Author Archives: Dan Miller

Revised Post #5: FOREX Market Remains Dominated by European Movements

Thesis:  After over 2 months have passed, recent European movements are still creating tremendous changes in the US foreign exchange market and banking sector at large. 

The start of the European Central Bank’s version of quantitative easing and the Swiss central bank’s abandonment of its peg to the Euro sent foreign-exchange markets into a whirlwind of activity and volatility that banks need to juice up their trading sectors.

Volatility in the currency markets, which tends to drive sales and trading activity, has risen drastically over this first quarter. Setting the stage for a rebound at banks, particularly like those that deal heavily in those products, like Goldman Sachs.

According to the Wall Street Journal:

“Banks tend to make more money when markets jump around, assuming the moves aren’t so sharp that they scare investors away or cause the banks’ to write down the value of their inventories. Moves likes the ones in the first quarter often prompt investors to change strategies and buy and sell securities through banks’ trading desks. The banks generally charge for such trades.”

At nearly 9%, the foreign exchange market is set to play a major role in the fixed income, currency and commodities sector, according to Goldman Sachs reports.  However this quarter, given the enormous news and outsized influence in the foreign exchange market, it may as well be called the currency & co. sector. Despite this, the banks may be a bit hurt by the weakness of the trading in corporate bonds and credit related instruments, which could hurt banks more dominant in those products like Morgan Stanley and Bank of America, and not achieve as much

Interestingly, the strength in currency this quarter could make this the first period in six years in which first-quarter markets revenue rise on a year over year basis.  Not to be too much of a chartist, but this is especially important because of the first quarter’s indication of yearly performance.

All this good news aside, there may be a bit of news that has remained a little too quiet recently. According to the Wall Street Journal:

“The strength in currency trading comes amid an investigation into banks over their foreign-exchange practices. A group of banks including J.P. Morgan and Citigroup are in negotiations with the U.S. Justice Department over allegations the banks manipulated foreign-exchange rates. The banks have said they are cooperating with the investigations.”

Fortunately, the investigations by the Justice department have brought about new regulations into the Forex market. The world’s major central banks have agreed to a new set of guidelines for the foreign-exchange market, creating a road map for how individual countries’ regulators should protect client information. The new guidelines establish that it will be the banks’ responsibility to implement policies which control communication between traders. These policies should “require their personnel to refrain from passing on information that they know or suspect to be misleading,” according to the document.

 

Positive Signs for Removing the Zero Lower Bound

During the heart of the Great Recession in 2009, a traditional policy rule used as a informal guide by the Federal Reserve suggested that interest rates should be set below negative 5%.

But economists had long said that interest rates couldn’t go below zero.

To get around this “zero-lower-bound,” then Fed Chairman Ben Bernanke bought billions of dollars of securities and expanded the Fed’s balance sheet to spur low rates and risk-taking, in a policy known as quantitative easing. The move set off a fierce political firestorm that hasn’t subsided even though Bernanke’s steps have been followed by other major central banks, including the European Central Bank.

With this background, economists have pondered what should be done to get ready for the next recession, and the chances that economic conditions may call for rates to go below zero in the future.

With this perspective, more and more economists are arguing in favor of negative interest rates.

What is the obstacle?

Critics argue the idea that negative interest rates would eliminate demand deficiency is ridiculous. They think that rather, it would make people much more aware of the inflow and outflow of their money, which would likely result in less spending. Europe’s experience has eased some of those worries. The Danish central bank found that after rates went negative in 2012, the money market continued to function normally. Rates today in Sweden, Denmark and Switzerland are more negative than they were in Denmark in 2012, yet none has yet seen a surge in currency demand.

In addition, a key reason that central banks can’t set rates as low as they would like is cash. The theory is that savers would take all of their money out of banks rather than be charged a negative rate.

What to do? Well, one idea is to get rid of cash and move to digital payments.

Sound absurd?

This really would not be that far off from the current reality.  Only 7% of transactions in the United States are done in cash, and most of them tend to be small amounts of money.  There are only two constituencies left for cash. The elderly and the poor depend on cash and can be helped Criminals also depend on cash because it is anonymous.

For the first time in history, four central banks — the ECB, the Swiss National Bank, the Swedish Riksbank, and the Danish Nationalbank — all currently have negative policy rates.

What about savers?

