2020 Maxwell Fry Global Finance Lecture

Each year, the U.K.’s Money, Macro & Finance Society, in collaboration with the Birmingham Business School, University of Birmingham (UK), sponsors a lecture in honor of Maxwell Fry. The MMF writes on its web page:

Maxwell J. Fry (1944-2000) was a prominent figure around the world in International Finance and his work was widely acclaimed in central banking circles. His contribution was in the fields of international and development (‘global’) finance and this annual lecture is given by an internationally leading academic or policymaker on a topic that reflects Fry’s interests.

Fry received his PhD in Economics at the London School of Economics in 1970 and taught at The City University of London for four years. In 1974 he joined the Department of Economics at the University of Hawaii before leaving to teach at University of California-Irvine in 1980. Shortly after this he accepted an endowed chair as a Professor of International Finance at Birmingham Business School. He passed away prematurely in 2000 and we remember him each year in late October.

I was honored to deliver the 2020 lecture, via Zoom. My slides are available here.

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Is the Road to Fiscal Hell Still Paved with Good Intentions?

As a New York Times subscriber (and former officemate of Paul Krugman), I admit some liberal leanings. I also confess a preference for a Clinton-style of fiscal policy rather than the Bush 43 style, that is: (1) decide government missions consistent with social pressures and voter tolerances, and (2) pay for them with tax revenue. The Bush policies of financing wars with tax cutting during prosperous times, to my mind, is irresponsible policymaking. John Keynes warned us that the time for governments to save via reducing public-sector indebtedness is during good times, not bad times. That said, I also have little sympathy for the “spend now and kick the can down the road” school of fiscal stimulus because it seems unlikely in the current political climate that the Congress ever will retrieve the can and refill it with gold. More likely it will be kicked until unrecognizable and a new can will be found, perhaps after a default.

In this spirit, I find Martin Feldstein’s recent analysis impossible to embrace (“Saving The Fed From Itself,” NYT, December 9, 2013, page A27). Certainly, popular macroeconomic models suggest it wise for policymakers to shift from a reliance on monetary policy to more intense use of fiscal policy whenever short-term interest rates reach zero. And, economic analyses have been hard-pressed to demonstrate sustained increases in aggregate demand due to the Fed’s QE policies. But suggestions that fiscal policy should be greatly expanded in the near-term — with a price-tag of $1 trillion over five years — and then believe that the Congress can agree on a scheme for long-term deficit reduction, in my mind, is naive. But perhaps that is the purpose of Op-Ed pages: to propose blue-sky ideas.

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When will analysts cease believing that higher inflation stimulates growth?

It is an old saw among ill-trained economic analysts that inflation aids growth. An oft-repeated corrolary flows from this mistaken idea: that being “anti-inflation” is the same as being “anti-growth.” Well-trained macroeconomists, following a path blazed by Edmund Phelps and Milton Friedman (among others), ceased saying long ago that higher inflation speeds growth. Rising inflation most-often is well-advertised and, hence, well-anticipated. When the higher inflation is fully anticipated, and when contracts and institutions have incorporated mechanisms to adjust, then the higher inflation lacks, itself, a mechanism to stimulate growth. Indeed, in the current economy, higher inflation has been anticipated for so long that it seems like waiting for Godot — or perhaps The Great Pumpkin.

The most recent restatement of the false argument that higher inflation stimulates growth came yesterday, by Binyamin Appelbaum in the New York Times. Writing on page B2, he says: “Rising prices can help stimulate the economy, making it easier for companies to increase profits and for borrowers to repay debts. Inflation also encourages people and businesses to borrow more money and to spend it more quickly. Low inflation reduces those incentives.”

Such nonsense.  A NYT reporter should know better — and so should its editors.

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Recommended: Juan C. Zarate. Treasury’s War: The Unleashing of a New Era of Financial Warfare (Public Affairs Books, New York, 2013)


The U.S. economy is the world’s largest and the US dollar the world’s reserve currency. Fundamental to all business, including terrorism and organized crime, is the ability to use the worldwide banking system to originate and receive payments. Most institutions involved in international payments find it necessary, eventually, to do business with financial institutions either located in the United States or American-owned abroad. Using this necessity as fulcrum and lever, the US Treasury Department during the last decade has cajoled (and occasionally coerced) businesses, financial institutions, and governments to cease doing business with terrorists, money launderers, and rogue states. Juan Zarate has written a fascinating first-person account of these actions.

Perhaps the most intriguing part of Zarate’s narrative is his willingness to “name names.”  Zarate’s revelations nicely complement the Snowden-based revelations regarding the NSA — and Zarate’s account is first-hand, not stolen. (Would this book have been published, in this form, if he had worked for the CIA?) The often illicit actions of individuals, firms, countries, and banks are revealed. The story of how the Treasury gained access to the SWIFT messaging service (and used the messages to track Al Qaeda financing) is fascinating. He includes first-person descriptions of negotiations with Saudi rulers, and carefully buttresses broad claims such as: “Cutting off flows of funds to Al Qaeda thus meant much more than just targeting  a few select individuals or institutions. It was ultimately about challenging a fundamental element of Saudi policy by constricting how the Saudis and their institutions funded activities abroad.” Specific meetings, persons, and events are included, including the effort to close the the large Islamic charity Al Haramain, limit drug financing in Afghanistan, trace the funding of the terrorist attacks in Mumbai, the growth of Lebanon as a center for “bad banks” and money laundering, North Korea’s production of US$100 “supernotes” (Zarate’s discussion is the first that I recall of the alliance between North Korea and US criminal elements to bring such notes to the US), Treasury efforts to bring pressure against Iran’s nuclear program, and others.

The book concludes with a thoughtful discussion of how players in international financial markets are seeking to create banking and payment schemes that never touch American soil or institutions, including efforts by China and the popularity of stateless electronic monies such as bitcoin, and hence are not susceptible to American financial pressures.

My sole complaint concerns repetition: chapters tend to begin and end with missives that seek to persuade the reader of the seriousness of the threats and the cleverness of the Treasury officials fighting them. But that point is well-made at the beginning of the book. My advice to readers is not to be put off by these chapter introductions — move rapidly into the meat of each chapter. Readers interesting in the intersection between the international financial system and international criminal activity will not be disappointed.

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December 3, 2013 · 4:06 pm

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