Erik Thedéen on QE, Central Bank Independence, and Digital Payments

Erik Thedéen is governor of Sweden's Riksbank, the world’s oldest central bank, Chairman of the Executive Board, and the first sitting central bank governor to appear on Macro Musings. In his first appearance on the show, Erik joins to discuss the history and operation of the Riksbank, the lessons learned from QE, the future of digital payments, and much more.

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This episode was recorded on September 4th, 2026

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Our guest today is Erik Thedéen. Erik is a very special guest. He is the governor of the world’s oldest central bank in operation, the Swedish Riksbank. Today he joins us to discuss the history and operation of the Riksbank, as well as lessons learned from QE and digital payments. Erik, welcome to the program.

Erik Thedéen: Thank you very much, David.

Beckworth: It’s a real honor to have a sitting governor on the podcast, particularly of the Riksbank. Now, as you know, I had one of your colleagues on the show a few months ago, Per. He and I had a fun conversation on the operational framework that you use there. I’ve become a big fan ever since, so it’s a real delight to get the governor, the leader of the central bank, to talk more about it, as well as other things about the central bank.

Now, I understand you just got back from Jackson Hole, the big conference there. Beautiful place to go and talk with fellow central bankers. We’ll talk a little bit about the Riksbank experience with digital payments later on. Also, again, QE, you guys have had some really interesting experiments and lessons learned from QE. Before we get into all that, though, Erik, tell us about yourself. How did you get into central banking and become the governor of the Riksbank?

Erik’s Career

Thedéen: As the governor, I’m basically closing the circle because my first job after university, the Stockholm School of Economics, was actually in the dealing room of the Riksbank back in 1989. I actually practically was working with the liquidity system and the interest rate setting. I spent a couple of years there, and then I was part of hiking the interest rate to 17.5%, I think. Then I left, and a year later, it was up on the famous 500% when we defended the krona back in the 1990 crisis. It was more or less the same time when the sterling also was hit by hedge funds.

After that, I’ve been deputy head of the National debt office. I’ve been on a hedge fund as a macro strategist. I’ve been head of the Stockholm Stock Exchange. I’ve been state secretary to the minister of finance. I’ve been heading up the Swedish financial supervisory authority for seven years. Then, since three and a half years back in time, I’m the governor of the Riksbank. I’m closing the circle. This was my first job. I don’t know if this is the last, but probably one of the last jobs anyway.

Beckworth: You’ve come full circle, as you said. You’ve seen a lot of the Swedish financial system, the economy, the institutions. You know the operational details as well as the politics. All that goes into running a central bank successfully.

History of the Riksbank

Now, it’s the Riksbank. This is the oldest existing central bank. I just want to talk about that for a while because that is so fascinating. Walk us through the history briefly and some of the innovations that your bank has brought to the practice and art of central banking.

Thedéen: I’m not a historian, but I know the basics of it. Basically, if you read the history of the Riksbank, it’s so fascinating. The bank was licensed to a private individual to run Stockholms Banco. It was Johan Palmstruch. He got the license from the king to run a bank. He was actually issuing notes. Of course, that was very profitable, so he issued too many notes. That ended, of course, in inflation, and he was fired. He was sentenced to a death penalty. It wasn’t the death penalty, but he was for sure sentenced to jail. 

That was the starting point of actually having a central bank under the parliament. Then there was a struggle between the king and the parliament. The king wanted to finance his wars. The parliament, of course, had some objections to that. It ended up in an institution under the parliament, which is interesting because we are still, I think, together with Finland, which at that time also was a part of Sweden. I think we still are the only central bank that is actually under the parliament. I might not be totally right here, but mostly they’re under the government. We’re still under the parliament. 

Then, the history from then, we issued the first notes in the world. First, it was under the parliament, and then it was a parliament that was different. It was different levels of society that changed. Eventually, it changed, I think in the end of the 19th century to Sveriges Riksbank. Big picture: The central bank was founded 1668. We had a 300 anniversary in 1968. 

That was, by the way, the year when the Nobel Prize for economics was founded. The bank set aside money for that. Since then, there is a prize in the memory of Alfred Nobel, as it says. It’s not a proper Nobel Prize. Anyway, the prize in the memory of Alfred Nobel was founded back in 1968. Then we had a very big party, which I actually took part in when we celebrated 350 years. That was eight years ago or something like that.

Beckworth: That’s incredible. I remember we celebrated 100 years of the Federal Reserve, but you guys celebrated 300 years in 1968, and now 350 just recently. You guys also have funded and started what we loosely call the Nobel Prize in economics. That’s not the proper name, as you just outlined. Is that something you participate in, or is there a select committee that does that?

Thedéen: I have a really good role in that. Basically, it’s a scientific committee that selects the prize winner, totally aside of the Riksbank. No one from the Riksbank is involved. I get to go to the party. That’s why it’s a very good distribution of labor, let’s say. I do go. I sometimes also invite fellow governors to the gala dinner at the city hall and the prize ceremony. That’s always a fantastic event to be at.

