Typography

[This is a guest post by Mike Sproul . Mike has posted a few times before to the Moneyess blog.] “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principles of Laissez Faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.” -J.M. Keynes, The General Theory. Keynes’ ruminations about bank notes and coal mines are a good place to draw a dividing line between classica...

In his first blog skirmish , Ben Bernanke took on Larry Summers' secular stagnation thesis, generating a slew of commentary by other bloggers. If the economy is in stagnation, the econ-blogosphere surely isn't. I thought that Stephen Williamson had a good meta-criticism of the entire debate. Both Bernanke and Summers present the incredibly low yields on Treasury inflation protected securities (TIPS) as evidence of paltry real returns on capital. But as Williamson points out, their chosen signal is beset by static. Government debt instruments like TIPS are useful as media of exchange, specifically as collateral, goes Williamson's argument. Those who own these instruments therefore enjoy a stream of liquidity services that gets embodied in their price as a liquidity premium. Rising TIPS prices (and falling yields) could therefore be entirely unrelated to returns on capital and wholly a function of widening liquidity premia. Bernanke and Summers can't make broad assumptio...

Milton Friedman's alleged license plate, showing the equation of exchange The excruciatingly large revisions that U.S. first quarter GDP growth underwent from the BEA's advance estimate (+0.1%, April 30, 2014) to its preliminary estimate (-1.0%, May 29, 2014) and then its final estimate (-2.9%, June 25m, 2014) left me scratching my head. Isn't there a more timely and accurate measure of spending in an economy? One interesting set of data I like to follow is the Fedwire Fund Service's monthly , quarterly , and yearly statistics. Fedwire, a real time gross settlement interbank payment mechanism run by the Federal Reserve*, is probably the most important financial utility in the U.S., if not the world. Member banks initiate Fedwire payments on their own behalf or on behalf of their clients using the Fedwire common currency: Fed-issued reserves. Whenever you wire a payment to another bank in order to settle a purchase, you're using Fedwire. Since a large percentage o...

The Cider Mill, by Robin Moline In general, the real price of land has been increasing all over the world, especially since the early 1990s. (Japan and Germany are the exception). The recent credit crisis hurt this trend in a few countries like Ireland, Spain, Netherlands, and the US, but in other countries like Belgium, Canada, Sweden, and Australia the secular rise in housing prices remains intact. A popular explanation for the rise in land prices are the various versions of the secular stagnation thesis advocated by folks like Paul Krugman and Larry Summers. According to Krugman , if the natural rate of interest has become persistently negative—i.e. new capital projects are expected to yield a negative return—then investors will look to existing durable assets like gold or land that yield no less than a 0% return. The prices of these goods will be bid upwards, bubble-like. Or, as Summers puts it, if the return on capital is below the economy's growth rate, then intrinsically va...

We are taught these days to view John Maynard Keynes and Friedrich Hayek as diametric opposites. This meme is encouraged by the Keynes vs Hayek rap videos , or Nicolas Wapshott's book Keynes and Hayek: the Clash that Defined Modern Economics . But when it came to the idea of moneyness, both Keynes and Hayek were in agreement. Wrote Hayek: although we usually assume there is a sharp line of distinction between what is money and what is not—and the law generally tries to makes such a distinction—so far as the causal effects of monetary events are concerned, there is no such clear difference. What we find is rather a continuum in which objects of various degrees of liquidity, or with values which can fluctuate independently of each other, shade into each other in the degree to which they function as money. I have always found it useful to explain to student that it has been rather a misfortune that we describe money by a noun, and that it would be more helpful for the explanation of m...

At first glance, the large circular discs that circulated on the island of Yap in the South Pacific certainly seem quite odd. Too big to be easily transported, the stones are often seen in photos resting against their owner's houses. So much for velocity. Yap stones have been considered significant enough that they have become a recurring motif in monetary economics. Macroeconomics textbooks, including Baumol & Blinder , Miles & Scott ( pdf ), Stonecash/Gans/King/Mankiw , Williamson , and Taylor all have stories about Yap stone money. Why this fascination? Part of it is probably due to the profession's obsession with the categorical divide between "money" and "non-money". In dividing the universe of goods into these two bins, only a few select goods end up in the money bin. That an object so odd and unwieldy as a three meter wide stone could join slim US dollar bills and easily portable silver coins in the category of money is pleasantly counterintu...

In between my more practical posts, once every week or so I'll do something on the idea of moneyness . Economists have known for a long time that the concepts of uncertainty and money are intimately intertwined. George Costanza knows this too. He holds a bunch of cash to deal with all eventualities... until his wallet blows up. I'll show how we can just as easily replace money with moneyness in this two-step with uncertainty. Uncertainty is an uncomfortable feeling one endures when thinking about an unforeseeable future. One of the ways to shield oneself from uncertainty is to devote a certain portion of one's portfolio to "money" – dollar bills, bank deposits, and such. Because these money items are liquid, it will be relatively easy for their holder to offload them in the future should some unanticipated eventuality arise. Holding money therefore alleviates discomfort about the future. This is the same sort of service that a fire extinguisher provides. Though ...

Here's why this blog is called Moneyness . When it comes to monetary analysis, you can divide the world up two ways. The standard way is to draw a line between all those things in an economy that are "money" and all those things which are not. Deposits go in the money bin, widgets go in the non-money bin, dollar bills go in the money bin, labour goes in the non-money bin etc etc. Then you figure out what set of rules apply specifically to money and what set of rules apply to non-monies (and what applies to both). The quantity theory of money is a good example of a theory that emerges from this way of splitting up of the world. The quantity theory posits a number of objects M that belong in the relation MV=PY. Non M's needn't apply. The second way to classify the world is to take everything out of these bins and ask the following sorts of questions: in what way are all of these things moneylike? How does the element of moneyness inhere in every valu...

Stephen Williamson catches a lot of flack on the net. Some is undeserved, some is deserved, but a big chunk is probably due to the fact that he and his fellow New Monetarist s have a communications problem. People don't understand what they're up to. So here's my attempt to bring Steve down to earth and explain to the world the importance of the research being done by him and his colleagues. I'll go about this by adding a bit of historical context. After a quick tour of the history of monetary thought, readers will be able to see where in the greater scheme of things the New Monetarists fit. Now Steve doesn't know much about the history of economic thought - he thinks it's unimportant. So in a way, I'm explaining not just Steve to the world, but Steve to Steve. One of the big problems in economics is how to deal with two significant but divergent streams of economic thought - monetary theory and real theory (ie. microeconomics). Put differently, there's...