Savers will no doubt be outraged, but discouraging savings is exactly what significantly negative interest rates are designed to achieve as it would increase investment and eliminate demand deficiency. It is important to highlight that discouraging saving (and encouraging spending) is not a bug of significantly negative interest rates, but a feature.

Planning for the 21st Century

As Hank Paulson insinuates in his 8 Rules for Dealing with China, the world is heading into a new economic era, where American hegemony does not exist, but the US and China can achieve partnership within a delicate balance of power.

Competition between the nations has been fierce and it will continue to be so. On the economic front, we need to be aware of a changing landscape.

In the past, China has moved to hold the renminbi at a a peg that many believed was undervalued, boosting their exports to the US.  Critics argued that this hurt the US job market because manufacturing jobs were being outsourced to China.

But things have changed.

As Tom Mitchell argues in the in the Financial Times:

“For now, China is more focused on supporting its currency. Through the daily trading limits and other safeguards China has constructed around its managed currency, the central bank has struggled to arrest the renminbi’s slide against the dollar over recent months. Officials say they would rather keep the currency rate stable, creating a survival-of-the-fittest environment in which only the most innovative companies thrive, creating jobs and boosting the economy. If realized, that vision would be better than any state stimulus.”

Why is this so important?

It is important because it means that the United States government is going to have to change its approach to its economic policy. It means that the United States is going to have to focus more on the value of the United States dollar in world markets than it has in the past.

In the triangular model of international economics, the argument is that a currency relationship can only incorporate two of the following three things:

  • A fixed exchange rate
  • A free international flow of capital
  • An independent economic policy

In today’s world, there is a free international flow of capital. So what has the United States chosen as its second?

In 1971, during the Nixon Shock, the US government decided to float its currency in international markets, leaving itself open to conduct economic policy within the United States independently. 

The result of this policy has been a declining value of the dollar. In terms of the Federal Reserve’s series on the dollar index against major currencies, the value of the dollar fell from January 1973 until the summer of 2011 by about 38 percent.

fredgraph

In the “new economic era” as described above, the United States is not going to be able to continue this approach.

If China is supporting a strong currency program to keep up the value of the renminbi, and it is doing so to create “a survival-of-the-fittest environment in which only the most innovative companies thrive, creating jobs and boosting the economy,” the United States cannot respond by continuing its weak dollar policy because it will have a hard time keeping full employment and labor force participation at peak levels in the long run.

The world economy is changing and the United States is going to have to change to continue to play an important role in this economy. United States policy makers must come to believe this and seek to create a vibrant and innovative society that will stand up to all the challenges that will be forthcoming in the new economic era.

Bottom of the Barrel?

Iran has agreed to a tentative deal with the United States that could add more supply to an already oversupplied market. News of the Iranian deal sent crude oil falling and leaving speculators to doubt prospects for oil.

I am certainly no expert chartist, and calling the base of a financial valley is very difficult, but I think crude oil has hit a low price. Markets anticipate events ahead of time, and they often reverse when the worst news comes out. For example, the S&P 500 bottomed in March 2009 when everyone thought that the government would nationalize the banks. Markets bottom during bad news events because sophisticated market participants generally sell when there is bad news to gain liquidity, creating an excess supply, driving down prices. Now that the Iranian news is out and the market has weighed the ramifications of Iran’s extra supply, there are less reasons to be skeptical. Given that the Iranian deal could run into roadblocks before Iran’s supply hits the market, there is the chance that Iran does not add as much supply as the market expects.

Another reason crude may have bottomed is the Shell-BG deal. For Shell to profit off of the deal, they will need oil futures prices to rise. Because Shell is willing to spend so much money on the deal, $70 billion to be exact, the deal is powerful enough to change the prevailing market sentiment for the better and shows confidence in the long-term price of crude oil. The Shell transaction could also very well shift the tides and lead to other news that would boost consumer confidence and value the long term price of crude higher than the current price.

A major downside driver for crude prices over the past six months has been the relentless rise of the dollar due to anticipation that interest rates will rise. Since crude is priced in dollars, if the dollar gains strength, crude’s value falls.

Although interest rates are almost guaranteed to rise given the present state of the U.S. labor market, rising interest rates will not necessarily lead to falling crude prices. Rising interest rates have historically caused massive disruptions in the world. When U.S. interest rates increased in late 90s, investors withdrew their capital from foreign countries and invested in the U.S. This action triggered the start of the East Asian Crisis, and caused severe currency devaluations and political unrest in South East Asia.

