Central banks like gold more than Treasuries

 

This is one of the most interesting charts this month. Central banks have kept more gold than Treasuries for an extended period until about 1997, when there was a switch to holding more Treasuries. This was the period of Bretton Woods II, when central banks increased their reserves as a measure to help defend their currencies in a crisis. Now, these central banks prefer gold over the safe asset of Treasury securities. There is a fundamental change in the perception or common knowledge concerning Treasuries as a safe asset.

Economics and the need for history

"Forty years of investment in mathematizing economics has made it less acceptable among economists to admit ignorance of mathematics than to admit ignorance of history" - Deirdre McCloskey

You cannot be an economist today without knowing your math. To complete any PhD program, you will need to possess a strong understanding of mathematics, statistics, and econometrics. You will also likely have strong programming skills. Finance is being dominated by quants. 

You will not need to know history in this environment; yet, as I get older, understanding history becomes a critical skill. All policy analysis needs context for what has worked in the past. You need history to describe "experiments" in the past. The past determines the path for the current and future. 

In finance at the local level, you need to know the history of companies; their evolution is relevant. At the macro level, we need to know the specifics to appreciate our generalizations. It seems that one semester of economic history is not too much to ask for our experts.

This has been a common theme on how we think.

Finance needs more history to help with the future

Financial amnesia and the need for financial history

Don't just follow history, act on it

The value of history for economics from Charles Kindleberger

History in five crashes - Finance in the last century

Counterfactuals, history, and market analysis

History, linear thinking, and addressing market noise

Financial crises are inherent within our system

 

Gary Gorton provides a good history of financial crises in the US financial system from the free banking period to the Great Financial Crisis. These crises are not one-off events but are inherent in our financial system. There will be credit booms and busts,  and our history is filled with them. What is unusual is that we had a long period from the Great Depression to the 1980s when there were no crises. Innovations that change the financial landscape, moral hazard issues, too-big-to-fail, and shortages of bank capital all contribute to liquidity crises and contraction of credit. Through following economic history, we can see how the seeds of crises are sown. Gorton does a good job in this short book of providing the history and theory for why we should always be concerned about the possibility of a financial crisis.

The Richard Stone Diagram of models, policies and plans

 

I came across the Model, Policies, and Plans diagram from the 1984 Nobel Prize winner Richard Stone. It attempts to explain the production process for economic knowledge. It is a helpful picture of how economists first blend facts and theory to form a model. A model is mixed with objectives to form policy. Controls on the policy will create a plan, and events will impact the plan, leading to our set of experiences. We then go back to the beginning and repeat. This is an iterative process. As we get new facts, we will adjust theories and models. In the case of monetary policy, we should ask how the Stone diagram works inside the Fed.