Beckworth: That is a sweet deal. They do all the hard work, and you get to go party with them afterwards.

Thedéen: Exactly.

Beckworth: Fantastic. You guys were the original central bank, 1668. I just got to throw this out there: You were also an early innovator, and maybe the only innovator—I’m not sure—of an actual price-level target from 1931 to 1933. As listeners of this show will know, I’m a big advocate of level targeting or makeup policy.

Now, of course, that has lost some of its popularity because of the high inflation a few years ago and because the Fed tried FAIT, but it’s great to see that someone actually tried it. We actually have a precedent. Kudos to you and your staff, and I guess to the 1931 staff of the Riksbank. You were also an early adopter of inflation targeting in 1993. You mentioned you were there right after the exchange rate system broke down.

Again, right out of the gate, you guys are trying something new. Then I have to also mention, in the 2010s, you were one of the first, maybe the first central bank to try negative interest rates. Is that right?

Thedéen: One of the first anyway.

Beckworth: Yes, negative interest rates. Then you’ve also been an early advocate of digital payments. In fact, we’ll talk about this later. Talking to Per and doing some of the reading, there’s some question maybe you guys went too far in digital payments. Cash still has some important role to play. This is all so fascinating that you guys are willing to get out there and lead the charge, experiment, see what works, what doesn’t.

That’s going to be a nice segue eventually into our discussion about QE because you guys have learned some lessons there. You had a really great speech in June of this year about there’s now going to be a high threshold to use QE based on those lessons learned. Let’s talk a little bit more about the Riksbank for those who aren’t as familiar with it. Help us understand the governance structure. You’re the governor, you’re the leader, and you work with an executive board. Tell us your roles, how things operate, how you give direction, and all that good stuff.

Thedéen: Basically, we have an executive board of five persons. We all have the same power in the sense that we vote on interest rates and we run the bank together. Of course, de facto is a little bit different roles naturally, given that we have different backgrounds. I’m the chair. In the Federal Reserve System, it’s called the chair; here, it’s called the governor, and the rest of the group, or the four other members, are deputy governors.

We are selected by a political council or a political committee that is selected by the parliament, so it basically reflects the parliamentary situation. Every election—we actually have one coming up now in one week’s time—they will change this governing council to reflect the result of the election.

They don’t have any say on interest rates. They don’t have any say on how we run the bank, but they oversee what we are doing. They have, I would say, the most important thing to do, which is to actually select the board members. For example, I sit for a six-year term. I could have an additional five or six years. If I get that or not, that’s the decision of this political selected council. We have had one deputy governor that was just selected just a couple of months ago, Göran Hjelm, and he was then selected by this committee. That’s an important part of it.

Apart from that, we run the bank in the committee. They don’t run the bank. It’s very clear that the political influence is in selecting and overseeing, but not influencing any of our decisions. In that sense, I would say—and I’ve been practically talking to people—we are one of the most independent central banks there is.

Beckworth: That’s great, that accountability structure. You’re still independent, but you have much more democratic engagement through this governing council that helps select the governors. What is it like to be a governor at a central bank that I think you could characterize as a small open economy? I bring this up because I sit here in the United States, more of a large, somewhat closed economy comparatively speaking, so we don’t face the same issues you do. You have an open economy. It’s very different dynamics. How do you think it’s different for you than, say, Chair Kevin Warsh?

Thedéen: No, I think the similarities are we both have a domestic and an international arena. Of course, my international, let’s say, presence in, let’s say, media is very limited if you compare to him globally. The reason is natural. Under his command, he has the world’s most important economy and hence the most important central bank. 

I think one thing that’s very similar is that our financial systems are very connected. Even if you’re in the US, you will be dependent on the financial stability of the Nordic banking system because if something happened here, it will probably affect the US. We knew that from the 2008 crisis. Even Icelandic banks could actually have an effect on the world’s financial stability. Iceland is a substantially smaller country than Sweden. I think these international interconnections in the financial system makes it important for me, but also for Kevin Warsh, to actually be very close to international, especially financial stability, issues. 

Then are we talking about inflation. I could say that I think we have gone from a situation where small open economy could have a little bit separate economic development, other inflation pattern, hence other policy rates. I think increasingly we are synchronized. Sometimes people ask me why you have so similar rate to the ECB, and I say yes, because we have fairly similar economy as the ECB. It’s not totally unnatural that we actually have similar, but not always the same. We have now a 50 basis points difference. We are lower than the ECB, for example. Norway, a neighbor, with a very, to some extent, similar economy, although they have the oil, they have 2.5% higher rates than we have. It could differ.

To get back to your question, I think that we need to be very aligned with the international world and what is going on because that affects us to very large extent, more so than the US, and that’s why we were so engaged in various international forums: the Basel Committee, the FSB, going to all the BIS meetings, and so on and so forth.

