Typography

Over the last few years I've increasingly crossed paths with the following claim on the internet: "The average life expectancy for a fiat currency is 27 years." Is this claim true? What definitions are being used? I mean, are we talking about inconvertible paper money here, or currency that was convertible into gold, too? I finally got curious enough that I decided to chase down the source of this meme. After all, without knowing what data it is based on, it's hard to evaluate the claim's truthfulness. Below I give a description of my trek through internet history. The average-life-of-fiat meme has become particularly popular among cryptocurrency types. For instance, here is Jimmy Song, a popular bitcoin educator/developer, confidently invoking the slogan back in 2017: "When a society lacks prudence, what happens is that the society collapses or goes into chaos. It’s not a coincidence that the average lifespan of a fiat currency is only 27 years." A lo...

If the world had a single cauldron for mixing various monetary phenomena, it would be Zimbabwe. Over the last two decades, it has experienced pretty much everything that can happen to money, from hyperinflation to deflation, demonetization to remonetization, dollarization and de-dollarization, bank runs, bank walks, and more. Adding to this mix, the Zimbabwe Industrial Index—an indicator of local stock prices—has recently gone parabolic, having more than tripled over the last twelve months. That's a good sign, right? Beware, these gains aren't real. As is often the case in Zimbabwe, the rise in stock prices is a purely monetary phenomenon. Ever since the great Zimbabwean hyperinflation led to the domestic currency becoming worthless in 2008, U.S. dollars have served as the nation's currency and unit of account. However, Zimbabwe's central bank, the Reserve Bank of Zimbabwe (RBZ), has spent much of the last two or so years surreptitiously bringing a new parallel monetary...

 In a recent podcast with Robert Hall, Russ Roberts asks: "If the Fed was so aggressive, why didn't we have inflation? And does that mean that Milton Friedman and others were wrong?" It's a good question. Because I find monetary policy confusing, I want to try answering Russ's question with an analogy to an example that doesn't involve money. Say there are two types of gold rings, those with diamonds and those without. The price of gold rings with diamonds exceeds the price of rings without diamonds by a wedge that equals the price of the diamond. A technology emerges that can create diamonds at zero cost. The supply of diamonds will rapidly grow until they become like water; while boasting desirable qualities, a diamond will sell for $0. When this happens the price of gold rings with diamonds will equal the price of gold rings without. Using this analogy, we can understand why—despite having been so aggressive—the Fed didn't create inflation. Treasury de...

Sir Thomas Gresham Anyone who makes an effort to study monetary economics quickly encounters the concept of Gresham's law, or the idea that bad money can often chase out good. Gresham's law is usually used to explain the failures of bygone monetary systems like bimetallic and coin standards. But the phenomenon isn't confined to ancient times. I'd argue that a modern incarnation of Gresham's law is occurring right now in Zimbabwe. Zimbabwe's stock market has blown away all other stock markets by rising 30% in the last month-and-a-half. The chart below compares the Zimbabwe Industrial index to the U.S. S&P 500, both of which are denominated in U.S. dollars. I'd argue that the extraordinary performance of Zimbabwean stock is an instance of Gresham's law. With the imminent arrival of newly printed Zimbabwean paper money, known as bond notes , "bad" paper money is poised to chase out "good" money, stocks being one of the few places wh...

I always like reading fund manager John Hussman because he writes very well, but I feel like he's dug himself into a bit of an intellectual rut—a situation that happens to all of us. For a number of years now Hussman has been accusing the Federal Reserve of setting off a massive bubble in equity markets. But if you ask me, his claim really doesn't square with the observation that we haven't seen a shred of consumer price inflation over that same time frame. Let's explore more. Hussman recently penned an admirable description of the hot potato effect , the process that is set off by an easing in central bank policy: Initially, central banks focus on purchasing the highest-tier government securities (such as Treasury bonds in the case of the U.S. Federal Reserve). Central banks buy these interest-bearing securities, and pay for them by creating “base money” - currency and bank reserves. That base money takes the place of interest-bearing securities in the hands of the p...

