Eric S Rosengren: Two key questions about the economic recovery Remarks by Mr Eric S Rosengren, President and Chief Executive Officer of the Federal Reserve Bank of Boston, at the New England Mortgage Expo, hosted by the Connecticut Mortgage Bankers Association and The Warren Group, Boston, Massachussetts, 14 January 2011. *  *  *  I’d like to thank the conference organizers for inviting me to speak with you today. The beginning of a new year is a good time to discuss the outlook for the economy. I will also try to answer a couple of the key questions that most everyone seems to be asking about, in relation to this recovery.1 As I’m sure you know, over the past several weeks we have been getting economic data consistent with a somewhat happier new year. A recovery that has been anemic for the past year and a half looks to be increasingly supported by private spending as 2011 begins. The Blue Chip forecast for 2011 has increased 4 tenths over the previous month, to 3.3 percent. And I am slightly more optimistic than the Blue Chip; my own forecast is for growth of 3.5 to 4.0 percent over 2011. This is certainly an improvement, but – soberingly – would still leave the unemployment rate close to 9 percent at the end of this year, a rate far above anyone’s estimate of full employment.
When we say that we are “withdrawing our money” from an ATM – what we are actually doing is converting our IOUs from our bank, ie commercial bank money, into banknotes issued by the Bank of England. So even though we don’t think about it, we’re already using private money all the time. Ninety-five percent of the funds households and businesses hold that are typically used to make payments are now held as commercial bank deposits rather than cash2. The pandemic has prompted a further decrease in cash usage, accelerating a longer-term decline that is likely to continue3. 1/5  BIS central bankers' speeches  Private Money: Why do we care? Today in the United Kingdom we don’t generally pay attention to whether we are using private or public money. We can assume that the value of the money we use will be more or less stable. Shops don’t need to scrutinize which bank holds your deposit before you pay – and they are generally as willing to receive private money in the form of card or smartphone wallet payments as they are cash. The fact that commonly used private money is interchangeable with cash anchors it to national currencies and, as a result, promotes financial stability. The fact that bank deposits can be exchanged for cash on demand guarantees uniformity – ensuring that bank deposits from one bank can be used interchangeably with cash and with bank deposits from another bank. While banks do fail, regulation and liquidity backstops makes that relatively rare.