Riksbank’s Inflation Target

Beckworth: Tell us about your inflation target. We already touched on that. You adopted it in ’93, but it’s 2%, right? Is that the number?

Thedéen: Yes, it’s 2%.

Beckworth: How do you think about that? It’s flexible inflation targeting, so it’s 2% on average over the medium term, or how do you think about that?

Thedéen: I think that’s a good way to express it. Definitely flexible. I think sometimes, say, as an example, why it is mentioned, example-wise, why it actually is flexible, we now have official CPI numbers below 1% because of temporary tax cuts that was made by the government. If it was not flexible, we might be prone to cut rates because inflation seemed to be very low. We don’t, because we have this flexible, but also very forward-looking, inflation targeting in the way we look at things.

The idea to build credibility, to have the inflation expectations anchored, that leaves us some room to actually be flexible if we have, for example, a supply-side incident, as we’ve had many in recent years. I think we’re trying to be flexible, but of course, there is a limit to how flexible you could be. We also have experienced, the last couple of years, recurring supply-side shocks, and that is, of course, an issue also for a flexible inflation-targeting central bank.

Beckworth: It’s got to be challenging to be a central banker anywhere in the world today.

Thedéen: It is.

Beckworth: It’s shock after shock after shock. The standard motto is you look through supply shocks if they’re temporary, but if you have a continual spate of them, it eventually bleeds into expectations, and you have to bite the bullet and respond at some point.

Thedéen: Maybe you could say we have also—as an extra comparison, which again, if you want to have the difference to Kevin Warsh and the Fed—the exchange rate that, from time to now, could be really important. We don’t have an exchange rate to target. Let’s take this year as an example. We had a strong appreciation of the krona back in 2025. That dampened inflation in 2026, so it has an effect on monetary policy indirectly. The exchange rate is unpredictable, but when it moves a lot, it has implications for monetary policy.

Riksbank’s Operating Framework

Beckworth: Let’s segue into your operating framework or your system. Again, I had a previous discussion with Per, who’s your colleague, and he used to, I guess, run the market strategy division. He’s doing research right now, but someone who’s really informed, and I learned a lot from this. I want to talk about it with you.

The way that I understand it, your system is a dynamic, incentive-driven, demand-driven approach to the operating system. I wouldn’t call it a classic scarce reserve system, but it can become that. What I like about your system, at least as I understand it, is it depends on what the banks want. You can go to scarcity, or you can go to ample reserves. Talk about that, and how did you come up with this approach?

Thedéen: I think you have to go back a little bit in time, and yes, we basically have what we call a corridor system. There was a fairly active interbank market. Some banks were in scarcity when it comes to liquidity. Some were in abundance of liquidity in their own balance sheet. Of course, then they could trade with each other in the deposit market and ended up then in some kind of joint position versus the central bank. That was the corridor system.

Then, of course, the whole QE happened. In relation to GDP, we did slightly less than, for example, the Federal Reserve, but we did a lot. That created a system that you could maybe describe as an abundant or an ample liquidity system. We actually even thought it was a good idea during the COVID crisis, so it was probably a good idea to have a lot of liquidity or high level of reserves in the system.

Now, of course, that has all changed because we have done the redemption of the holdings, but also active QT. We are now going down to more or less a zero position when it comes to the domestic bond holdings. We still have our foreign exchange reserves, so even after this, we will have some supply of liquidity. Then, coming back to your question that this is demand-driven, the deposit rate for reserves is 10 basis points below the policy rate, but we offer these certificates at the policy rates.

There is an incentive to actually bid for the certificates to get 10 basis points higher interest rate. You might expect that they will all be bid, so 100% will be in certificates, but it’s not. They actually leave reserves voluntarily. They leave in total around 100 billion. It’s a demand-driven system. The sum of around 100 billion could vary a little bit, and that amount ends up deposited O/N with the Riksbank. The banks are prepared to take a little bit of a lower remuneration, a lower rate, in order to have that more accessibility of liquidity.

Having said that, we are also trying to have a dialogue with the banks to reinstate some of the interbank market, secured or unsecured, because I think that’s probably the way we are hoping to get them. We could—but we have not said we should, but we could—of course, create stronger incentives for that by lowering the deposit rates for reserves. We think that we will do this very gradually and have this dialogue with the banks and see where we end up.

Beckworth: What I love about your system—and I like to call it a state-contingent operating system—is that it allows for this flexibility to go to ample reserves if you need it. You mentioned zero lower bound. The economy is crashing. You want an ample reserve. You need to collapse into that, but when you’re done, you can unwind it completely. You can go back in the other direction and restore healthy interbank operations, lending, and such, but you leave it up to the banking system to determine how much liquidity they want.

