Typography

Nick Rowe , Scott Sumner , and most recently, David Glasner , all say that the US's current medium of account is the dollar. I disagree. I think that the current medium of account is CPI units. Here's why. First, there's been some sloppiness with definitions in the links above, so let's define the term. The medium of account is whatever defines the unit of account . I think this a pretty standard definition. That's Bill Woolsey's definition here . David echoes this definition in his comment here . Take an old-style central bank that holds 100% gold reserves in its vault. It chooses the word "dollar" to stand as the unit of account . The bank then goes on to define the dollar as equal to x grains of gold. Thus the medium of account is gold. Our central bank issues paper notes which are to be used as the medium of exchange . Shopkeepers post prices in terms of the unit of account , the dollar, and accept notes as payment. Some shopkeepers might eve...

Mirroring Nick Rowe , here are some quick comments on the departure of Mark Carney from the Bank of Canada to the Bank of England. Canadian monetary policy is set via an ongoing conversation between the Prime Minister, his/her agent the Minister of Finance, and the Governor of the Bank of Canada. This joint conversation happens because unlike Japan, Europe, or the US, the Finance Minister has the legislated power to fire the Governor of the BoC before his/her term is up. The minister must provide a public (and potentially embarrassing) explanation for doing so. As a result both minister and governor are incentivized to cobble policy jointly. So whatever policy we've had in Canada since 2008, you can be sure that there's a bit of PM Harper and Finance Minister Jim Flaherty mixed in with the Carney. Did we ever really know the man? With Carney leaving but the other two sticking around, will there be much of a difference going forward? As for the UK, Carney's term at the BoE r...

Stephen Williamson catches a lot of flack on the net. Some is undeserved, some is deserved, but a big chunk is probably due to the fact that he and his fellow New Monetarist s have a communications problem. People don't understand what they're up to. So here's my attempt to bring Steve down to earth and explain to the world the importance of the research being done by him and his colleagues. I'll go about this by adding a bit of historical context. After a quick tour of the history of monetary thought, readers will be able to see where in the greater scheme of things the New Monetarists fit. Now Steve doesn't know much about the history of economic thought - he thinks it's unimportant. So in a way, I'm explaining not just Steve to the world, but Steve to Steve. One of the big problems in economics is how to deal with two significant but divergent streams of economic thought - monetary theory and real theory (ie. microeconomics). Put differently, there's...

The word "moneyness" is synonymous with liquidity-premium. Both refer to that portion of an item's value that is derived from an individual's ability to sell it in the future. I wrote about bitcoin's liquidity premium here , and here I talked about how QE affects the liquidity premium of the targeted asset. Since it happens so rarely, it's always fun to see the idea of liquidity premiums pop up in academic literature. I was recently reading an old interview with Thomas Sargent in which he describes himself as “a Harrison-Kreps-Keynesian.” Here is Harrison and Kreps's paper ( pdf ), and here is the money quote: We say that investors exhibit speculative behaviour if the right to resell a stock makes them willing to pay more for it than they would pay if obliged to hold it forever. This phenomenon will not occur in a world with one period remaining (as in the capital-asset-pricing model), in a world where all investors are identical, or in a world with compl...

When people talk about gold, they usually talk about the gold price. But there are a few other key gold market metrics that often go unmentioned. The chart below stacks the gold price on top of the gold forward rate (GOFO), LIBOR, and the lease rate. The gold lease rate is an interest rate. Just as you can lend your cash to a bank at the bank's deposit rate, you can lend your physical gold to a bank at the lease rate. Understanding GOFO and the lease rate is important not only for gold bugs, but for anyone who wants to get a good grasp of the phenomenon of interest rates. GOFO and the gold lease rate demonstrate that interest rates are not phenomena solely confined to paper assets. The ability for an investor to lease their gold and earn an interest return makes up part of gold's peculiar "own-rate". All commodities have own-rates. From our perspective as consumers, we rarely get to see these markets, but they do exist. I've illustrated them in the following chart...

Last week I wrote a post that attempted to dehomogenize Scott Sumner from Krugman. I left a similar but more precise comment on Bob Murphy's blog. Sumner seemed to endorse it. But there's something that doesn't make sense. Open market operations can really only have an effect if markets are not efficient. Yet Sumner is a great believer in efficient markets (as commenter Max notes on RM's blog). See Scott here and here . How can Sumner reconcile those two positions? First, some definitions. I'll define efficiency as the idea that financial assets trade in the market at the discounted value of their future cash flows. Any deviation from this value will be fleeting as investors arbitrage it away. Another word for discounted value is fundamental value . Here's the logic for why open-market operations need an inefficient market to work.* Say reserves are currently plentiful and yield 0%. Twenty-year 2% bonds are trading in the market at their fundamental value ...

