13 | March | 2018 | Mostly Economics

Archive for March 13th, 2018

Blockchain revolution without the blockchain…

March 13, 2018

Hanna Halaburda of Bank of Canada in this note says blockchain has spinned a revolution in thinking about new technologies.

Blockchain technologies will likely have a significant impact on many industries, not just finance.

However, this may not happen in the way envisioned. Computation and communication technologies have decreased the cost of experimentation and digital entrepreneurship. This resulted in a proliferation of start-ups, creating competitive pressure and exposing inefficiencies in existing (legacy) systems. Both new and existing players are looking with interest at the properties of smart contracts and Bitcoin’s blockchain. But as they realize the benefits of different aspects of the system, it may turn out that new encryption tools and smart contracts have large and clear benefits, while distributed ledgers may have a more limited appeal. And for many applications, the most suitable will be the traditional distributed database rather than one based on Bitcoin’s blockchain.

Most of all, we need to realize that outside of Bitcoin (or other cryptocurrencies) we do not have a technology that offers “permissionless distributed ledgers that cryptographically assure immutability without a need for trusted third parties.”

The blockchain revolution may give us new tools and change the landscape of some industries. But since the benefits of encryption and smart contracts can be realized without a distributed ledger, the world after the blockchain revolution may well be a world without the blockchain.

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What has changed since the 2008 financial crisis?

March 13, 2018

The more we say they have changed, the more they remain the same.

V. Anantha Nageshwaran in his Mint piece asks What has changed since the 2008 financial crisis:

So, what do we have now? Post-2008, Greenspan blamed lack of regulation but still maintained that markets would self-regulate. That has not happened. The industry has replaced one set of derivatives products (credit default swaps) with another (ETF). These products have enjoyed exponential growth. Not all ETFs are alike. Some of them hold illiquid assets and yet promise daily liquidity to ETF holders. Volatility is now traded; derivative products have been launched on volatility and they are spiced with leverage (debt). Despite strong growth, investors expect interest rates to stay on hold or stay low. To round it off, regulators now suspect manipulation after having watched these products being launched and leverage piled on top of them. So, what has changed since 2008?

Two things have changed. One is that we have a new chairperson of the Federal Reserve. There are tentative signs—based on his past public comments—that he does not set as much store by asset prices as three of his predecessors had done. As I had noted in my piece on his testimony to the US congress two weeks ago, he is willing to take into consideration the overheating, as evident in financial market prices, even if consumer prices are rising at a slower pace. Gavyn Davies argued in his regular blog in the Financial Times that not just the Federal Reserve chairperson but six of the seven board members would be nominated by the current administration when the process is completed next year. Davies thinks the new Federal Reserve board might be inclined to confront rising asset prices, and might be less gradual in raising interest rates. Both might be welcome departures from the monetary policy framework of the last one or two decades.

The second thing that has changed is that the US 10-year government bond yield appears to have ended its long-run trend of declining. It now stands at 2.90%. In July 2016, it had reached a low of 1.38%. If it breaches 3%, it could create big losses for leveraged investors. On Friday, American stocks greeted the employment report showing strong job gains and tame wage gains with glee. James Montier calls this a cynical bull market. I am not sure if providence is known to be kind to cynics.