The clever thing, at least for me, is that you guys have this term deposit or the certificates of deposit at the policy rate, and then the settlements or reserves below that 10 basis points. You create an incentive for them to think, do I really want to sit on all this cash? There are incentives. It’s demand-driven, but ultimately, it’s the choice of the banks. Then the final thing I’ll just say here is, there is always latent ample liquidity.

Banks know they can always come to your repo facility. They can always get the liquidity they need. It’s not like they’re scrounging around for liquidity. They know they can come to the bank. You just have, I think, a great setup. My hope is that as the Fed considers some of the changes it’s making, it will look to the Riksbank.

Thedéen: We both have the repo facility. That’s true. If you have been buying certificates, and they’re only one week in maturity, if you, after two days, realize you need more liquidity, you could just sell them back to the Riksbank. You could also use them as collateral. The availability of liquidity is always very high. Again, we give the flexibility for the bank to choose.

That’s basically what you’re saying. It’s not only the repo transactions. Well, I guess it’s the repo if you do it with a certificate, but you can also outright sell it back after two days. Then you get the liquidity in your balance sheet.

Beckworth: In your system, you could go between ample and scarcity within a week, right? It depends on the banks.

Thedéen: Yes, I would say so because if you take now, we’re offering 400, 500 billion, maybe more, 400 billion in the certificate auctions. They bid up for, let’s say, 300. If we were to see that something is happening in the system, we want to have ample liquidity for safety reasons, we could basically skip the auction. Then we have, all of a sudden, a lot of liquidity. Yes, it’s a fairly dynamic system.

Beckworth: That’s incredible because, again, coming from this side of the Atlantic, it’s like, man, we’re stuck in a system. If we do change, it’s going to take a lot of time. It took a lot of time to get into this. You have a system set up that’s so nimble, so dynamic; within a week, you can go from ample liquidity to scarce liquidity. That’s just mind-blowing, honestly, from this perspective. Great stuff.

One last question on operating systems and the frameworks. There seems to be this push around the world toward more demand-driven operating systems. Your bank’s an example, but the ECB, the Bank of England, I think the Bank of Canada, the Reserve Bank of Australia, they’ve really gone a long way in that direction. I think the Fed now is also waking up. A lot more conversations about, at least, let’s reduce the demand for reserves, more demand-driven. Why do you think this big push now? Why this global change in perspective toward demand-driven operating frameworks?

Thedéen: Sometimes I have this slightly cynical view on this, that one thing is that you want to pick the best system, and you can have a lot of intellectual discussion on which system is the best, and you can listen to your show with many different views. I also think it’s state-dependent. If you have a lot of QE, a lot of bonds in your balance sheet, you create ample reserves, then you will say that the floor system is good. If, like the Riksbank, we were able to actually get rid of our domestic bond holdings, we have the opportunity to choose another system, and then maybe we get prone to look into other systems.

That’s my cynical view. It’s a little bit state-dependent here. If we were stuck with the $1,000 billion that we actually were at when we reached the top in holdings forever, maybe I would be sitting in the show and say, I actually think an ample system is really good. I think it’s a little bit dependent on that. For sure, for us, that makes a big difference, as we have been successfully reducing that.

Again, it’s very hard, also, I must say, to compare systems, but Sweden, small, open economy, not the world’s largest bond market. We have a small debt, which I  think is important. When we sold bonds, it was not like the tapering back for the US. It was like, yes, please sell more because we want to have the liquidity. We got the foreigners to buy bonds because, all of a sudden, they could trust that the market liquidity was okay.

For us, it was welcomed that we brought down our balance sheet. Of course, if you have a higher debt-to-GDP as the US, but not only the US, flooding the market with supply is, of course, more risky and more complicated.

Beckworth: That’s, again, something I like about the Riksbank is you guys are thinking carefully about independence and the fiscal pressures that the US faces. That actually has me worried. As far as the eye can see, we have large primary deficits. At some point, that intersects with what the Fed can do. You guys have taken steps to address that. I’ll come back to this deposit facility where banks earned 0% interest as one of the steps you took.

Let’s talk about balance sheets and QE because we were touching on this. This is a great time to bring it up. You had a speech back, I believe, on June 4th, and you were speaking to the annual meeting of the Swedish Economic Association. You gave a speech titled, “On the Riksbank’s High Threshold of Asset Purchases.” It was a really interesting speech. We’ll provide a link to it in the transcript for the show. Walk through the lessons learned and then what it means for this new high threshold.

Riksbank’s Experiences with QE

Thedéen: I think we tried to draw some experiences or, let’s say, learn from the QE. This is not saying that my predecessors did something wrong. It’s prudent to assess what you actually did and see if you can learn something. I think what we learned is that doing bond buying or QE for financial stability reasons, you can never, ever exclude because eventually, you might end up in a Liz Truss moment or, in our case, we had a lot of turmoil in the corporate bond market. Then I think that kind of tool should be available.

