Money, Banking, and Financial Markets

Understand the principles, understand the future

Digital currency is all the rage. Bitcoin has more than one thousand crypto cousins. There is even a token called dentacoin, whose issuers claim it will transform dentistry! In the past, we have been clear in our views. We agree with BIS General Manager Agustín Carstens: these are exactly like past attempts of people to issue their own private money. As Carstens said on another occasion, these tokens are “a combination of a bubble, a Ponzi scheme and an environmental disaster.”

Regardless of whether the blockchain will revolutionize dental health, the appearance of cryptocurrencies has driven central banks to think about one particular aspect of their business: paper currency issuance.

In this post, we expand on some aspects of our earlier discussion of central bank digital currency (CBDC). What is it and what would its wider introduction mean for the financial system? Our conclusion is unambiguous: Watch out what you wish for! ….

In an effort to understand the dynamics of the distribution of consumption, income and wealth, over the past decade, there has been an explosion of research. While important debates about measurement and data interpretation continue, a range of evidence points to two important conclusions. First, over the past two centuries, the global income distribution has become far more equal. But, while the gap between countries is now much smaller, in recent decades, inequality within some advanced countries, especially in the United States, has risen.

Rather than income or consumption, in this post we focus on the distribution of wealth. Wealth affects welfare in at least two key ways. First, in the presence of borrowing constraints, it provides a buffer against fluctuations of income, allowing households to smooth consumption in the face of temporary bouts of illness or unemployment. Second, it provides the basis for household spending in retirement. .

As we will see, the distribution of wealth is far less equal than that of income. Moreover, recent research shows that, following the Great Financial Crisis of 2007-2009, the U.S. wealth distribution has become decidedly more unequal. As a result, a large portion of U.S. households appears to have little scope for meeting retirement needs out of their current net worth, making federal insurance programs key to their future well-being.

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... the site where you can learn about finance and economics. We provide commentary on events in the news and on questions of more lasting interest. Because the financial system is constantly evolving, our analysis is informed by a set of core principles: understand the principles, understand the future. The opening excerpts of our two most recent posts appear above. For prior posts, click on the Commentary link to the left, or on the month-by-month Archives to the right. Alternatively, if you are interested in a specific topic, use the tags.

The site also provides material related to our textbook, Money, Banking and Financial Markets, 5th edition, 2017. The Five Core Principles on which the book is based are highlighted here. In addition, Cecchetti and Schoenholtz 5e systematically integrates the use of economic and financial data from FRED, the online database provided by the Federal Reserve Bank of St. Louis. Click on FRED Lessons on the left to access help on how to use this incredible resource.

Steve Cecchetti and Kim Schoenholtz

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