Typography

Here are Paul Krugman and James Hamilton on the renewed demand for dollar bills. So what's behind the soaring demand for US paper dollars? A simple strategy for getting a grasp on US data is to compare it to the equivalent in Canada. Comparisons between Canada and the US serve as ideal natural experiments since both of us have similar customs and geographies. By controlling for a whole range of possible factors we can tease out the defining ones. The chart below shows the demand for Canadian paper dollars and US paper dollars over time. To make visual comparison easier, I've normalized the two series so we start at 10 in 1984. On top of each series I've overlayed an exponential trendline based on the 1984-2006 period. I've zoomed in on 1997 for no other reason than to provide a higher resolution image of the typical shape of cash demand over a year. Some interesting observations: 1. Not a huge surprise, but the demand for US paper has been accelerating far faster than...

James Hamilton and Stephen Williamson recently commented on the Republican Party platform ( pdf ) which calls for a commission to investigate possible ways to set a fixed value for the dollar. Here is a fragment from the platform: Determined to crush the double-digit inflation that was part of the Carter Administration’s economic legacy, President Reagan, shortly after his inauguration, established a commission to consider the feasibility of a metallic basis for U.S. currency. The commission advised against such a move. Now, three decades later, as we face the task of cleaning up the wreckage of the current Administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar. JDH was puzzled about the odd timing of an appeal to the gold standard, given a decade of low (sometimes negative) inflation. I left my thoughts on JDH's blog. Gold bugs tend to be conspiracy theorists... but here I think I've one-upped them by placi...

James Hamilton at Econbrowser had an interesting series of posts ( here and here ) on determining the effect of naive commodity index funds in crude oil and other commodity markets. His hypothesis was that: the more futures contracts the funds want to hold, the more risk the counterparties who short the contract are exposed to. According to the model, the futures price must be bid high enough to compensate the short side for absorbing the risk. This compensation comes in the form of an expected profit to the short side of the futures contract.  I pointed out in the comments that this sounded very familiar to me: ...isn't this an attempt to prove a version of Keynes's theory of normal backwardation? Here is Keynes: "If supply and demand are balanced, the spot price must exceed the forward price by the amount which the producer is ready to sacrifice in order to hedge himself, ie. to avoid the risk of price fluctuations during his productions period." Keynes wrote that ...