When it comes to big asset purchases for inflation targeting reasons, I think our hurdle is high for a couple of reasons. One is that the borrowing that goes on from the household sector, but also from corporate sector, is at variable rates. If we bring down the long end, basically nothing will happen with the borrowing costs for private individuals nor for corporates. So, hence, that kind of stimulative effect that you might expect from QE bringing down interest rates is much more in doubt, I would say, in Sweden.

Then maybe, which I think is the most important argument, and I have some experience from it also firsthand, that’s the interconnection or interactions with the political system. As we are buying bonds, and then we actually made a loss, which is true for most central banks when interest rates went up, we have to go to the parliament and ask for capital injections. That was what we did because we have this mark to market, and we had a fairly weak revenue stream. That was because of the signal rush.

Basically, we asked for capital injections. We started with 0.5%, 0.6% of GDP in injections, more than 40 billion Swedish. We eventually got 25 billion. To sit down with people from the parliament coming from the central bank and asking for money, that is not, if you do it regularly, not good for your independence. That’s my clear lesson. We had a lot of credibility. They trusted us. One time is fine, but I don’t want to be there several times.

Even if  Federal Reserve or the ECB, don’t get capital injections, but for sure they’re delivering less revenues to the government, as they also are making losses, but they, as you know, have a different kind of accounting system. I think maybe more important is that if you are involved in the government bond market as a central bank, you’re indirectly, or maybe even directly, into fiscal policy.

What happens if we are often in the market, it might be in another situation 20 years from now. We have, let’s say, a high deficit, a higher debt, and interest rates are going up. Why shouldn’t we support the government in bringing down interest rates? If we are selling and rates are going up, we might have a discussion why we are destroying for households and corporates. We are in a business that we shouldn’t be in.

For independence reasons, it’s important to stay away from these capital losses, but also stay away from this ongoing interaction in the finances of the public debt because that’s basically what our debt office is doing—keeping away from that. For me, it’s a very fundamental independence question. 

To that, again, adding that for us, the positive effect that you, of course, intellectually argue and even argue there, if you bring down interest rates, it will be easier for corporates to borrow and so on. That was not such a strong argument. I think the more fundamental arguments, to me, are extremely important. That’s why we think that the hurdle should be really high. We’re not saying that we never, ever will do it, but we’ll say, yes, that the hurdle should be high.

Beckworth: Yes. Those are great points. I think we see some of that happening here in the United States. Secretary Bessent is trying to use some Fed facilities to tamp down on long-term Treasury yields. He has his own Treasury buyback, but effectively, he’s wanting to use the FIMA Repo Facility at the Fed as one way to minimize disruptions on longer-term yields.

That is the concern, is that if the Fed’s balance sheet is this thing that you can just operate, without any constraint—because one of the claims at least, is that ample reserve separates the size of the balance sheet from the stance of monetary policy. It’s an extra degree of freedom. You can expand and shrink it without affecting the stance. Why not use it to buy up debt if there’s problems in the Treasury market? That is a big concern. It does concern me. We’re getting closer and closer to that. Great points.

You mentioned that you had to go to the parliament, to the government, and ask for capital. Now, in the US, as you mentioned, we hide that. We’re implicitly doing the same thing by spending less. We have this deferred asset. It’s a great point. The more people become aware of that, the more questions it raises, and the more you border on this independence being reduced.

Deposit Facility at Riksbank

It’s a great exercise, what you’ve done. I think this is a great time. Let’s talk about this deposit facility you set up: a special deposit facility to avoid some of the need to go to parliament. Tell us about it.

Thedéen: We have a special situation as our outstanding volumes of notes and coins are very limited. It’s like 0.7%, 0.8% of GDP. It’s been shrinking. That is the typical revenue stream for central banks. Debt without interest rates in large volume, that gets you to pay your staff, and eventually also pay money to the government if you have a surplus. We can’t rely on that.

After the capital losses, we were running a negative equity. We asked for the capital injection. Then we realized we need to have some kind of regular revenue coming in, so we, over the course of, let’s say, 10, 20 years, build up the capital. We can’t be running too low revenues year after year; that will eventually lead to another discussion of capital injection. We need to create something that has some of the criteria as cash, namely, we don’t pay interest rates.

Then, by law, we could introduce reserve requirements, but we could only do it where you could pay zero rate. We could only do that for monetary policy reasons. I find it hard to argue that are any monetary policy reasons to get revenue to keep our independence. We tried to make that argument internally, but I think, talking with the legal department, they were not convinced, let’s say.

Basically, we went to the parliament and said, “This is what we want to do. We need to have this kind of revenue stream.” It’s, I think, reasonable that the banks are paying. They will get a lot of services from us. It used to be cash, which actually is no longer. They are, in a sense, earning money for not having to handle the cash. 

Basically, in a very, very short period of time, I think it’s from start to end, it was six months or something like that. That’s really quick for being a legal process. All political parties unified behind this legislation, so giving us the right to have this reserve requirement with zero interest rate. Explicitly, the reason being to let us earn revenue.

