Typography

I'm currently updating my History of the Fed chart . As a side project, here's what's happened to the various Federal Reserve credit programs initiated during the crisis. Most of them have rolled off the Fed's balance sheet. Even the most toxic of them - Maiden Lane I and III - seem set to be paid off. Go to scribd to see a higher resolution pdf. Alternatively, my public gallery has a high-res GIF. This chart illustrates one role of a central bank, that of lender of last resort role. A central banking facing a crisis is supposed to lend to everyone on any sort of collateral and buy all sorts of assets. If you read through the fine print of the chart, you'll see that the Fed's new facilities accepted a broad range of assets - from commercial paper to CDOs to RMBS, and opened themselves up to a fairly wide array of counterparties. What is really happening here is that the Fed is providing liquidity insurance. Liquidity insurance is like any other form of insuran...

An Old Man and his Grandson , circa 1490. Domenico Ghirlandaio The title of this post comes from this Paul Samuelson paper. Paul Krugman mentioned the paper last week, as did a few others, including Bob Murphy and Garett Jones . Nick Rowe has brought it up a few times ( here for instance). So I trudged through it. Here are a few quick thoughts. The setup goes something like this. Samuelson comes up with a science fiction world in which there's a young generation and an old generation. There are no durable goods. So if the current generation can't save, how can it prepare for a retirement in which it can hardly produce anything? Retirement will be "brutish". On the other hand, what if they print "oblongs of paper" and  "officially through the state, or unofficially through custom, make a grand consensus on the use of these greenbacks as a money of exchange. " Then the current generation will be able to acquire some of these paper bits and excha...

Tyler Cowen and Scott Sumner discuss the idea of abolishing central bank-issued cash. The existence of cash can create problems for monetary policy. Say a central bank wants to reduce the rate it pays on central bank deposits to below zero. If it did so, everyone would immediately convert deposits into cash, since owning 0% yielding paper notes is better than owning an instrument that pays a penalty rate. There appears to be a zero-lower bound to the interest rate on deposits. Ban cash and you might remove that bound. Tyler points out that the alternative to an outright ban is to put a Silvio Gesell-style tax on cash that brings a bank note's yield to something below 0%. This way, no one will prefer cash to negative yielding deposits. But as he points out, this is slightly "goofy" since it requires serial numbers and scans on all paper notes. There is a simple alternative that doesn't require a ban, nor does it require that all cash carry sensors, serial numbers, or...

Barry Ritholtz at The Big Picture spotlighted my most recent chart, "The size of major bull markets." You can purchase it on paper format here . While the improvement in GDP and employment since 2009 has been tepid, you can't complain about the stock market's performance. That being said, the current rally pales in comparison to the speed and vigor of the 1933-37 rally. Thoughts? Comments?

Gavyn Davies's post Will central banks cancel government debt? dovetails nicely with the recent fundamental value of fiat money debate. [For commentary on this debate, see Nick Rowe , Paul Krugman , David Glasner , Stephen Williamson here , here , and here , David Andolfatto , Brad DeLong , and Noah Smith ] Let recap the debate first before turning to Gavyn's post. Noah Smith pointed out that since fiat money is fundamentally worth nothing (its future value = 0), then all financial assets are worth zero. Financial assets, after all, are mere promises to receive fiat money. Now back up a second. As I pointed out here , modern central bank money is not fundamentally worthless. Were it to fall to a small discount to its fundamental value, Warren Buffet would buy every bit of money up. Central bank money has a fundamental value because even if it can no longer be passed off to shopkeepers, there are assets in the central bank's kitty. Modern central bank money provides a cond...

Noah Smith has an interesting post in which he asks: "Is money fundamentally worth nothing more than the paper it's printed on?" He goes into some soul searching on the definition of "fundamental." His concern with definitions is helpful. The recent debt super-debate was largely blown out proportion due to definitional differences, in my opinion . If anyone is worthy of describing the word fundamental , it's the sage of Omaha. In deciding whether to purchase a stock or not, Warren Buffett conceptualizes the problem by imagining that he'll never be able to sell it again. He's stuck with it forever. If you abstract from an asset's ability to be exchanged onwards, what you're left with is pure fundamental value. This applies to commodities and consumer goods as well as it does to financial assets. The definition of fundamental having been dealt with, we're left with a thorny problem. The word money is still undefined. As Neil Wallace poin...

