The Big Picture

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• Crisis Chronicles: The “Not So Great” Re-Coinage of 1696
• Sting’s 60th Birthday Party
• Succinct Summation of Week’s Events (October 4, 2013)
• Credit Suisse Fed Cheat Sheet
• S&P500 % Change Relative to Government Shutdown
• 10 Friday AM Reads
• Yay! Its a No-NFP Non Farm Payrolls Friday !
• How to Bypass the Debt Limit
• Constellation of Fornax

Crisis Chronicles: The “Not So Great” Re-Coinage of 1696 Posted: 05 Oct 2013 02:00 AM PDT Crisis Chronicles: The "Not So Great" Re-Coinage of 1696 James Narron and David Skeie September 30, 2013       In the late 1600s, England operated a bi-metallic monetary system of high-value gold coins and lower-value silver coins. In the early 1690s, however, the market price of silver began to rise at a time when the mint price of gold was higher than the market price. Thus, gold bullion was flowing to the mint while silver coins were flowing to the commodity markets. By 1695, nearly half of the silver specie was missing from coin in circulation in England as coins were "clipped" (shaved) with the result that their face value no longer reflected the metal content. Ironically, low-weight coin was still accepted for tax payments. In this post, we recount England's efforts to remedy the "ill state of the coin of the kingdom" during the re-coinage of 1696. A Bi-metallic Primer A bi-metallic standard is a monetary system consisting of two metals—usually gold and silver— where the government or the mint fixes the price between the two metals. As a hypothetical example, the mint might determine that 1 ounce of gold = £1 and 1 ounce of silver = 1¢. Therefore, 1 ounce of gold = 100 ounces of silver. The key to making a bi-metallic standard successful is two-fold. First, the mint and the public must be willing to buy or exchange 100 silver coins for a gold coin, and vice versa. This is called maintaining mint price parity. But just as importantly, the mint must be willing to buy gold and silver bullion from the commodity markets for £1 per ounce of gold and 1¢ per ounce of silver, respectively. This is called maintaining market price parity to the mint price. If external forces change the market price of the underlying metal—for example, if a gold rush causes gold to flood the market, forcing the market price for gold down—the mint must decide whether to continue buying gold bullion at an inflated price or to change the fixed rate between the gold and silver coins through a re-coinage. The Ill State of the Coin of the Kingdom In the late 1600s, coin was still struck manually, so the quality of coin production was low and off-struck coin—coin that was not precisely centered when it was minted—was both common and generally accepted. (The image below shows a heavily clipped and off-struck Elizabeth I silver sixpence minted from 1569 that was still in circulation in 1696.) When the market price of silver began to rise in the 1690s relative to the mint price, silver started flowing from England to the European Continent. So while the difference between the mint price and the market price fueled the incentive to clip silver coin and sell the clippings in the continental commodity markets, the poor mint quality made it even more difficult to detect a clipped coin, leading to a situation reminiscent of the Kipper und Wipperzeit crisis of the 1620s described in our earlier post. At the same time, the Royal Mint was paying more than market price for gold bullion, so gold bullion began to flow from the Continent to England. By 1695, high-value gold coins were plentiful in England but there was a notable shortage of small-denomination silver coins, creating a monetary contraction. This led to a dual problem. First, the monetary contraction inhibited the ability to pay the armies engaged in the Nine Years' War. Second, because silver was used for small-denomination subsidiary coins, the coin shortage impeded everyday transactions between individuals. The Bank of England did not have the authority to intervene in the markets, so a "Commission on the Coinage" was chartered from 1694 to 1695 to deal with the crisis. These developments set the stage for what economist Charles Larkin called "one of the great monetary events in history" in his work The Great Re-Coinage of 1696. During the Commission's debates, many solutions to the crisis were proposed: Treasury Secretary William Lowndes favored devaluation, Treasury advisor Charles Davenant advocated the expansion of credit, and Royal Mint Master Sir Isaac Newton sought to achieve gold and silver mint price parity. Ultimately, a plan to demonetize the existing clipped coins and issue new, full-weight coins—put forward by Commission member and prominent philosopher John Locke—was approved. The William III silver sixpence shown below was minted in 1696 as part of the great re-coinage. It displays the milled edges introduced around 1662 in an effort to reduce clipping. A Classic Bank Run for Specie In January 1696, the Act for Remedying the Ill State of the Coin of the Kingdom stipulated that by May 4, clipped coin would no longer be legal tender, and by June 24, clipped coin would no longer be accepted for tax payments. But the Royal Mint was woefully unprepared to replace the monetary base and had only minted about 15 percent of the silver coin needed for the exchange. Compare this to the preparation for issuing the euro, when European central banks stockpiled roughly 350 coins per capita in anticipation of the euro launch. While the milled-edge design used in the re-coinage prevented further coin clipping, it didn't address the ongoing attack on silver coinage by seventeenth-century arbitrageurs and the continuing silver outflows. These problems resulted in depositors flocking to the Bank of England on May 4 to demand specie. By May 6, the Bank of England was forced to forestall debt payments, and it was not able to resume payments until October, when it received a loan from the Dutch government. In the second half of 1696, England's economy essentially stopped, and the ensuing monetary contraction led to massive unemployment, poverty, and civil unrest. The smallest gold coin, the golden guinea, and various forms of credit provided the only remaining liquidity in the market, with the Duke of Beaufort famously being forced to pay for a dinner by entering his name in a book at the height of the crisis. The crisis ultimately spurred a new era of economies driven by a broad set of financial instruments, not just specie, and laid the foundations for the later development of "fiat money," which is backed by full faith and credit in the issuing government, as we'll explore in a future post on the Continental Currency Crisis. So, how great was the great re-coinage? Tell us what you think.     -Liberty Street Economics     Disclaimer The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Sting’s 60th Birthday Party Posted: 04 Oct 2013 04:30 PM PDT Sting’s 60th birthday party Beacon Theatre, New York October 1, 2011 Sting and Robert Downey Jr – Driven to Tears ~~~ Sting feat Lady Gaga – King of pain Guitar: Dominic Miller Drums: Vinnie Colaiuta Double Bass: Christian McBride Keyboards: David Sancious Keyboards: Rob Mathes Percussion: Rhani Krija Backing Vocals: Jo Lawry (center), Lisa Fischer (stage right), Tabitha Fair (stage left)