Beckworth: For me, that’s another lesson learned for the Fed from the Riksbank because as the US gets into dollar-based stablecoins, in theory, those dollar-based stablecoins could displace at least some part of the US currency franchise. That currency franchise is an incredibly cheap funding source, as you just mentioned. One of my friends and often guest on the show, BillNelson, likes to call the currency the “golden goose” of the central bank. If you lose that, you’re in trouble.

Now, of course, dollars are everywhere. This is an extreme scenario, but it’s good to think through that. That’s why I think it’s probably smart for the Fed to not pay interest on these proposed skinny Fed master accounts they’re talking about. It’d be very similar in spirit to what you guys are doing there.

Let’s circle back, though, again to your speech. We were discussing this in the context of that speech about the high threshold. You’ve mentioned several reasons, some concerns. What is this threshold? What will it take for you to trigger and use QE again, given that you have these concerns?

Thedéen: I think it is very much dependent on which situation you’re in. If they exclude the COVID period because that was also for financial stability reasons—COVID was an extreme event where you couldn’t exclude some kind of Armageddon, basically, 10% drop in GDP or what have you. That was an extreme scenario. In such a situation, you probably want to buy some insurance.

The years before that, it was about bringing up inflation from 0.3%, 0.4%, 0.7% to the 2% target in an economy that was actually growing pretty well. I think, to me, it would be more reasonable to be more patient and, again, flexible inflation target, live with a slightly lower rate. Of course, be watching inflation expectations so they don’t drop dramatically, but be patient and wait until inflation comes, and don’t jump into the QE too fast because you have these drawbacks with QE, the risk of capital losses, the link to the fiscal policy which could hurt your independence, and also scrutinize the argument, is this actually going to make inflation go up?

Then you have the argument that I mentioned with variable rates. I think also for other central banks, I think that argument should be scrutinized. What then happened, which was more bad luck but I think also tells a story, it was that we were monetarily stimulating the economy a lot—zero rates, QE, and then we entered into ending COVID. That was a total shock.

Everybody was out traveling, going to restaurants. All of a sudden, demand went up dramatically, and also in sectors that had been closed down in an economy that had been stimulated a lot, not only by monetary but also by the fiscal side. Of course, risk management will tell you maybe you should be a little bit cautious how much of stimulus you put into the economy if you would enter into something, maybe not COVID, but something that actually would change the scenario.

Beckworth: That’s great to hear. You’re going to have to think more carefully going forward whether you pull that trigger.

Thedéen: Also, maybe, David, after that, I think what I pinpointed a lot, and I think that it’s also written by IMF and others, is that when entering into, either if it’s for financial stability reason, and the Bank of England did a really good job in the Liz Truss crisis, but also for inflation reasons, you should have some kind of exit plan. Not just say, I’m buying, but actually try to think through what are the arguments and when should I exit so it doesn’t go up and up and up, and in the end, you will have this, as you have on the show several times, this ratchet effect that you have higher and higher all the time.

Beckworth: Yes, I was glad to see that in your speech. You talked about the ratcheting effect of QE, which is, at least in the US, a serious problem because we did have an exit plan with the early QE1, QE2. The goal was to return to some similar rising but trend path we had before QE. Now, I want to be fair to the Fed. The system they had before 2008 was a little bit weird. They had, what I would call, an asymmetric corridor system. There was no interest on reserves; it was effectively 0%.

Banks had this incentive to really spend a lot of resources to get away from holding reserves. Had we had a traditional corridor, interest on reserves at the bottom, there would have been less of that distortionary effect. I don’t think we ever go back to pre-2008, but we do need to think of a system, I guess what I’m trying to say here, that allows the Fed to fully unwind QE and not have this ratchet effect that this continues to build up over time.

One of the big takeaways from that literature that Raghu Rajan and his co-authors is, not just that the balance sheet gets bigger, but it actually can impair overall aggregate liquidity. You think you’re adding liquidity to the system, but then banks go out, and they add liquidity too that depends on the existing liquidity. It’s tied up. You’re actually more fragile than you think you are just by looking at aggregate reserves. I was delighted to see you address that concern.

Thedéen: I found that argument that Raghu puts forward very interesting. I don’t know if it holds when you look into the data, but it might. Basically, if you have a lot of liquidity, you might be more prone to offer liquidity to your clients, and in the end, you have the same liquidity risk that you had when you started. I found that very compelling as an argument. That will, I guess, take away a little bit of the positive effects of having this ample liquidity situation.

Beckworth: That’s their core argument. They say one implication is that banks are going to fund with short-term liabilities and therefore, they’re not going to actually do as much long-term lending as a result. It kind of mutes or offsets the intended goal of QE in the first place.

Thedéen: I find it a little bit like you’re driving a little bit faster if you have the seat belt on, right?

Beckworth: Yes.

Thedéen: If you have a little bit more space, you drive less—

Beckworth: Incentives.

