Typography

In his broad account of monetary economics, Nick Rowe points out that most modern economies are closer to being pure monetary exchange economies than pure barter economies. I'll argue that we're about half way between the two poles, although it's impossible to say for sure. A helpful way to determine whether an economy is barter or monetary is to look at all trades made over a period of time and count the frequency of occurrence of each good in trade. In a pure barter economy, no good will appear more than any other. We'll see a flat, or uniform, distribution of media used in trade. In a pure monetary economy, a single good should appear in all trades. The distribution will be uneven. Nick describes it a bit differently but it's the same idea: You could make a table, with a list of all the different goods for the columns, and the same list of all the different goods for the rows. So it's a square table, with n columns and n rows, if there are n different goods....

Much of the conversation about bitcoin adoption focuses on its use in goods and services transactions. Breaking bitcoin news , for instance, draws attention to the fact that the Internet Archive will be giving employees the option to be paid in bitcoin. This focus on brick & mortar transactions means that the role that bitcoin financial instruments—stocks, bonds, and derivatives—have to play in promoting bitcoin adoption often gets overshadowed. I'm currently reading Barry Eichengreen's Exorbitant Privilege which goes into the mechanics of what it takes to create a truly international currency. Eichengreen points out that prior to World War I the dollar played a negligible role relative to the pound sterling in world markets, but by the mid 1920s it was the dominant unit for invoicing payments and denominating bonds. Eichengreen's theory is that the US dollar became the world's go-to currency because of the emergence of a very specific financial instrument—the ba...

Bill of exchange for £30 for tobacco sales, on April 26th 1769 Here's some interesting news. Ripple is finally being implemented. What is Ripple? Ripple is an open source P2P credit system dreamt up by Ryan Fugger in 2004 . Its mission is to provide a non-banking payments alternative by decentralizing the process of creating and circulating highly liquid IOUs. Put differently, Ripple offers an environment in which individuals can be their own credit-issuing and credit-accepting banks. Ripple has always remained conceptual. But now a team of developers lead by Jed McCaleb, founder of MtGox, the world's largest bitcoin exchange, are implementing a living breathing Ripple network. Ripple might seem to be unprecedented, but the decentralized credit system it envisions existed centuries ago in the form of the historical bills of exchange system. We tend to assume that all transactions conducted by people living in the 16th, 17th and 18th centuries were naive barter or coin-based tr...

I've written before about Iranian monetary sanctions .  We can disagree on motives and targets, but monetary sanctions are undeniably a very powerful instrument. They work because in severing Iran from the global payments network, the sanctions degrade the liquidity of Iranian wealth. I'm going to borrow this idea and see if I can apply it to central bank monetary policy. Can a central bank like the Federal Reserve conduct monetary policy by manipulating the *expected liquidity* of the liabilities it issues? Can the Fed hit its inflation targets by sanctioning its own deposits or, put differently, by freezing and/or unfreezing them? Let's say that the expected return from holding a Federal Reserve liability can be decomposed into 1. capital appreciation/depreciation (ie. inflation); 2. interest (either interest on reserves ["IOR"] or the federal funds rate), and 3."liquidity services". Traditionally, an inflation-targeting central bank manipulates the ...

Other central bank balance sheets I've illustrated include that of the Bank of Canada , Federal Reserve , and People's Bank of China . Making these charts reminds me of a great xkcd cartoon. 

I've been playing the game of Settlers of Catan for ages. Over time I've gotten less cutthroat and more philosophical about the game. What I've come to realize is that Settlers is a great tool for both thinking about monetary phenomena and building different sorts of monetary economies. In this post I'll assume a basic knowledge of Settlers—if you haven't played the game by now, you're living on the moon. 1. Catan isn't a barter economy The first thing worth noting is that Catan is not a barter economy—it's a monetary economy. This might seem like an odd thing to say . After all, the trades that we see in a typical Settlers game are all commodity-for-commodity trades. To see why it's a monetary economy, imagine the case of autarky , or a Catan in which trade is prohibited. Here, players can only build structures using cards earned from tiles on which they have a settlement. The value of a lumber card in an autarkical economy is derived solely from ...

The following quote is a great expression of the efficient market hypothesis : ...the bulk of the statistics which the fundamentalists study are past history, already out of date and sterile, because the market is not interested in the past or even in the present! It is constantly looking ahead, attempting to discount future developments, weighing and balancing all the estimates and guesses of hundreds of investors who look into the future from different points of view and through glasses of many different hues. In brief, the going price, as established by the market itself, comprehends all the fundamental information which the statistical analyst can hope to learn (plus some that is perhaps secret from him, known only to a few insiders) and much else besides of equal or even greater importance. So who wrote these words? Fama, Malkiel, or Samuelson? Funny enough, I've pulled this quote from The Technical Analysis of Stock Trends by Robert Edwards and John Magee, the so-called bibl...

Some interesting things have happened on the Iran monetary sanctions front since I last wrote on the topic. In my first post I explained how the sanctions work . In my second post, I speculated about the so-called gold-for-gas trade , one of the routes Iran had been using to get around the sanctions. To recap, here's how the trade works. Turkish companies buy Iranian natural gas with Turkish lira deposits at Halk Bank , a large government-owned bank based in Ankara. Iran then converts these deposits into gold and re-imports the metal back into Iran (primarily via Dubai) in order to use it to purchase goods elsewhere or to fortify its FX reserves. There was nothing about the gold-for-gas route that contravened the letter of US sanctions. Now there is a new rule that will plug the gold-for-gas trade. Measures included in the 2013 National Defense Authorization Act signed by President Obama on January 3, namely Title XII, Subtitle D, known as The Iran Freedom and Counter-Proliferatio...

Most people don't realize that the central banks of Belgium, Japan, Greece, Switzerland, and South Africa are all publicly-traded. In times past, central clearinghouses were typically privately-owned while the issuance of bank-notes was the domain of competing banks. The fact that a few central banks still retain traces of their former private nature is a good reminder that centralized banking isn't necessarily the domain of the public sector. The Swiss National Bank , for instance, was founded in 1907 to take upon itself the issuance of national bank notes, hitherto provided by private banks. According to Hübscher and Kuhn ( pdf ), efforts to establish a wholly government-owned central bank were defeated in an 1897 national referendum. Opponents of the plan drew up an alternative proposal for a privately owned bank the structure of which would, according to Bordo, "not allow for state socialism or the public control of credit policy." One fifth of the new bank's ...