If interest rates rise now, the Middle East will lose a degree of economic stability. It is likely that more instability would lead to more political unrest and increase the risk premium on the vast amount of oil coming out of the middle east. There is already severe unrest in Yemen, Iraq and Libya, and if economic stability is hurt further, we could see much worse problems arising in the middle east.  This would only further drive up the price of oil.

Foul Play in the Commodities Market?

Thesis: The recent manipulation of the derivatives market by Kraft and other major corporations further undermines trust in corporate responsibility.

The U.S. commodities regulator sued giant food companies Kraft Foods Group Inc. over alleged manipulation of wheat prices in 2011. In a lawsuit filed on Wednesday, the U.S. Commodity Futures Trading Commission said Kraft and its former parent Mondelez earned profits of $5.4 million through a 2011 effort to artificially lower the price of physical wheat by buying large amounts of futures contracts.

Kraft bought $90 million of December 2011 wheat futures in early December 2011, the equivalent of a six-month supply of wheat for its mill.The complaint charges that the companies “never intended to take delivery of this wheat and instead executed this strategy expecting that the market would react to their enormous long position by lowering cash wheat prices and strengthening the spread between December 2011 wheat and March 2012 wheat futures.”

Wheat prices spiked in the summer of 2011 after drought damaged crops in Russia, Europe and China. That boosted the cost of grain for food companies like Kraft, which the CFTC said uses 30 million bushels of wheat a year to make products like Oreo cookies and Wheat Thins crackers.

In response, Kraft’s wheat traders developed a plan in which the company would heavily buy December-dated wheat futures contracts, sending a signal to other traders that food companies and other grain processors intended to acquire large quantities of wheat near the end of that year.

In response, the price for Kraft to buy physical wheat prior to December would decline, because grain companies that supply crops directly to food makers may have believed that Kraft’s mill didn’t require as much grain immediately.

Kraft executed its plan, and the market reacted as Kraft expected, yielding Kraft more than $5.4 million in futures trading profits and savings from its strategy,” CFTC officials wrote in the complaint.

The case is important because it allows the CFTC to set a precedent of fostering open, transparent, competitive, and financially sound derivatives markets. The manipulation and abusive practices that undermine the integrity of the markets must come to an end. The fact that this happened in the generally quiet wheat markets can only make the common American wonder, how often does this happen and go undetected or unpunished?

Surprisingly, the market was indifferent to the news of the lawsuit, with Kraft’s shares dropping less than 1% at the start of trading because of the news, but climbing 4% over the course of the trading day.  Perhaps the root of the indifference is that at 3 years old, this is relatively old news in terms of the markets daily operations.

How Long Will Saving Last?

Thesis: Americans are stockpiling most of the money they’re getting from slowly rising incomes and cheaper gasoline.

The personal saving rate rose to 5.8% in February, the highest level in more than two years, the Commerce Department said Monday.

Screen Shot 2015-03-30 at 7.06.45 PM

The rate measures the percentage of disposable income Americans don’t spend. In absolute dollar terms, the figure was a seasonally adjusted $768.6 billion, also the highest level since December 2012–when new taxes set for 2013 skewed the numbers.

According to Ben Leubsdorf and Jeffrey Sparshott of the Wall Street Journal, the frigid winter may have had something to do with the high savings rate:

“Snowstorm after snowstorm pounded New England this winter, and customer traffic in February fell by about half at Eggers Furniture Inc. in Middleboro, Mass. “The weather totally destroyed Valentine’s and President’s Day shopping,” owner Robert Saquet said

Mr. Saquet was counting on a sales rebound as the weather cleared, and one did materialize, he said. But March’s weather wasn’t much of an improvement, he said, and he’s hoping for a bigger pickup in April.

Americans have more money in their pockets—personal income rose by 0.4% in February from the prior month, according to Monday’s report—but they’re holding on to more of it, at least for now. The personal saving rate climbed to 5.8% in February, its highest level since the end of 2012 and up from 4.4% as recently as November.”

The latest saving figures suggest households have been cautious, opting to build up their rainy-day funds. Consumer spending during February rose a weak 0.1% while disposable incomes–personal income after taxes–advanced 0.4%.

After years of spending as if there were no tomorrow, consumers are now saving like there is a tomorrow. What is unclear, however, is how long this will remain the case.

