Typography

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...

While it somewhat lacked in structure, a good time was had by everyone in the live chat section of the big Warren Mosler vs Bob Murphy debate last night. You can see a replay of the debate here . One of Mosler's running themes (and which Murphy turned into a running gag) was the idea that he (Mosler) could give his business card a positive price by requiring members of the audience to hand over said card to Mosler's bouncer should they wish to leave the room unmolested. Voilà, modern fiat money. In order to get his fiat cards out into the audience, presumably Mosler would have had to spend them into existence by purchasing stuff from the the audience. Only then would audience members be able to afford to leave the room without being subjected to the bouncer's whims. In the MMT literature, this is called twintopt .* A state imposes an obligation on its citizenry to pay a tax, and then dictates what good or item (the "twintopt") will be sufficient to discharge that ...

An Old Man and his Grandson , circa 1490. Domenico Ghirlandaio The title of this post comes from this Paul Samuelson paper. Paul Krugman mentioned the paper last week, as did a few others, including Bob Murphy and Garett Jones . Nick Rowe has brought it up a few times ( here for instance). So I trudged through it. Here are a few quick thoughts. The setup goes something like this. Samuelson comes up with a science fiction world in which there's a young generation and an old generation. There are no durable goods. So if the current generation can't save, how can it prepare for a retirement in which it can hardly produce anything? Retirement will be "brutish". On the other hand, what if they print "oblongs of paper" and  "officially through the state, or unofficially through custom, make a grand consensus on the use of these greenbacks as a money of exchange. " Then the current generation will be able to acquire some of these paper bits and excha...

David Glasner had some recent posts ( here and here ) on Ludwig von Mises and Austrian Business Cycle Theory (ABCT). Bob Murphy pushed back here with a good rebuttal. But David's general point still stands: what necessarily forces a central bank that has adopted the practice of lending at a rate below the natural rate to ever cease this practice? Why does there have to be an inevitable bust? I consider myself an Austrian in that one of my favorite economists is Carl Menger. I've also written a thing or two for the Mises Institute, my most recent being on Menger and Leon Walras and how the two would have differed on the phenomenon of high frequency trading. On the other hand, when it comes to macroeconomics, I remain a business cycle agnostic. I'm willing to be converted though. All you've got to do is answer a few questions of mine. Say a central bank decides to reduce the rate at which it lends below the natural rate. Businesses can come to it for cheap loans -- and...

Having read Larry White's book on free banking ( pdf ) and a number of George Selgin's papers I consider myself to be an advocate of free banking. That being said, I can't help but wonder about a few of George's recent points in his post on Intermediate Spending Booms , the most recent in a series of posts that trains a critical eye on market monetarists. Here is George: But in seeking to free monetary theory and policy from the Keynesian overemphasis on interest rates, the Market Monetarists tend to downplay the extent to which central banks can cause or aggravate unsustainable asset price movements by means of policies that drive interest rates away from their "natural" values. Such distortions can be significant even when they don’t involve exceptionally rapid growth in nominal income, because measures of nominal income, including nominal GDP, do not measure financial activity or activity at early stages of production. George is saying that nominal GDP migh...

Bob Murphy asked whether Lionel Robbins was right in saying that central bank policy in the late 1920s and early 1930s was a complete reversal of traditional central bank doctrine. A blogger named Lord Keynes, (perhaps the ghost of Keynes? ), takes exception to this idea, noting somewhat dramatically that Murphy is "dead wrong" and "utterly absurd". These sorts of us vs. them dramatics would be best left to the likes of professional sports casters (economic history is not a competition), but I'm going to look past the silly theatrics so as to delve into what is a very interesting issue. The nub of the debate, in my view at least, boils down to the definition of traditional central banking doctrine . My conclusion, which I'll get around to explaining, is that compared to the 1800s, central bank policy between 1929-1932 was probably a complete reversal. But compared to Fed policy through most of the 1920s, the Fed's policy during the Depression was sim...

Bob Murphy asks if central bank actions taken during the early 1930s might be considered "unprecedented". In the comments I pointed out that during that era an early form of QE was tried. I'm not referring here to the famous 1933 Roosevelt purchases of gold that market monetarists often point to. For instance, see David Glasner here , David Beckworth here , and Scott Sumner here . Scott also has a very interesting paper on the 1933 gold purchasing program ( pdf ). No, I was referring to the 1932 treasury purchasing program. I'm going to replicate the simple graphical analysis that market monetarists use in order to look at the 1932 episode. See this post by Lars Christensen, for example, who overlays important monetary events (QE1, QE2, LTRO) over the S&P500. Here is the context. Prior to 1932, the Federal Reserve system was significantly limited in its ability to embark on large purchases of government securities. This was because of strict backing laws in the ...

The Austrian vs Keynesian end of the blogosphere often battle over the existence of a natural rate of interest. The Keynesian side typically points to Piero Sraffa's argument that there are many natural rates of interest, or own-rates, and therefore an Austrian sort of monolithic natural rate of interest simply doesn't exist. Over the last few weeks I've participated in the comments here at Jonathan Finegold Catalan's blog and here at Daniel Kuehn's blog. Here is an older comment in this vein on "Lord Keynes" blog. Bob Murphy also has a paper ( pdf ) on this subject and has commented on the above blogs on this subject. Sraffa's point that there are different own-rates was not a new one. Irving Fisher pointed this out many years before, in Appreciation and Interest (1896): If we seek to eliminate the money element by expressing the rate of interest in terms of real " capital," we are immediately confronted with the fact that no two forms o...

I didn't comment much on the great debt debate, stirred up a Krugman post called Debt Is (Mostly) Money We Owe to Ourselves , but followed it quite closely. Nick Rowe taught me ( here , here , here , and here ), and Bob Murphy clarified ( here , here , here , here , here , here , here , and here ), that present generations can indeed take resources from future generations via debt issuance. I also learnt via Daniel Kuehn here and here that if you use a very unintuitive definition of "generations", than this is not the case. Basically, you can swap the meanings of terms to argue your way out of a tight spot. My comment is from a Murphy post : I’ve learnt that the method by which one aggregates individuals into groups, and the labels that one attaches to such groups, can have an important influence on a debate’s ability to reach resolution. If people are aggregating differently, and using non-standard words for their categories, then the debate will degenerate into shouti...