Succinct Summation of Week’s Events (October 4, 2013) Posted: 04 Oct 2013 12:00 PM PDT Succinct Summations week ending October 4, 2013.   Positives: 1. Despite the government shutdown, equity markets were pretty calm, the Nasdaq hit a new 52-week high. 2. The national average price for a gallon of gas has declined for 30 straight days. 3. A 13 bp drop in average 30 yr mortgage rate, MBA refi apps rose 3.1% on the week. 4. Four-week moving average for jobless claims is the lowest since mid-2007. 5. NFP comes in at, doh! 6. Chicago PMI came in at 55.7 v expectations of 54, boosted by Detroit, of course. 7. ISM manufacturing rose to 56.2, the highest level since April 2011. 8. Dallas fed manufacturing index came in at 12.8, well above expectations of 5.5. 9. Japanese manufacturing PMI prints highest number since February 2011, score 1 for Abenomics 10. IMF, EU and ECB bless Portugal's post bailout progress and their 10 yr yield drops a sharp 43 bps on the week to 6.4%, a 6 ½ week low. Negatives: 1. Government shutdown continues. While its temporary, it's a big inconvenience for those businesses that rely on government data or contracts 2. Mortgage applications fell 0.4%, down 5 of the past 8 weeks. 3. ADP came in at 166k expectations of 180k, job market still lousy. 4. September Vehicle sales cool off a bit to 15.21mm (est = 15.60mm) – the lowest since April 5. Prior ADP revised down to 159k v 176k. 6. Non-manufacturing ISM comes in at 54.4 v expectations of 57. 7. Initial jobless claims rose 1k last week to 308k. 8. HSBC China PMI came in at 50.2 v expectations of 51.2, still expanding albeit slowly.