Indeed, spending may have slowed while parts of the country were hit by bad winter weather. If that’s the case, there could be a spring rebound. In addition, people may see the recent drop in gasoline prices as an increase in their transitory income because they believe that it is only a matter of time before they increase again.  In the theory of Ricardian Equivalence this would make sense.

In contrast, the data are periodically revised, and sometimes it makes a big difference. Figures last year showed the personal saving rate climbing from 4.8% in March to 5.6% in September, which would have been the highest rate in nearly two years, but new data erased a big chunk of that money. Now, Commerce estimates the personal saving rate peaked last year at 5.1%, fell to 4.6% in September and hit a low of 4.4% in November.

Revised Post #4: Penny for Your Thoughts

The time has come to abolish the almost worthless, bothersome and wasteful penny.

You can not buy anything with a penny any more. Any vending machine? Put a penny in and it will spit it right back out. Penny candy? Not for sale in my life time. Sometimes it pays to take a look at history: a dime today is worth less than what a penny was worth in 1950, and according to the US mint’s 2013 annual report, every penny costs 1.8 cents to make. The U.S. military itself has already decided they’re essentially useless with Army and Air Force Exchange Service stores on bases rounding all cash purchases up or down to the nearest nickel. Despite this, the U.S. Mint keeps producing a billion pennies a month.

Where do the pennies go?

Two-thirds of them immediately drop out of circulation, into coin jars or behind chair cushions.  While quarters and dimes circulate just fine; pennies disappear because they are literally more trouble than they are worth. President Obama has stated his willingness to abolish the penny on February 15th, 2013.  Saying, “Anytime we are spending money on something people do not use, its something that we should change.”

The remaining 300 million or so, that’s 10 million shiny, useless items punched out every single day by government workers who could be more usefully employed, go toward driving retailers and consumers crazy. They cost more in employee-hours, waiting for buyers to fumble around for them, count them, pack them up and take them to the bank, than it would cost to toss them in the garbage. And as Greg Mankiw stated in his argument to abolish the penny, time is our economies’ most valuable resource. That’s why you see penny cups next to every cash register. When looking at the costs and benefits in aggregated terms, there have been studies that have shown that the penny results in an annual loss of $900 million in the US economy each year. How did they come by this number? The economist Robert Whaples stated that every cash transaction that involves pennies takes two extra seconds because people are fishing them out of their purses and pockets.  He also argues that eliminating the penny could make people keen on using $1 coins, which would save the US an additional $500 million a year because coins are more durable than bills which are torn and lost easily.

 What purpose does the Penny currently serve?

The penny pinchers argue that those $9.99 price tags save the consumer cents because if the penny was abolished, merchants would round up to the nearest dollar. That’s just foolish: the idea behind the 99 cent price is taking advantage of the psychological phenomenon that, “its less than 10 dollars.” In general, we cannot predict what merchants would do because they could just as often round down to $9.95, saving consumers billions of dollars over time. Indeed, it could become an even more obsolete of a fear if we were to increase our use of electronic currency.

What’s really behind America’s clinging to the penny?

The answer has to do with zinc, which composes approximately 98% of each penny minted since the early 1980s. The powerful zinc lobby has enough of a foothold in congress to persuade the senators and representatives to swat the “Penny Abolition” legislation away, as they have done twice in the last decade.

In addition, popular support for the penny is still high, at 67%, and national inertia does not seem to be moving in the direction of the tossing the penny. Sentimentality could be playing a major role in this phenomena.  “A penny saved is a penny earned,” and “A penny for your thoughts” are iconic phrases that Americans love to use and they most certainly do not want them to become obsolete.

Finally, abolishing the penny is a symbol of inflation and would be criticized as such. “The Obama administration is so inflationary that they abolished the penny!” Even though, in fact, a big failing of the Obama administration is that it let inflation be below target by not stimulating the economy enough.

Conclusion

As for the feasibility of the abolition of the penny, it be reasonable to say that the zinc lobby is powerful, so it is hard, but it is still worth trying to make it happen.  If the abolitionists want the penny to be taken down, they will have to approach it from the stand point that we should limit all of our physical currency monetary transactions and switch to e-currency.

Although the switch to electronic currency has many beneficial implications beyond simply cooperating with the elimination of the penny (such as allowing for negative interest rates), it will naturally cause massive political waves.  The moves outlined by Professor Miles Kimball to eliminate paper currency storage should help the public become accustomed to the growing number of transactions conducted electronically.

