but absent in both the case of 5G spectrum provision and currency options. This hurts consumers and organizations, and leads to unintended consequences that ripple through the broader economy. In the case of cryptocurrencies, however, a motivation driving this regulatory and governmental crackdown and scrutiny might indicate another goal: the adoption of this technology into the existing financial apparatus.
Bitcoin has lost much of its luster as a fiat alternative, and other private sector actors have developed and introduced alternatives that are simpler and easier for consumers to use. Against a backdrop of increased private sector involvement, it was inevitable that governments would become intrigued as to how these technologies could be adopted. The Libra initiative may have inadvertently provided central governments and financial institutions a blueprint for how this new emerging area can be brought under the umbrella of centralized institutions.
The People’s Bank of China Takes Notice
The U.S. and Chinese governments are, of course, in the middle of a convoluted and wide-ranging trade dispute/war; the benefits of hurling tariffs back and forth remain difficult to ascertain, but that isn’t the only story. Emerging technologies like 5G and the potential of blockchain/crypto for financial services may still be evolving quietly, but there is nevertheless substantial movement within the space.
Technology, not soybeans, lies at the crux of the tug-of-war currently underway between the world’s two largest economies, and the possibility of a crypto-fiat hybrid highlights the interest of both governments in these emerging tools. This includes the People’s Bank of China (PBoC), which more than the Federal Reserve in the United States is an arm of governmental policy and direction.
Several central banks, including the regional Federal Reserve Banks and the Bank of International Settlements, have issued similar statements. But the embrace of this concept within the Chinese banking establishment is noteworthy in no small part owing to how closely the proposed cryptocurrency mirrors the Libra structure.
The former governor of the PBoC, Zhou Xiaochuan, has argued that the Chinese state should take measures to strengthen the yuan even more in response to the launch of Libra. This follows statements by President Xi Jinping that have openly praised blockchain as central to the country’s plan to lead in several technology categories in the near future.
Given the central government ban on initial coin offerings (ICOs) and many other crypto-related activities, the launching of a cryptocurrency may seem ironic until one looks under the hood. The cryptocurrency announced by the PBoC looks very similar to a crypto-yuan: supported, controlled, and issued by the central bank, and potentially decreasing Chinese reliance upon the world’s reserve currency, the U.S. dollar.
Under the Hood
What follows are three specific ways in which the PBoC plan borrows heavily from the Libra Association model, and how easily other governments could emulate such a plan if so desired.
PBoC: The only official and authorized issuers of this cryptocurrency will be the central bank itself and commercial banks that have been approved by the central bank. According to the Congressional Research Service, four out of five of the largest banks have the government as a large if not their largest shareholder, resulting in de facto control by the central government.
Libra: The Libra Association will be selecting which third parties will be authorized to redeem and exchange Libra.
PBoC: Based on publicly available information, the PBoC will design, implement, and monitor all wallets used to access this cryptocurrency. Excluding sophisticated institutional investors or programming experts, retail investors and consumers will need approved wallets to access crypto holdings.
Libra: The Calibra wallet will be connected to both Facebook and the Messenger platform.
PBoC: Since the PBoC is only accountable to the state, and since the government is rolling out a Social Credit system, it is not unreasonable to see these financial transactions as part of that system.
Libra: How can Facebook, or any other centralized entity governing a cryptocurrency or similar product, guarantee that these financial transactions and holdings will be held separate from other services (like the social media business at Facebook) or governmental initiatives? (That is, if someone is banned from Facebook, will they lose access to their cryptocurrency capabilities and/or savings?)
The similarities between the PBoC project and the underpinnings of Libra are difficult to ignore, and just one example of how governmental scrutiny and crackdown could ultimately lead to the subsumption of a private market idea under the apparatus of centralized institutions.
Akin to the government control over the spectrum, any assumption of control over the market for crypto-fiat applications would likely lead to a distorted and stunted marketplace going forward. Projects like Libra should be scrutinized, and have controls in place to prevent abuse, but the private market for emerging technologies like 5G and crypto applications should be allowed to grow and develop, or fail, on its own. The alternative is an underdeveloped market rife with misallocations that benefits neither the acquiring organizations nor consumers.
Sean Stein Smith is a Visiting Research Fellow at the American Institute for Economic Research, focusing on blockchain, cryptoassets, and the economic impact of these technologies. He is an Assistant Professor at the City University of New York (Lehman College), serves on the Advisory Board of Wall Street Blockchain Alliance, where he also chairs the Accounting Working Group, and chairs the Emerging Technology Interest Group of the New Jersey Society of CPAs. His research has been quoted in dozens of scholarly and practitioner publications, and he is a regular speaker at accounting and technology conferences. Follow him on Twitter.