Credit Suisse Fed Cheat Sheet Posted: 04 Oct 2013 10:30 AM PDT hat tip ZH

S&P500 % Change Relative to Government Shutdown Posted: 04 Oct 2013 08:30 AM PDT S&P 500 (% Change from Government Shutdown Start) Source: Chart of the Day

10 Friday AM Reads Posted: 04 Oct 2013 07:30 AM PDT My morning reading: • Wall Street Professional Survey Reveals Widespread Misconduct, Acceptance of Illegal Activities, and Disregard of Client Interests (Labaton Sucharow) • Companies Rush to Lower Earnings Bar (WSJ) but see Stock Investors Get a Little Less Defensive (WSJ) • Apple: Why the Market Is Mispricing a Brand Behemoth (Fiscal Times) • How the White House sees the shutdown (and debt ceiling!) fight (Wonkblog) see also Economists fear debt ceiling fight may bring recession (CNNMoney) • Disney World extends hours for part timers so they get health-care (Boing Boing) • Insane Bloomberg Headline 2-fer: …..-Freak Grape-Razing Hail Crushes Burgundy Winemakers' Dreams (Bloomberg) …..-Pig Sales Fly Blind as Data Cut by Shutdown Hampers Firms (Bloomberg) • Why Uncle Sam is hoarding gold (MarketWatch) • Several banks considered too big to fail are even bigger (Los Angeles Times) see also The Big Lie of the Post-Crisis (Columbia Journalism Review) • Every First-Edition Ian Fleming James Bond Book Cover (1953-1966) (The Man in the Gray Flannel Suit) • Ferrari GTO Becomes Most Expensive Car at $52 Million (Bloomberg) What are you reading?   Stock Investors Get a Little Less Defensive Source: WSJ

Yay! Its a No-NFP Non Farm Payrolls Friday ! Posted: 04 Oct 2013 04:15 AM PDT Okay, so here is the deal: We have no report of the NFP data today. The net impact of this? Nothing. Total loss to the investment community? Nada. Actual impact to the economy? Zilch. There are two things we need to understand about this report: The first is what makes it significant; the second is the impact to your investments. As we have detailed over and over again, any single monthly datapoint is hardly significant. What matters is the long term trend in employment — is the economy creating jobs or is it losing them? This refers to the trend, not any single noisy month. Most of the time, its fairly innocuous. At major turning points, it suggests either an expansion ending, and potential recession; or at the other end, a recession coming to an end and the eventual recovery. Both of these events will be reflected in consume rsentiment, retail sales and of course, corporate earnings. The second detail is the impact of NFP on your investments. If you are a HFT, then this is a big data point, one that will give your algos a run for their money. If you are a long term investor, the monthly employment situation seems to be lots of noise, with very little signal. So while the usual suspects will trip over themselves trying to explain the horror we face from this missing datapoint, you should be aware that it is far less important than is commonly claimed — unless you have 14 hours of airtime to fill each day. BLS report is out at 8:30 am  . . .  Nope.     Previously: NFP Day: The Most Over-Analyzed, Over-Emphasized, Least-Understood Data Point (February 4th, 2011) Contextualizing the NFP Data (April 1st, 2011) An Unusually Unusual NFP Payroll Day! (June 3rd, 2011) THE MOST IMPORTANT EVER NFP blah blah blah (June 7th, 2013) "What's Your NFP Number?" [Don't have one]  (August 2nd, 2013)

How to Bypass the Debt Limit Posted: 04 Oct 2013 03:00 AM PDT click for video Source: Yahoo Finance

Constellation of Fornax Posted: 04 Oct 2013 02:30 AM PDT Lying 45 million light-years away from Earth in the southern constellation of Fornax (The Furnace), this bright star-forming ring surrounds the heart of the barred spiral galaxy. Source: spacetelescope.org via Buzzfeed

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