Restoring Confidence in Banks

Everyone should know that banking and finance are industries built on confidence.  Measuring confidence in banks and other financial institutions has become an industry all its own, with high profile institutions giving credit ratings banks and nations alike.  Banking can only be successful when lenders have full confidence that it has the financial strength to meet its obligations as and when they fall due.

The financial crisis, which began seven years ago, was in essence a collapse in confidence. It stress-tested banks and they were found to be weaker than we thought. Bank risk managers severely underestimated the risk that such a widespread loss of confidence in the banking system could occur. The result is that the crisis continues to impose substantial costs on society.

This crisis of confidence, which is what underlies a liquidity crunch, reflected uncertainty. Everyone knew that banks had taken hits from the subprime loans fallout. But no one knew anymore what the banks were hiding. Was the capital that banks reported really present and ready to absorb these losses as intended?

The shortcomings in risk management and regulatory settings exposed by the crisis are many.  I will focus on one and how we can improve it.

In some jurisdictions, under regulations that still exist today, the capital requirement called “equity capital”, was allowed to run too low. Capital requirements govern the ratio of equity to debt, recorded on the assets side of a firm’s balance sheet. They should not be confused with reserve requirements, which govern the liabilities side of a bank’s balance sheet, in particular, the proportion of its assets it must hold in cash or highly-liquid assets. Banks were allowed to let their equity capital, which is the main shock absorber for losses, to be run down as low as 2% of risk-weighted assets. According to the FDIC, firms are required to hold at least 6% of their risk weighted assets as equity capital.

All of this meant that, when confidence in banks was most needed, the key regulatory metric of financial health – the regulatory capital ratio – was increasingly discounted because it potentially overstated a bank’s true loss-absorbing capacity.

How to restore confidence.

Fortunately, the regulatory bodies of the banking industry have already begun to act to right the wrongs of the past. Under the new Basel III banking agreement large internationally active banks will be required to hold a minimum of 4.5% of their risk-adjusted assets in common equity. This regulation is to be fully effective as of 1 Jan 2019.

In the United States, the Federal Reserve has decided that all banks will need to adhere to the standard, with the largest banks required to hold an extra buffer. The capital must be of higher quality as well, with common equity at the core, and standards to ensure that other types of capital instruments are truly shock-absorbing.

In addition, Basel III does an excellent job of also making the capital framework more countercyclical. Banks will hold more capital in good times to prepare for inevitable downturns: this is the countercyclical capital buffer, and then the very largest banks – those designated as globally systemically important – will need to hold extra capital to take account of the extra damage their failure would inflict on society.

The financial crisis made it clear that the existing banking regulations did not allow market participants to get a clear and timely picture of a bank’s material risks. In short, the future of the banking system will have materially greater loss-absorbing capacity. This should provide greater confidence in the ability of banks to survive periods of stress, whenever they occur. There is no doubt the that Basel III and other post-crisis reforms will produce a more resilient financial system.

Doping and Game Theory

One of the memorable events of the Tour de France was the Festina affair of 1998. A car full of drugs was found, exposing the extent and scale of doping in the peleton. A few days later and riders were protesting at police raids on cars. Legend has it that millions dollars worth of dope products were flushed down the drain in that part of France as teams tried to cover their tracks. But, riders were protesting not at the fact a team was cheating, but that they were having their easy access to dope taken away. They had become so used to doping, they couldn’t see anything wrong with it.

How did this become the reality in pro-cycling? The answer comes from game theory and Nash equilibrium, in which two or more players reach an equilibrium when none has anything to gain by unilaterally changing his or her strategy, as long as the other players do not change their strategies.

Here’s how it worked. The rules clearly prohibit the use of performance-enhancing drugs, but the incentive to dope is powerful because the drugs are extremely effective, the payoffs for success are so high, and most of the drugs are difficult if not impossible to detect. Once a few elite athletes in a sport cheat, their competitors must also cheat, leading to a cascade of cheating through the ranks.

Doping doesn’t create more winners. It just meant that their take home prize money was significantly less because they had to spend so much on dope to help win. If you took away doping from cycling:

  • Their would be the same number of winners (not necessarily the same people, some respond better to dope, and some simply took much more dope than others),
  • Their health would be better
  • Sponsors would be more willing to put money in the sport.
  • Fans would be less cynical and more admiring

Dope free cycling is a clear welfare gain for everyone involved (except the dodgy doctors who charge over $100,000 a year for their services).

