Typography

Central bank digital currency, or CBDC, is a form of highly-liquid digital debt that most governments have, till now, held back from issuing. But there is a growing push to change this. Free market economists are generally not big fans of CBDC. They see it as government encroachment on the banking sector. In this post I'm going to push back on the free market consensus. (This post was inspired after reading posts by Tyler Cowen and Scott Sumner ). Look, we're always going to have a government. Right? And that government is going to have to raise funds somehow in order to keep the lights on. The question is, how? Should it issue 30-day Treasury bills? Fifty-year bonds? Perpetual debt? Paper currency? Why not issue currency-ish debt instruments in digital form? Let's start with a parable. Imagine a world in which the government has only ever issued 30-year bonds. But next month it wants to shift some of its borrowing from the 30-year bond range to the 10-year range. Governm...

I've been playing the game of Settlers of Catan for ages. Over time I've gotten less cutthroat and more philosophical about the game. What I've come to realize is that Settlers is a great tool for both thinking about monetary phenomena and building different sorts of monetary economies. In this post I'll assume a basic knowledge of Settlers—if you haven't played the game by now, you're living on the moon. 1. Catan isn't a barter economy The first thing worth noting is that Catan is not a barter economy—it's a monetary economy. This might seem like an odd thing to say . After all, the trades that we see in a typical Settlers game are all commodity-for-commodity trades. To see why it's a monetary economy, imagine the case of autarky , or a Catan in which trade is prohibited. Here, players can only build structures using cards earned from tiles on which they have a settlement. The value of a lumber card in an autarkical economy is derived solely from ...

We discussed the definition of legal tender last week . Legal tender, in short, is any medium that can always be relied on to discharge a debt. Here's the next question—how does the conferral of legal tender status on an item affect that item's value? Here are my rough thoughts. As I did in an older post on chartal coupon money , I'm going to make use of McDonald's Corporation to illustrate monetary phenomena. Let's say McDonald's wants to create its own form of legal tender: frozen meat patties. It does so by setting the 4 inch wide, 1/4 inch thick frozen beef patty as legal tender for all its receivables. This means that anyone indebted to McDonald's has to settle their debt with legal tender patties. If they owe $1000, they have to pay with $1000 worth of beef. Next, McDonald's requires its suppliers, many of whom are entirely dependent on McDonald's for survival, to abide by its legal tender rules. Rather than give up their relationship with McDo...

The trillion dollar coin debate has inspired a lot of chatter about legal tender , not all of it correct. The best source on the meaning of legal tender is Dror Goldberg (the same Dror Goldberg from my Yap Stone post ). His paper, Legal Tender is short and concise. Give it a read. This post is largely based off his work. First off. If someone offers to pay you in legal tender, say a US platinum coin, are you obligated to accept it? The answer is no. When a medium-of-exchange is denoted as legal tender, that means that it must be accepted in the discharge of certain types of debt . If you are engaged in an exchange with someone that doesn't involve the settling of debts, then legal tender laws don't apply. For example, say you walk into a corner store and offer to pay for cigarettes using legal tender platinum coins. The store owner can legally refuse to accept the coins. After all, the two of you are not settling debts—you're engaging in a spot transaction. The owner is on...

Garett Jones did a podcast on Irving Fisher at Econtalk last week. He talked about the Great Depression and Fisher's debt deflation theory. Jonathan Catalan and Daniel Kuehn also discuss the podcast. Jones focuses on Fisher's 1933 paper The Debt Deflation Theory of Great Depressions . Two interesting quotes from Fisher's paper popped out at me: Those who imagine that Roosevelt's avowed reflation is not the cause of our recovery but that we had "reached the bottom anyway" are very much mistaken. At any rate, they have given no evidence, so far as I have seen, that we had reached the bottom. And if they are right, my analysis must be woefully wrong. According to all the evidence, under that analysis, debt and deflation, which had wrought havoc up to March 4, 1933, were then stronger than ever and, if let alone, would have wreaked greater wreckage than ever, after March 4. Had no "artificial respiration" been applied, we would soon have seen general ...

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...