(Disclaimer: this article is geeky. If you want to follow it, you should already know a bit about the European Target2 imbalances debate ( here is a good intro) and have read my description of the US Interdistrict Settlement Account) There is a tension involved in being a lender of last resort. Central banks are supposed to provide liquidity to solvent but temporarily illiquid institutions during a liquidity crisis. But they're not supposed to go as far as keeping bankrupt banks or governments alive. Hans-Werner Sinn ’s proposal to import the Federal Reserve's Interdistrict Settlement Account (ISA) into the Eurosystem seems to me to be an attempt to impose on National Central Banks (NCBs) the discipline necessary to prevent them from crossing this almost transparent line. But an ISA-type settlement mechanism in a European setting threatens to not only prevent NCBs from crossing the line; it could prevent them from fulfilling even their basic duty as lender of last resort. Thi...

David Beckworth has a good post pushing back against people who are pounding the Fed-is-monetizing-the-debt drums. His point was that there is no evidence of monetization. The Fed today holds roughly the same amount of government debt as a proportion of outstanding debt as it did in times past. Accusations of monetization need to start out with proper definition of the term. To "monetize" means to turn into money. All banks engage in monetization, whether they be central banks or private banks. Banks monetize houses, debt, commodities and all sorts of other assets, issuing liquid liabilities in return. A credit card essentially monetizes your 30-day IOU. So to accuse a bank of "monetizing" is like accusing someone of breathing. In conducting QE3 purchases, the Fed is currently monetizing government debt and agency-issued MBS. Is that bad? The Fed has to monetize something . Would people be happier if it was monetizing corporate bonds? Gold? Or do they simply want i...

I listened to a good Econtalk podcast last night with guest Steve Hanke . Few people in the world know as much as Steve does about hyperinflation. His catalogue of 56 hyperinflations (with Nicholas Krus) inspired me to do this chart. Most of us have been lucky enough not to have lived through hyperinflation. Here's what it might feel like if we did.

On November 15 @ 5:37 PM, Wordpress.com tweeted that it would be accepting bitcoin as payment. Over the next twenty-four hours, the price of bitcoin steadily rose on Mt. Gox , the major bitcoin exchange. See chart below. This is a great illustration of the idea of a liquidity premium . All assets carry a liquidity premium. This premium will be smaller or larger depending on an asset's ability to be easily bought and sold, or its liquidity. The idea of liquidity is straight from Carl Menger, who figured things out back in 1872 ( pdf ). Keynes also knew this, read Chapter 17 of the General Theory. (This is one of those great examples of Austrians and Keynesians agreeing). Other words for liquidity include saleability and marketability. In short, the more marketable an asset, the larger its liquidity premium, which in turn means a higher price. Illiquid assets have small premiums and lower prices. In announcing the acceptance of bitcoin, Wordpress has added yet another avenue for th...

Daniel Kuehn and Robert Murphy wonder why Scott Sumner takes Paul Krugman to task on liquidity traps when they each seem to be saying the same thing - monetary expansion will get you out of a trap. The phrase "monetary expansion" can mean many things. I think Krugman and Sumner have categorically different opinions concerning one specific sense of the phrase   – quantitative easing's ability to have independent effects in a liquidity trap, . When it comes to thinking about monetary policy, Krugman, Delong, Eggertson, Woodford, and other New Keynesians begin with a frictionless model populated by rational agents. No individual has the power to set prices and everyone can attain any quantity of assets at a given price. There is no limit on borrowing. With these assumptions and interest rates at zero, quantitative easing is powerless. That's because all asset prices are uniquely determined by the present value of their future cash flows. A central bank that threate...

An "alt-chain" is any alternative to the flagship cryptocurrency, bitcoin. New alt-chains pop up all the time. Terracoin debuted just last week, and the month before an alt-chain called PPcoin began. Most alt-chains are similar to bitcoin. Indeed, some are identical. From what I've read, terracoin developers just took the bitcoin source code and copied it, modifying only the name. PPcoin makes some changes to bitcoin's methodology by adopting a different method for adding to the blockchain, the cryptocurrency's digital memory of transactions. But the concept is the same. PPcoin and terracoin join a long list of alt-chains that have emerged since bitcoin became popular in 2011, including namecoin, litecoin, solidcoin, Ixcoin, IOcoin, liquidcoin, geist geld, solidcoin, devcoin, tenebrix, fairbrix, and more. Below is a chart of the market capitalization of bitcoin and its largest alt competitors, as well as the date they debuted. You can see that bitcoin is both th...