Thedéen: You probably add some safety, or you do, but maybe you’re a little bit more careless.

Digital Payments

Beckworth: Risky. Let’s transition into another fascinating feature of the Swedish economy. We’ve touched on it. This is its early adoption and promotion of digital payments. As I mentioned, you just got back from Jackson Hole. The whole theme there was on financial innovations, and payments and policy. There were some fascinating speeches there by Darrell Duffie, Eswar Prasad, a bunch of people there. I’ll mention Arvind Krishnamurthy’s speech. There’s a lot of interesting discussions there that went on.

Of course, the big speech by Kevin Warsh everyone wanted to hear as well. I’m sure you had a good time there—the talks, the hallway conversations. I think it’s a great motivation or segue into thinking about what we have seen with digital payments. Tell us about your experience, or the Swedish experience, with being an early promoter of digital payments.

Thedéen: I think it’s very much about this network effect. I sometimes get the question, how come you have such a vibrant capital market? How did you do it? I never have an answer because it just happened because we did a number of reforms, including the pension system and others. Then it evolved into a vibrant capital market.

It’s a little bit like the payment system as well, I would say. There was this introduction of the Swish system, which is the mobile instant payment system. That created some traction. All of a sudden, much more traction. We actually have a verb now for Swisha. Basically, when you’re sending money, typically to your kids, actually, but also to some friends maybe.

That network effect that the mobile pay created. Then, as that was so successful, it was also introduced into e-commerce. Now, if I go in, I want to buy something on the internet, I could do it over Klarna. I could do it in Visa, Mastercard, but I can also Swisha. Of course, we already had the credit cards that were efficient and widely used. I think there’s been a little bit of a tipping point. Once you’re at that tipping point, everything moves really fast.

In 2010, I think 40% of all purchases in stores were cash. Now it’s 5%. It’s a dramatic move. We have turned on that tipping point. Since then, to counter a little bit what you say about innovation, there’s not been so much innovation going on. We don’t have any stablecoins in krona. The tokenization has not really taken off.

We go to all these seminars, including the fantastic seminars in Jackson Hole, talking about what could happen. We are really in this fairly advanced digital payment system that we have, but it’s basically similar to where we were, let’s say, five years ago.

Beckworth: Let’s touch on a related issue that we mentioned earlier, and that is, can we go too far in digital payments? My understanding is there’s some hesitation now among policymakers because they’re worried that some people need cash, and so it’s hard for them to shop or transact. Tell us about that.

Thedéen: I think two dimensions we could go to. One is cash, and we are trying to now push for people to have cash holdings. I’ve said in press conferences, you should have at least 1,000 kronas. That’s about $100 per adult in order to be able to buy food and medicines in a crisis situation. That, I think, got some traction. Also, not only have it in your drawer, but actually to use it as well. That’s what we are trying to push for.

There was also a legislation put forward, which we pushed for, making it mandatory for grocery stores to accept cash. If you move around Stockholm, a lot of the shops say, “No cash,” but that will not be permitted for grocery stores and pharmacies. That’s also a way of legally actually saying, well, don’t go too far. 

Then, more generally, and that was some interesting interventions also at the Jackson Hole that this 24/7 idea, is that really a good thing for the society overall? To me, it’s not 100% sure because you have the AML issue. How do you check for AML if everything is instant 24/7? I think you should have some concerns about that. Of course, many financial crises have been solved during a weekend because everything is closed down. If you don’t have any weekends any longer, what will then happen? Will you need to stop the banking system by law or something like that?

I think there is a reason to be a little bit cautious and actually have a debate on the social value of having everything 24/7. Maybe there is an argument that the social value for some people is very big. For most people, it’s zero, I think. Also, think about, are there policy reasons to be a little bit careful here?

Beckworth: Yes, I’ve had guests on the show before who are like—I’ll mention his name: Aaron Klein from Brookings. He’s a friend. He’s very much, “We need to have better payment systems in the US.” It’s true, our payment system in the US is behind. He thinks people get paid on Friday, but they don’t get their money until Monday or Tuesday of the next week, that is a real issue, and maybe we can address that.

Then I’ve had other friends tell me, “Yes, but if we completely go to 24/7, as you said, what do we do with bank failures on the weekends?” There’s actually some social good. It’s fascinating to hear you mention that as well.

Thedéen: I think you can’t stop that we’re going from three days to something close to instant. Is instant one second, or is it two minutes? I think we’re at five minutes. Three days is basically, yes, banks earning rents. I’m not in favor of that.

Beckworth: Yes. It was fascinating to read the talks there. I was really fascinated by Darrell Duffie’s, I’ll just mention it briefly, but I learned a new term. I’m a macroeconomist. I’m still learning all this financial stability and digital stuff, but atomic settlement. It’s the idea of atomic settlement that everything simultaneously—the payment, the sending of the asset—that all happens in one on a ledger somewhere.