Garett Jones did a podcast on Irving Fisher at Econtalk last week. He talked about the Great Depression and Fisher's debt deflation theory. Jonathan Catalan and Daniel Kuehn also discuss the podcast. Jones focuses on Fisher's 1933 paper The Debt Deflation Theory of Great Depressions . Two interesting quotes from Fisher's paper popped out at me: Those who imagine that Roosevelt's avowed reflation is not the cause of our recovery but that we had "reached the bottom anyway" are very much mistaken. At any rate, they have given no evidence, so far as I have seen, that we had reached the bottom. And if they are right, my analysis must be woefully wrong. According to all the evidence, under that analysis, debt and deflation, which had wrought havoc up to March 4, 1933, were then stronger than ever and, if let alone, would have wreaked greater wreckage than ever, after March 4. Had no "artificial respiration" been applied, we would soon have seen general ...

In the name of monetary experimentation I bought some bitcoins a while back and have been watching them fluctuate in value. Bitcoin is a digital form of exchange created back in 2009 that has since grown to considerable proportions. One bitcoin is worth around $11 these days, up from a fraction of a penny just two years ago. With around 10.2 million coins outstanding, the entire value of bitcoin stands at around $120m. That's small fry compared to $1 trillion paper US dollars in circulation, or the $5 trillion or so worth of gold, yet it's big enough to deserve attention. Bitcoin creates problems for two theories that attempt to explain why a new fiat money might gain traction and continue to have value - the Regression Theorem and chartal theory of money. In order to delve into these two theories, here's some data on the debut of bitcoin as a currency that should help out. Back in March 2010, someone tried to offer bitcoin for pizza in but never managed to get a bid . Late...

By yours truly: scribd version

David Glasner had some recent posts ( here and here ) on Ludwig von Mises and Austrian Business Cycle Theory (ABCT). Bob Murphy pushed back here with a good rebuttal. But David's general point still stands: what necessarily forces a central bank that has adopted the practice of lending at a rate below the natural rate to ever cease this practice? Why does there have to be an inevitable bust? I consider myself an Austrian in that one of my favorite economists is Carl Menger. I've also written a thing or two for the Mises Institute, my most recent being on Menger and Leon Walras and how the two would have differed on the phenomenon of high frequency trading. On the other hand, when it comes to macroeconomics, I remain a business cycle agnostic. I'm willing to be converted though. All you've got to do is answer a few questions of mine. Say a central bank decides to reduce the rate at which it lends below the natural rate. Businesses can come to it for cheap loans -- and...

I've been having fun with the visually-striking infograph Profitable Colours . Go here . It classifies company logos by colour, then ranks them according to worth, stock performance, and sorts them into industries. Finance companies tend to be blue while consumer goods logos tend to be red. I wonder why.

Having read Larry White's book on free banking ( pdf ) and a number of George Selgin's papers I consider myself to be an advocate of free banking. That being said, I can't help but wonder about a few of George's recent points in his post on Intermediate Spending Booms , the most recent in a series of posts that trains a critical eye on market monetarists. Here is George: But in seeking to free monetary theory and policy from the Keynesian overemphasis on interest rates, the Market Monetarists tend to downplay the extent to which central banks can cause or aggravate unsustainable asset price movements by means of policies that drive interest rates away from their "natural" values. Such distortions can be significant even when they don’t involve exceptionally rapid growth in nominal income, because measures of nominal income, including nominal GDP, do not measure financial activity or activity at early stages of production. George is saying that nominal GDP migh...

