Typography

I'm starting to sell my position in bitcoin. I'll probably keep about 10% of my overall position but the rest will be repatriated back to the conventional fiat banking system. Anyone who's been reading my bitcoin posts knows that I consider the fundamental value of bitcoin to be around zero. Consider what a bitcoin is. When you buy a bitcoin, you're basically securing a spot in a ledger. Bitcoin isn't actually a coin—it's just a key, a ticket, or an identifier, that indicates where in the ledger you sit. When people trade bitcoins among each other, what they're doing is swapping themselves into or out of that ledger. Space is limited. The amount of bitcoin in existence amounts to about 11 million, so there are only 11 million spots available. Now there's nothing wrong with paying good money to secure a spot in a ledger. We've all done it before. When you buy an airline ticket you're basically buying room in an airline's ledger. The airline c...

Like Guntram Wolff over at the Bruegel blog , I hope that the much-rumoured capital controls on Cypriot deposits don't get enacted. So far the Euro authorities seem to have done everything right, albeit in a slow and circuitous manner. Insolvent banks are being closed, uninsured depositors, unsecured creditors, and shareholders are being bailed in, and solvent banks are slated to reopen. Wolff's main concern is that capital controls threaten the very meaning of a monetary union: With capital restrictions, the value of a euro in Cyprus is no longer worth the same as a euro held by any other bank in the eurozone. A euro in Nicosia cannot be used to buy goods in Frankfurt without limits. Effectively, it means that a Cypriot euro is not a euro any more. Enact capital controls and we'd see the emergence of an entirely new currency trading pair CYP€:onshore€, with Cypriot euros trading at a discount. The discount would emerge since the ability of CYP€ to buy things outside of th...

Dreaming of Immortality in a Thatched Cottage - 1500s Exogenous/endogenous money , reflux , hot potato money , helicopter money , inelastic vs elastic currency. These are all part of the colourful lexicon developed by monetary economists over the centuries to outline a general set of problems: how does money get emitted from source, and when, if at all, does it return to source? We usually describe money as exogenous, hot potato, helicopter, or inelastic if it is emitted at the initiative of the issuer, and the issuer doesn't allow the public to exercise any initiative in returning this money back to source. Once it has been air-dropped into circulation from a helicopter, this kind of money becomes immortal, passing like a hot potato from person to person forever. We describe money as elastic or endogenous when the money-using public exercises its own initiative in both drawing money out from an issuing source and pushing (refluxing) this money back to the source. This sort of mo...

Ok, readers. Here's a chance for you to flex your muscles. The following chart shows various short-term interest rates: Why are these rates all so different? Can the differentials between them be arbitraged away? What sorts of institutional rigidities might be preventing arbitrage? For instance, we know certain institutions like Fannie Mae and Freddie Mac can't get interest on reserves held at the Fed. What other sorts of fine details might be important? Or are the differentials between these various rates not currently open to arbitrage? Can they be explained by term risk? How much do other sorts of risk, like liquidity risk, counterparty risk, default risk etc drive spreads?  A few specific questions: a) The DTCC Treasury General Financial Collateral (GCF) repo rate used to trade at or below the fed funds rate. The Treasury GCF repo rate is a collateralized rate. Since collateral reduces risk, it makes sense it would trade below the fed funds rate. But why is the riskier rate...

Cullen Roche penned an article on moneyness last week. In it he hypothesized that bank deposits are more money-like than paper dollars. In this post I'm going to highlight some thorny problems in ranking moneyness. I'll get back to Cullen's observation at the end. If an observer wants to rank items by their moneyness, or liquidity, they might choose to begin the task by evaluating data like bid-ask spreads and frequency distributions of various assets in trade. Assets with low spreads and high frequencies might appear near the top of the observer's moneyness list, and those with high spreads and low frequencies might appear at the bottom. But spreads and frequencies are the objective liquidity data of markets. What we want to know is how the market experiences and digests this objective data on the way to building its own unique moneyness ranking of assets. Moneyness, after all, is subjective . The best way to find out what the market actually thinks about something ...

One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as "marketability" and "liquidity," sing the praises of companies with high share turnover . . . but investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pick pocket of enterprise. - Buffett Our favorite holding period is forever - Buffett While Warren Buffett may not be fond of marketability , liquidity or short holding periods, the fact that stocks have moneyness—that they have varying degrees of liquidity—is vital to understanding stock prices. In this post I'll show why analysts can't ignore the liquidity factor when they try to evaluate whether today's S&P500 is over or undervalued. With equity markets setting new highs by the day, the chorus of fundamental analysts shrieking "overvalued" is deafening. These analysts often buttress their point by an appeal to some sort ...