If you haven't heard,  protests are breaking out in Zimbabwe and unpaid civil servants are going on strike . This sort of thing hasn't happened in many years. It's possible to trace at least some of the motivation for these developments to monetary mischief. Over the last twenty years, no nation has suffered more problems with its money than Zimbabwe has. Everyone remembers the hyperinflation and subsequent dollarization in late 2008. The most recent episode has seen a nation-wide bank run break out as Zimbabweans queue at ATMs to withdraw U.S. dollars, the local currency. Remember last year's Greek bank run? I'd argue that Zimbabwe's bank run is similar. If you recall, Greek depositors were worried that—in the event of a Greek exit from the Eurozone—their deposits would be redenominated from euros to a Greek version of the euro or even a new drachma. Better to cash out in good euros before getting stuck with something worse. Line-ups grew outside Greek banks u...

A Zimbabwean washes U.S. dollars, from NPR Planet Money Here's a surprising development. Zimbabwe, a dollarized nation, is on the verge of issuing its own $2, $5, $10, and $20 banknotes. Here is is the central bank's press release. Let's back up a bit. Zimbabwe suffered one of the worst hyperinflations in history during the 2000s thanks to awful policies by the government. Citizens were so fed up that they spontaneously dropped the Zimbabwe dollar in late 2009, the U.S. dollar being recruited as media of exchange and unit of account and the South African rand serving a backup role as small change. Since then the rand has been steadily moving to the background in Zimbabwe monetary affairs: Currency utilization levels in Zimbabwe [ source ] Another change is that last year Zimbabwe re-entered the world of monetary production by minting its own 1, 5, 10, 25, and 50 cent coins, otherwise known as bond coins. At the time I was in favor of bond coins because Zimbabwe was follo...

Why can't we create inflation anymore? Maybe it's because money isn't what it used to be. Money used to be like a car; the market expected it to depreciate every day. When we buy a new car we accept a falling resale value because a car provides a recurring flow of services over time; each day it gets us from point a to point b and back. And since these conveniences are large, the market prices cars such that they yield a steady string of capital losses. Money, like cars, used to provide a significant flow of services over time. It was the liquidity instrument par excellence. If a problem popped up, we knew that money was the one item we could rapidly exchange to get whatever goods and services were necessary to cope. Given these characteristics, the market set a price for money such that it lost 2-3% every year. We accepted a sure capital loss because we enjoyed a compensating degree of comfort and relief from having some of the stuff in our wallets. These flows of services...

A common argument against the Fed raising interest rates next week is the asymmetry in risks that it faces. If it keeps rates low too long and sets off inflation, no problem: it can quickly hike rates a few times to bring prices back in line. However, if it boosts rates too early and an unintended slowdown sets in, the Fed won't have room to cut a few times in order to fix its mistake. That's because the Fed is at the zero lower bound , the edge of the world in monetary policy terms. To avoid this conundrum, the Fed should hold off as long as possible before raising, at least until it "sees the whites of inflation's eyes." As Paul Krugman points out , the asymmetry argument is only a recent one. Historically U.S. interest rates have hovered far above zero. If the Fed made a mistake, it didn't have to worry about falling off the edge of the world in order to fix the situation, it could simply ratchet rates down a few times. Rather than waiting till the last m...

Statistical agencies employ data collectors who walk up and down aisles with hand-held computers gathering sticker prices for things like frozen french fries and bicycles. The data they collect gets amalgamated into an index and passed on to central bankers who use it as the basis for rate change decisions. It seems simple enough, but what happens if the source material has been corrupted? Might central bankers be reacting to mere shadows on the wall? Here's how prices might go bad. Start with the U.S. and Canadian payments systems. For each credit card payment, a North American merchant must pay 1-2% in fees to the card networks Visa and MasterCard. Retailers in both countries have very different strategies for coping with this burden. In the U.S., retailers are permitted to offload network fees onto customers by asking them to pay a surcharge on each credit card payment. Because Canadian retailers are prohibited from surcharging customers, they react by marking up every sticker p...

Here's a conundrum. Many commentators have been trying to puzzle out why stocks have been continually hitting new highs at the same time that bond yields have been hitting new lows. See here , here , here , and here . On the surface, equity markets and bond markets seem to be saying two different things about the future. Stronger equities indicate a bright future while rising bond prices (and falling yields) portend a bleak one. Since these two predictions can't both be right, either the bond market or the stock market is terribly wrong. It's the I'm with stupid theory of the bond and equity bull markets. I hope to show in this post that investor stupidity isn't the only way to explain today's concurrent bull market pattern. Improvements in financial market liquidity and declining expectations surrounding the pace of consumer price inflation can both account for why stocks and equities are moving higher together. More on these two factors later. 1. I'm with...