Typography

An evaporation in liquidity. September 13, 2012, at 12:25:27 to ~12:32 PM, eMini contract. From Nanex . Steve Roth, who blogs at Asymptosis , recently posted a thoughtful critique of the idea of moneyness over at Cullen Roche's blog . (We've had a series of exchanges before on these questions). Even if my response can't sway Roth it should provide new readers of this blog with a rough overview of where I've been going with the idea of moneyness. Let's start with definitions. Moneyness is a fancy word for liquidity. In short, it refers to the ease with which we expect to be able to trade something away for another item of value. Our expectations about liquidity are conditioned by an item's historical liquidity and modified by anything that we think could change it in the future, including new market mechanisms that might promote (or demote) that item's liquidity. All valuable goods & assets have varying levels of liquidity, or moneyness. Some will b...

The building that housed the original Swedish Riksbank, the earliest European issuer of banknotes In my previous post on bitcoin, I noted offhandedly that I don't consider modern central bank-issued banknotes to be fiat but classify them as liabilities of the issuing bank. By fiat, I mean unbacked, intrinsically valueless, inconvertible, unenforced bits of paper. In the comments section , monetary operations whiz ATR (who blogs here ) challenged me to clarify the nature of the IOU attached to paper currency, and whether that IOU had any value. It would be cheating to point out that the world's 160+ central banks all list banknotes as a liability on their balance sheet. The deeper reason that I prefer to classify banknotes as liabilities (i.e. IOUs, promises, claims, or obligations) rather than fiat bits of paper is the "fine print". The best place to find the clauses governing the IOU nature of banknotes isn't on their face, but rather in the various acts and leg...

by Paul Conrad When we talk about bitcoin, one thing we need to ask ourselves is this: can worthless things circulate and be accepted in trade? If so, how? And can this state of affairs continue indefinitely? An intrinsically useless, unbacked, and costless fiat object might be accepted in trade, but only if it already has a positive price. A history of positive prices will generate sufficient expectations among potential acceptors that they will be able to trade that object on tomorrow. But how might our fiat object earn a positive price to begin with? If we reply that early adopters expected it to be widely accepted by others in trade, how did these early adopters ever form these expectations if that object didn't already have a positive price? We're dealing with a problem of circularity. There is no way to "break into" a dynamic that might generate a positive value for a fiat object. So logically, worthless things cannot trade in the market at a positive value. How...

Economists are sometimes guilty of misrepresenting real-world liquid objects as living examples of the abstract variables populating their favorite monetary model. A good example of this is the incorrect reliance on Yap stones to illustrate the idea of fiat money by economists as varying as Keynes, Milton Friedman and James Tobin. Whereas fiat money is intrinsically useless, inconvertible, and unbacked, Yap stones certainly aren't, the anthropological evidence revealing that the stones had cultural and religious significance apart from their monetary value. Similar in concept is the story of the macute , a unit of account used in Angola hundreds of years ago. Much like the exotic Yap stone, the existence of the macute (or macoute) came to the attention of Western thinkers as trade and conquest revealed ever large parts of the globe. Montesquieu was one of the first to describe the macute, noting: The negroes on the coast of Africa have a sign of value without money. It is a sign ...

There's a counterintuitive meme floating around in the blogosphere that quantitative easing doesn't do what we commonly suppose. Somehow QE reduces inflation or causes deflation, rather than increasing inflation. Among others, here are Nick Rowe , Bob Murphy , David Glasner , Stephen Williamson , David Andolfatto , Frances Coppola , and Bill Woolsey discussing the subject. Over the holidays I've been trying to wrap my head around this idea. Here are my rough thoughts, many of which may have been cribbed from the above sources, though I've lost track from which ones. Let's be clear at the outset. Inflation is a rise in the general price level, deflation is a fall in prices. QE is when a central bank purchases assets at market prices with newly issued reserves. In equilibrium, the expected returns on all goods and assets must be equal. If they aren't equal then people will rebalance towards superior yielding assets until the prices of these assets have risen high...