It solves a lot of problems, but it also creates new ones. He mentioned it might expand the central bank’s footprint because you need more clearing money to make sure those transactions happen. The more we go down this path, there’s efficiency gains, but it’s also complicated, and maybe that’s the world we end up in. 

Thedéen: I also listened to that, of course. What struck me when I listened to all the speech of what could happen in the future is how about the transition? Let’s say everything’s gone into stablecoins. How would the transition look like? That should also be cared about. You need to be stable. We talk about payments here. We talk about salaries, pensions. I think that transition is something that you need to think of when you’re thinking about new clearing systems, new payment system or this atomic settlement system.

Beckworth: It’s fascinating to hear that Sweden is realizing there’s actually a place for physical cash. I’ve told this story before on the podcast, but just to reiterate it, whenever there’s a storm, like in the US or hurricanes, power goes out. What do you do? You need cash. 

My brother lives near Asheville, North Carolina. About a year ago or so, they had a big hurricane go through. All the power went out. They had to get out. The only one in their family that had some cash on them was his daughter. They found a gas station, but the gas station would only take physical cash because there was no internet to do the payment. There is a time and place for that. 

Dollar-Based Stablecoins and Sweden

Let’s move on and talk about, again, some of these conversations you had there about digital payments, about stablecoins. I want to touch on something that came up in one of the talks. I believe it was Eswar Prasad’s paper about the dollar-based stablecoins could be dominant. There’s a lot of conversations already about this. Should Tether and USDC, and other dollar-based stablecoins, spread through the world? It’s not clear that they will, but should they? Does that have any bearing on what happens in Sweden and geopolitical concerns you might have in this moment that we’re in?

Thedéen: First, I don’t think it will happen in the developed world, but you should be very careful what you say. It might happen, and then people will pick up what I said. I’m a little bit skeptical that it will happen. This dollarization, I think, is much more at risk, or maybe for some countries, it’s an opportunity, but maybe mostly at risk for the developing world. 

We are close to the euro, we have a flexible exchange rate to the euro. In some stores, you could actually even pay with euros. There would be, you could argue, a big risk of a euroisation of the Swedish krona. We are 10 million people. They are like 400 million people, so why wouldn’t we just pick up the euro? There’s some volatility, but it’s not 50%. It’s like 10% up and down, but we haven’t. To me, that tells a story that if you have everything in order—fiscally, monetary institutions are credible, democracy, rule of law, and stable prices—it seems like you’re pretty well protected for the euroisation in that case, but also, I would argue, for a dollarification.

I wouldn’t be that worried about dollarification if we keep our things in order. I think we do, both in Sweden and in Europe. There might be certain niches where the dollar could expand even further. We already have the dollar as a very important means of payment in business, in oil markets, what have you. Maybe that could be expanded to even more goods and services. I wouldn’t exclude that, but that’s more on the exporter to importer.

If they have successful stablecoins in euros, that, of course, could be something that challenges the euro payment system. Potentially, in kronas, I don’t think they think our market is that interesting.

Tokenization

Beckworth: In the time we have left, I want to talk about what do you think could happen in the future with the digital payments, and in particular, tokenization. A lot of talk about tokenization. Again, the Darrell Duffie paper, I found real fascinating. He talked about tokenized reserves, like the central bank itself could have its reserves traded 24/7 on some kind of ledger, so it wouldn’t have to be during the daylight hours. It could be any time.

Maybe the Riksbank already does something like this, but do you see a world where we have more tokenized activity, central banks, tokenized securities, tokenized deposits, at least in the developed world? Is there a future for that, or are you skeptical?

Thedéen: No, I think there’s a future for it, especially when you’re now talking about the traditional system that we use, I would say, successfully. The reserves, the deposits, the clearing systems. I think stablecoins have a very important role to play. They will inject competition. They will push the system to develop because, let’s be honest about it, central banks are not the best innovators, and nor maybe are some of the incumbent banks.

If we have some outside pressure, not only the stablecoins but the fintechs of the world, I think eventually the system would need to adapt, and that’s typically what we see when we have seen other kinds of pressure from the fintechs of the world. Yes, I think the tokenization definitely is a very important development. 

We haven’t seen much of it in Sweden, but for sure on the settlement side, for example, on the government securities, there are some discussions going on. We see that Switzerland is testing. Yes, I think so. Again, my lesson from innovation is that often banks survive, the systems survive, but they adapt. They could be a fairly different animal at the end of the process, but they don’t just fall down and die. It’s more like they’re adapting. If you look on the banking development last 20, 30 years, they’ve been challenged many times, but they’re still there. They’re adapting, and I think that’s going to happen also when it comes to the tokenization and a DLT technology or what have you.

Beckworth: Okay. With that, our time is up. Our guest today has been Erik Thedéen. Erik, thank you so much for coming on the program and being the first sitting governor to join Macro Musings.

Thedéen: Thank you very much.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.