The US is currently importing significantly less crude oil and crude oil products than it did in 2005. Now if you were listening to the Presidential debates, then you probably heard Barack Obama take credit for this improvement. But the real driver has been improvements in technology, namely fracking and horizontal drilling. The chart below disaggregates the flow of petroleum into its constituent parts. The US is certainly importing less crude oil than seven years ago. It is also now exporting significant quantities of refined crude products. The largest contributor to this shift comes from the distillate/diesel category. A lot of this diesel is going Rotterdam and from there to the rest of Europe. The switch from importing to exporting products isn't confined to diesel though, note how almost all the black arrows in the products section are now red.

Bitcoin is a pretty complex institution. If you're a cryptoanalyst you'll have one explanation for bitcoin, if you're developer you'll have another. What follows is a useful way for monetary economists to think about bitcoin. What I do in this post is explain how bitcoin compares to a central bank note and a bank deposit. The conclusion is that bitcoin does something truly revolutionary. It also has a lethal problem at its core. There's two characteristics of a bank deposit. The first is the deposit's intrinsic nature. A deposit is a claim on the credit of the issuing bank. Secondly, these deposits can be traded. The issuing bank keeps a ledger detailing who holds every deposit. When people wish to exchange with each other the prospective trade is announced to the bank. The bank then checks the identities of transactors and verifies that the deposits are there. Then it simply rearranges the pattern of deposits on its ledger. To abstract from this story, there...

Isaac Newton, Master of the Mint Miles Kimball's proposal for subordinating paper money to electronic money sounds to me a bit like abandoning bimetallism. Beginning in 1717, Isaac Newton, Master of the Royal Mint, put England on a bimetallic standard. Under bimetallism, the pound sterling was defined as a fixed quantity of silver or gold. In other words, where before England's medium of account was a certain quantity of silver, the new medium of account was a certain quantity of both metals. The unit of account through all of this remained pounds. As the market prices of gold and silver varied due to technological advances and new discoveries, the fixed silver-to-gold ratio meant that one or the other would be undervalued relative to its actual market price. As a result, the entire nation's stock of circulating coin would either flip to gold (if gold was overvalued by the mint) or silver (if silver was overvalued). After all, why bring your silver to the Royal Mint in L...

David Glasner and Scott Sumner have posts on Chinese monetary policy. They both inquire about the People's Bank of China (PBoC) balance sheet. I've affixed a chart of it below. Here's a quick rundown of how the PBoC balance sheet changes. The PBoC sets the yuan-to-dollar exchange rate at some rate below what it would in a free market. Chinese exporters thereby enjoy a subsidy. The law requires that the foreign currency that exporters earn overseas be repatriated and exchanged for yuan. The PBoC prints yuan (bottom green area) or provides deposits (bottom purple area), receiving this foreign exchange in return (top green area). (scribd pdf ) By creating such large quantities of liquid currency and reserves, the PBoC will force the domestic price level  to rise. In order to prevent this inflation, the Bank must "sterilize", or mop up the liquidity it has created. It does this by issuing bonds (dark blue area at bottom) to domestic banks in exchange for currency an...

Bankers clear and settle with each other at a clearing house Perry Mehrling had in interesting comment about how to settle the Eurosystem's Target2 imbalance problem. If there were Eurobills, balances could be settled periodically by transfer of assets, just as is done in the Federal Reserve System. More precisely, if there were a System Open Market Account at the ECB, in which all of the national central banks held shares, settlement could be made by transfer of shares. Perry is talking about adapting the structure of the Fed's Interdistrict Settlement Account to Europe. To understand the ISA, check out my Idiot's Guide to the Federal Reserve Interdistrict Settlement Account . In short, the 12 regional Reserve banks run up debts and credits to each other over the course of the year due to changes in payments flows. These debts and credits are settled each year by transferring securities that have been bought in open market operations from debtor Reserves banks to credit...

Bill Woolsey , Scott Sumner ( here and here ), and Nick Rowe and a debate that was fun to follow. It seems to me that they more or less end up on the same page. Here's my rough synopsis. The argument seems to have started as a semantic battle over the definition of the word money. Scott holds that money is the medium of account (MOA), Nick and Bill say it's the medium of exchange (MOE). I say ignore this part of the conflict. Pretend the word money doesn't exist. Money . The semantics detract from the main points of the debate which, to me at least, is about how price rigidity, MOA, and MOE interact to cause recessions. Scott's point centres around the following example. The MOA in Zimbabwe is gold. This means that the sticker prices of goods and services are set in gold ounces. But Zimbabweans pay for these things using a central bank issued Zim$. Shopkeepers keep a sign at the till showing the current exchange rate between an ounce of gold and Zim$ so people who hav...