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It's healthy to ask others for a sound check every now and then. I'm going to give a short description of how I see the monetary policy transmission process working, then readers can tell me how far off I am. Hopefully this sound check will bring some more rigour to my thought process. Briefly, the story from start to end it goes like this... 1. A central bank reduces interest rates. 2. After a delay, consumer prices will be higher than they would have been without the rate cut. Here's some more detail on how I get from 1 to 2. A) In the first moment after the rate cut, banks find themselves earning a smaller return on balances held at the central bank than on competing short term/safe financial assets (like government bills and commercial paper). Central bank balances are overpriced, government bills and commercial paper are underpriced. B) To maximize their profits, banks all try to sell their overpriced balances, driving the prices of government bills and commercial pape

One more post on equity deposits. My last post described a dirt cheap (and hypothetical) way for long-term investors to get exposure to equities. Briefly, an investor commits a certain amount of money to a one-year term deposit that promises an equity index-linked return. The manager of this equity deposit (ED) invests that money in an appropriate number of shares in the companies that make up the index, then lends these shares out to borrowers for one year at a fixed rate. At the end of the year the stocks on loan are recalled, sold, and the investor's deposit is repaid. The interest earned on stock loans is shared with the depositor, boosting their returns. It's worth pointing out that ETFs already lend out shares, but unlike an ED they can only do so on an overnight basis. So an ETF can't harvest the extra term premium on long-term loans. EDs have a broader social purpose than just saving a few bucks. Here's a quick list: 1. Equity deposits would reduce the dead wei

John Bogle, father of passive investing With fees as low as 0.10%, passively managed ETFs are one of the cheapest ways to get exposure to equities. Not bad, but here's a financial product that would be even cheaper for investors: an equity deposit . I figure that equity deposits would be so cost efficient that rather than charging a management fee, investors would be paid to own them . To understand how equity deposits would work, I want to make an analogy to bank deposits. Think of an equity ETF as a chequing account and an equity deposit, or ED, as a term deposit. In the same way that chequing deposits can be offloaded on demand, an ETF can be sold whenever the owner wants, say on the New York Stock Exchange or NASDAQ. Equity deposits, like term deposits, would be locked in until their term was up up. Issued in 1-month, 3-month, 1-year, 3-year, and 5-year terms, EDs would replicate a popular equity index like the S&P 500. Given that both ETFs and EDs track the same index, and

Juan Galt recently introduced me to one of bitcoin's biggest problems. Bitcoin is not money, at least not according to the law. Economists like to say that money is unique because it is a medium of exchange, store of value, and unit of account. Lawyers and judges have a different story to tell about money's uniqueness. Unlike goods, money can't be 'followed.' When a good is exchanged, its entire history goes with it. This history may be checkered. Say that a car has been stolen at some point in its past and then sold, and the police discover this fact. The current owner—though having purchased the car innocently—is required to return it to its rightful owner. The law 'follows' goods. With money things are different. Each time a monetary instrument is transferred, its history is wiped clean. As long as the recipient accepts the money in good faith, the original owner of stolen dollars cannot make a claim for those dollars. This peculiar legal treatment of mo