Unsurprisingly, nearly every rider who confesses to doping say they never wanted to, they only felt obliged to. This makes sense, why would any sportsman want a culture of doping? It’s dangerous, immoral and makes them worse off. But, once you enter the sport, there was a clear personal economic incentive to dope.

If you look at any of the riders who failed a dope test, they usually earned a lot of money. A lot more than those riders who left the sport in disgust. The USADA report led to confessions from several top riders, such as Floyd Landis and Tyler Hamilton. They have received bans, but their career earnings and salaries remain. It’s true that you have the adverse publicity of a failed dope test. But, many have been able to revamp their image and brush off doping charges because of the decreasing marginal interest with every new case.

The case of Lance Armstrong is more complex. He not only doped, but sued anyone who suggested otherwise. Now that he’s been stripped of his titles, he will face demands to return Tour de France prize money and could get counter sued. But, Lance Armstrong made so much money from the past 12 years through endorsements and sponsorship, that financially, he will be still have gained financially from doping.

The tragedy of doping in cycling is that it is a classic case of market failure. But, because it has been hard to detect, there has always been a strong financial incentive to follow what everyone else is doing.

Thankfully things are changing. But, the cleaner the sport becomes, the bigger the gain from cheating. If everyone else is doping it takes you to the same level. But, if everyone else is clean, you only need a small amount of dope to gain a competitive advantage and the prize money. The financial incentive is always there.

 

Revised Post #3: Penny for Your Thoughts

The time has come to abolish the outdated, almost worthless, bothersome and wasteful penny.

You can not buy anything with a penny any more. Penny candy? Not for sale since I’ve been alive. Any vending machine? Put a penny in and it will spit it right back out. Sometimes it pays to take a look at history: it takes nearly a dime today to buy what a penny bought back in 1950, and according to the US mint’s 2013 annual report, every penny costs 1.8 cents to make. The U.S. military itself has already decided they’re essentially useless with Army and Air Force Exchange Service stores on bases rounding all cash purchases up or down to the nearest nickel. Despite this, the U.S. Mint keeps churning out a billion pennies a month.

Where do the pennies go?

Two-thirds of them immediately drop out of circulation, into coin jars or behind chair cushions.  While quarters and dimes circulate just fine; pennies disappear because they are literally more trouble than they are worth. President Obama has stated his willingness to abolish the penny on February 15th, 2013.  Saying, “Anytime we are spending money on something people do not use, its something that we should change.”

The remaining 300 million or so, that’s 10 million shiny, useless items punched out every single day by government workers who could be more usefully employed, go toward driving retailers and consumers crazy. They cost more in employee-hours, waiting for buyers to fumble around for them, count them, pack them up and take them to the bank, than it would cost to toss them in the garbage. That’s why you see penny cups next to every cash register. When looking at the costs and benefits in aggregated terms, there have been studies that have shown that the penny results in an annual loss of $900 million in the US economy each year. How did they come by this number? The economist Robert Whaples stated that every cash transaction that involves pennies takes two extra seconds because people are fishing them out of their purses and pockets.  He also argues that eliminating the penny could make people keen on using $1 coins, which would save the US an additional $500 million a year because coins are more durable than bills which are torn and lost easily.

 What purpose does the Penny currently serve?

The penny pinchers argue that those $9.99 price tags save the consumer cents because if the penny was abolished, merchants would round up to the nearest dollar. That’s just foolish: the idea behind the 99 cent price is taking advantage of the psychological phenomenon that, “its less than 10 dollars.” In general, we cannot predict what merchants would do because they could just as often round down to $9.95, saving consumers billions of dollars over time. Indeed, it could become an even more obsolete of a fear if we were to increase our use of electronic currency.

What’s really behind America’s clinging to the penny?

The answer has to do with zinc, which composes approximately 98% of each penny minted since the early 1980s. The powerful zinc lobby has enough of a foothold in congress to persuade the senators and representatives to swat the “Penny Abolition” legislation away, as they have done twice in the last decade.

Taking into account the arguments of those in support of abolishing the penny, which tend to focus on statistics of aggregated costs, it will not happen.  Popular support for the penny is still high, at 67%, and national inertia does not seem to be moving in the direction of the tossing the penny.  In addition, the Keynesian idea of “menu costs” is something that has not been researched fully.  If the abolitionists want the penny to be taken down, they will have to approach it from the stand point that we should limit all of our physical currency monetary transactions and switch to e-currency.