People often have difficulties wrapping their head around the idea of selling a stock short. It seems odd. Once people understand how it works, they also tend to perceive short-selling as immoral. They also assume that only a few malcontents engage in that sort of transaction. But everyone either has been, is, or will be a short-seller. When you short a stock, you're basically borrowing a stock and immediately selling it in the market. When the lender of the stock demands the stock back, as the short seller you've got to buy the stock back in the open market and deliver it to the lender. Now consider someone who borrows from the bank. You borrow a deposit and immediately sell it in the market. When the bank demands the deposit back, as the borrower you have to buy the deposit back in the open market and deliver it to the bank. These two transactions are the same transaction. Borrow an asset, sell it, and when the lender requires delivery, buy it back and deliver it to the lende...

click here for full version. This is an illustration of the interconnectivity of CDO markets from Deus Ex Macchiatto . All of the CDOs in a strongly connected subgraph depend on all of the others. You can’t value any one in isolation: you have to consider all of them together. So… how big do the strongly connected subgraphs get? Financial fragility or robust self organization?

Noah Smith asks what would happen if the Fed kept interest rates at zero forever. Specifically: Suppose that the Fed targets only one interest rate, a short-term nominal interest rate, and that its only tool is Open Market Operations (it cannot provide any "forward guidance" or communicate with the public at all). Suppose that at date T, the Fed decides to keep the interest rate at zero in perpetuity, and remains unwaveringly committed to this decision for all time > T. He asks this because Nayarana Kocherlakota, head of the Minneapolis Fed, once said , somewhat counter-intuitively, that over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation. This seems odd at first blush because we've been conditioned to assume that low interest rates lead to inflation, not deflation. I'm going to try and give an answer that financial types will understand. The spoiler is... over the short term we'd have inflation, but Kocherlakota is prob...

Gauti Eggertson's paper ( pdf ) claims that the US recovery from the Great Depression was driven by a shift in expectations caused by FDR's new policies: "On the monetary policy side, Roosevelt abolished the gold standard and—even more importantly—announced the explicit objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending, which made his policy objective credible." I thought the chart below was effective: Economists often describe the regime uncertainty created by FDR's policies. Does anyone know of any charts illustrating regime uncertainty between 1930 and 1934?

Bob Murphy asked whether Lionel Robbins was right in saying that central bank policy in the late 1920s and early 1930s was a complete reversal of traditional central bank doctrine. A blogger named Lord Keynes, (perhaps the ghost of Keynes? ), takes exception to this idea, noting somewhat dramatically that Murphy is "dead wrong" and "utterly absurd". These sorts of us vs. them dramatics would be best left to the likes of professional sports casters (economic history is not a competition), but I'm going to look past the silly theatrics so as to delve into what is a very interesting issue. The nub of the debate, in my view at least, boils down to the definition of traditional central banking doctrine . My conclusion, which I'll get around to explaining, is that compared to the 1800s, central bank policy between 1929-1932 was probably a complete reversal. But compared to Fed policy through most of the 1920s, the Fed's policy during the Depression was sim...

Bank of Canada researchers recently published an interesting paper tilted the Evolution of Canada's Global Export Market Share . One's gut reaction is to assume that with the commodities boom of the last decade, Canada's export share would have dramatically risen. We are, after all, hewers of wood and drawers of water, and the stuff we sell is generally more expensive. Not so. I've cribbed a few charts and tables from the paper: As the table shows, Canada's share of global exports has steadily declined since 1990 from 4.1% to 2.8%, despite oil prices being some 8x higher than before.. Why is this? The next table illustrates growth in various Canadian and world export markets: While Canada's energy commodity exports have ballooned, look what has happened to machinery, automotive, and consumer exports since 2001. Splat. The commodity boom's influence on Canada's export share has been entirely counterbalanced by general weakness in Canadian manufacturing ex...

Bob Murphy asks if central bank actions taken during the early 1930s might be considered "unprecedented". In the comments I pointed out that during that era an early form of QE was tried. I'm not referring here to the famous 1933 Roosevelt purchases of gold that market monetarists often point to. For instance, see David Glasner here , David Beckworth here , and Scott Sumner here . Scott also has a very interesting paper on the 1933 gold purchasing program ( pdf ). No, I was referring to the 1932 treasury purchasing program. I'm going to replicate the simple graphical analysis that market monetarists use in order to look at the 1932 episode. See this post by Lars Christensen, for example, who overlays important monetary events (QE1, QE2, LTRO) over the S&P500. Here is the context. Prior to 1932, the Federal Reserve system was significantly limited in its ability to embark on large purchases of government securities. This was because of strict backing laws in the ...