Welcome to 2022! I am glad to be getting the machine back into gear after a year-end hiatus. I also noticed that it's been half a year since I last spelled out what Soon Parted is all about. The newsletter's audience has grown quite a bit since then.
So it seems like the right moment to look at the big picture. The material of this blog falls into three big categories: the global dollar, the evolution of payment technologies, and the political economy of finance.
The global dollar system
The international monetary system is strongly hierarchical: the US dollar plays a distinctive role among currencies, so the Federal Reserve, the US central bank and thus administrator of the dollar, plays a distinctive role among central banks. The Fed provides dollar banking services to the US banking system, to other core monetary authorities, to non-core central banks, and to the US government.
Today's global dollar system is organized around market-based credit, with a core of marketable securities that serve as collateral. The importance of market-based credit was already visible in the 2008 crisis, and has only intensified since then. The repo market, short-term loans of money where specific collateral is first in line to absorb losses, has commensurately increased in importance. Indeed US monetary policy is often easiest to understand when viewed through its effects on repo markets.
A bank is its balance sheet, and so too for a central bank. So an important window on the global dollar system is the Fed's balance sheet, which in the policy response to the COVID-19 pandemic has doubled in size to nearly $9 trillion. Both sides of the balance sheet have been relevant—big purchases of Treasury and mortgage-backed securities on the asset side, a big reverse repo facility on the liability side.
On its current trajectory, the Fed will wind down its asset purchases over the next couple months. An increase in policy interest rates is possible later in the year. These shifts are likely to make big ripples in the money markets. The global dollar perspective will be, in my view, more informative than commentary framed in terms of inflation and the Federal Funds rate.
Finance is responsive to technology like any industry, but system-wide changes are difficult: trillions of dollars flow every day through a highly regulated system, involving a very large number of individuals and institutions, in many jurisdictions. Stakes are high, tolerance for error is low. Perhaps for these reasons, although finance has seen plenty of technological change at the margins, some of the core functions of the system are quite antiquated.
In the last few years, and especially since 2020, pressure for change has become intense. One symptom is the unignorability of crypto, its cleverness often indistinguishable from its foolishness. Another symptom is the increasing presence of fintech startups in payments, trying to win a tiny percentage of huge systemic payment flows. A third is the apparent inevitability of central bank digital currencies, fast-moving experiments at the periphery and methodical consensus-building at the core.
My view, generally, is this: there are widely felt limitations to the existing payments infrastructure, and there are technological advances being made in the crypto sandbox. Incumbent players will allow those advances to gain a foothold only inside the regulatory perimeter. Regulators, however, are being increasingly clear that currently existing crypto assets are not sufficiently inside the perimeter. So the likely outcome is a new regulated payments technology stack, crypto innovations rebuilt inside the fence. The design of this new infrastructure is the real substance of debates about central bank digital currencies.
If there is a single overriding principle in these debates, it is the demand for programmable contracts: the possibility of building legally binding financial infrastructure that fully incorporates the innovations of modern web technology. Programmable contracts, by design, operate without human discretion, and so raise important new questions about liquidity, and the possibility of an entirely new kind of financial crisis.
These developments in the microstructural mechanics of finance go hand in hand with disruptions at the institutional level. The final big theme that makes up the perspective of Soon Parted is a pattern of institutional change that I have called "platform finance:" the increasingly deep interaction between platform-based technology businesses and existing financial businesses.
There are lots of people asking questions about this phenomenon, though not everyone uses the same terminology and the conversation is not yet particularly organized. Platform businesses (e.g. Amazon, Meta, Twitter) are consistently taking steps toward internalizing financial functions. Financial companies increasingly think of themselves not just as users of technology, but in fact as tech companies. The changes in payment technologies mentioned above will affect the balance of competition over this terrain. I am interested in understanding the political-economic consequences of such shifts.
And all the rest
Beyond the steady diet provided by these ongoing themes, money and finance can also be relied upon to provide entertaining scandals, the occasional heist or notable bungle, arcane theoretical squabbles, and even movies and music.
I'll be following all of these in the year to come. Thank you for reading!