Well this is interesting. A bitcoin "fork" has emerged. I'm watching right now as the price of bitcoin on the Mt-Gox exchange plunges from $48 down to $37 or so, and now back up to $45. My guess is that the fork will be pretty much resolved before I wake up tomorrow—if not the mechanics, at least the optics. What's a fork? I like to think of bitcoin as a publicly distributed ledger. Anyone who owns a bitcoin has a spot in that ledger. The ledger is in turn updated every ten or so minutes to account for new transactions. Updating occurs in a decentralized manner. Competing "miners" work to add batches of recent transactions to the ledger by solving a complex problem. The winning miner earns some bitcoins while all the the other miners double check to verify that the block of transactions submitted by the winner are real and sync with the existing ledger. This all works fine as long as there are enough competing miners working to verify the process. If one mi...

In you were living in Canada between 1870 and 1880 there's a good change that you might have held in your wallet the odd beast that was the private $7 note pictured above. Below is a $6 note issued by Banque Nationale in 1870, a bank that continues to operate in Canada today. The first striking aspect of the $7 note is that the issuer is Molsons, the very same Molsons that brews one of Canada's best selling beers. Molsons Bank would eventually merge itself with the Bank of Montreal in the 1920s. Going back a bit in history, the brand name on these notes isn't so unusual. Most Canadians are probably not aware that the entrance of the Bank of Canada into the business of issuing paper money is relatively new. Established in 1935, the BoC has only been a money printer for 78 or so years. Private Canadian chartered banks, on the other hand, began to issue paper banknotes as early as 1819. Until they gave up their right to issue notes in 1935, these banks had been continuously ...

Here's a fun tool you can play around with. You may have to download the Flash player : I made this chart back in 2009 but never quite finished it. A few days ago I decided to get 'er done, but when I opened the old document the dismal realization hit me that I had completely forgotten how to make charts in Adobe Flash. What a slog the last 46 hours have been. Anyways, enjoy. The original is available here if you want to use it in your own posts, or if Blogger of  Google Reader won't play it for you.

There's been a steady hum of articles that either worry about the Fed's potential QE-related capital losses or entirely discount them. Are central bank losses irrelevant or important? In this post I'll make the case that we should not discount losses as meaningless. Let's say that year over year a central bank operates at a loss. It is unable to fund ongoing operations from cashflow, and to compound problems, the central bank is already operating with a bare bones staff and can't slim down. One way to plug the funding gap is to get a capital injection. Who would do the injecting? The government, of course. This answer comes easily, since economists tend to build models that assume the consolidation of the government and its central bank. By tying them together with a nice red bow, the math and logic are made much simpler. Thus a central bank can easily run at a loss since it is really just a department within a larger consolidated entity. Let's adopt the per...

Over at the Free Banking blog , Kurt Schuler has two good posts on where to draw the line between money and other assets. While Schuler likes to differentiate between the monetary base (deposits at the central bank + currency) and other assets, he points out that there are a number of other popular spots to scratch out a line. The monetarists, for instance, settled on M2. I seem to recall that in America's Great Depression , Murray Rothbard let the cash surrender value of life insurance policies slip over the line into money supply territory. There are a thousand-and-one places to draw the line. Schuler notes that rather than drawing a sharp line between money and other assets, one can also recognize a spectrum of "moneyness." Anyone who's read this blog knows that I'm amenable to this idea. Before we can ask where do we draw the line? we need to ask how do we draw the line? . Either treat money as a set of distinct goods, or treat each good as more or less m...

One of the world's newest monies has been born. A cryptocurrency (these seem to be coming out every week), our new unit goes by the currency code XRP . What makes this even more interesting is that XRP is a chartal currency. Unlike commodity monies, chartal currencies are intrinsically worthless. The only reason they have a positive market value is because people must get their hands on them in order to pay taxes. Just so with XRP—people must pay their "Ripple taxes" with XRP. But more on that later. XRP and Ripple go hand-in-hand. I wrote about Ripple last week . Ripple is an online environment which allows individuals to exchange IOUs denominated in bitcoin, US$, ₤, or any other unit of account. I'm not going to go into more depth on Ripple but if you're interested, click through last week's post or read this very well-written article from Bitcoin Magazine . What is interesting is that in order to make use of the Ripple environment, Ripple developers have re...

A few weeks ago, David Beckworth egged me on to write about Somalian currency. I can't resist—it's a fascinating subject. The material I'm drawing on comes from Luther & White (2011), Luther (2012), Symes (2005), and Mubarak (2003) Orphaned banknotes When Somalia collapsed into civil war in January 1991, the doors of the Central Bank of Somalia were blown apart, its safes were blasted, and all cash and valuables were looted.* But something odd happened—Somali shilling banknotes continued to circulate among Somalians. To this day orphaned paper shillings are used in small transactions, despite the absence of any sort of central monetary authority. The strange case of circulating Somali shillings forces us to ask some fundamental questions about money. If the Federal Reserve and all other branches of the US government were to be suddenly swallowed up into the sea, would Fed banknotes, like Somali shillings, continue to be used? What forces conspire to keep coloured ...