Typography

Whenever biologists stumble on a strange specimen, they first try to see if it fits into the existing taxonomy. If it doesn't fall within any of the pre-existing categories, they sketch out a new one for it. For people like myself who are interested in monetary phenomena and finance, Bitcoin and other cryptocurrencies like Dogecoin and Litecoin have presented us with the same challenge. How can we classify these strange new instruments? Because they have the word 'currency' in them, the knee-jerk reaction has been to put cryptocurrencies in the same bucket as so-called fiat money , i.e. instruments like bank deposits and banknotes. But this is wrong. Bitcoin, Dogecoin, and other cryptocurrencies are fundamentally different from $100 bills or Citibank deposits.  To see why, here is a chart I published last year at Sound Money Project : I've located cryptocurrencies in the zero-sum outcome family. Banknotes and deposits are in a different family, win-win opportunities . ...

I executed one of the oddest financial transactions of my life earlier this week. I did Norbert's Gambit. These days a big chunk of my income is in U.S. dollars. But since I live in Quebec, my expenses are all in Canadian dollars. To pay my bills, I need to convert this flow of U.S. dollars accumulating in my account to Canadian dollars. Outsiders may not realize how dollarized Canada is. Many of us Canadians maintain U.S. dollar bank accounts or carry around U.S. dollar credit cards. There are special ATMs that dispense greenbacks. Canadian firms will often quote prices in U.S. dollars or keep their accounting books in it. I suppose this is one of the day-to-day quirks of living next to the world's reigning monetary superpower: one must have some degree of fluency with their money. Anyways, the first time I swapped my U.S. dollar income for loonies I did it at my bank. Big mistake. Later, when I reconciled the exchange rate that the bank teller had given me with the actual mar...

Courtesy of Kerry Taylor's twitter feed , here is a chart which was presented during a recent investing conference in Toronto. Apparently bitcoin has a moneyness score of 22 while cowry shells ring the bell at 15, both of them exceeding the moneyness of U.S. dollars at 13. The presentation that contains the chart was created by angel investor Sean Walsh and is available here . Since my blog is called moneyness, and I've written quite a lot on this topic , I feel somewhat obligated to chime in. Let's start with the good bits about the chart. Instead of classifying items as money-or-not, we can appraise objects by their degree of moneyness. Because every valuable object or instrument is exchangeable, some more easily than others, everything lies somewhere on the money spectrum. The diagram below illustrates this idea. This way of looking at things can provide some insights that we don't normally get when taking the money-or-not approach, and its nice to see that folks ...

The way we ascribe labels to things results in the creation of categories, and this in turn affects the construction of our mental landscapes—best to get the words and categories right from the start lest our thinking goes astray. In this post I quibble with some of the common words and categories we use to describe trade. Walking out the front door last night, I told my wife that I was going to buy a few items at the grocery store. But as I trekked down the street, I asked myself why I hadn't chosen to tell her an alternate version: that I was going to the grocery store to sell my cash. The problem with this wording, I figured, was that if I was to be the one selling stuff in the upcoming transaction, then by process of elimination the grocery store could no longer be the seller in the deal but the buyer—of my cash. And that would be a weird way to view things. Linguistic convention requires that there be a seller and a buyer in any trade. One side spends, the other receives. That...

I'm going on holiday and don't have enough time to write anything new. At the risk of being repetitive, here's a recapitulation of what is one of this blog's major themes: the idea of moneyness. Most of the component parts are spread out over a couple of dozen posts written over many months—here I'll try and piece the whole quilt together in one spot. Money vs moneyness The initial point comes from one of my first posts (as well as a later one ). There are two ways of thinking about monetary phenomena. The standard way is to draw a line between all things in an economy that are "money" and all those things which are not. Deposits typically 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 and so forth. The second approach, the one this blog takes, begins with the idea that all things in an economy are money-like. The line we are interested in here is the extent to which the value of ea...

An evaporation in liquidity. September 13, 2012, at 12:25:27 to ~12:32 PM, eMini contract. From Nanex . Steve Roth, who blogs at Asymptosis , recently posted a thoughtful critique of the idea of moneyness over at Cullen Roche's blog . (We've had a series of exchanges before on these questions). Even if my response can't sway Roth it should provide new readers of this blog with a rough overview of where I've been going with the idea of moneyness. Let's start with definitions. Moneyness is a fancy word for liquidity. In short, it refers to the ease with which we expect to be able to trade something away for another item of value. Our expectations about liquidity are conditioned by an item's historical liquidity and modified by anything that we think could change it in the future, including new market mechanisms that might promote (or demote) that item's liquidity. All valuable goods & assets have varying levels of liquidity, or moneyness. Some will b...

Steve Williamson recently posted a joke of sorts: What's the difference between a New Keynesian, an Old Monetarist, and a New Monetarist? A New Keynesian thinks no assets matter, an Old Monetarist thinks that some of the assets matter, and a New Monetarist thinks all of the assets matter. While I wouldn't try it around the dinner table, what Steve seems to be referring to here is the question of money. New Keynesians don't have money in their models, Old Monetarists have some narrow aggregate of assets that qualify as M, and New Monetarists like Steve think everything is money-like .* This is a interesting way to describe their differences, but is it right? In this post I'll argue that these divisions aren't so cut and dry. Surprisingly enough, Milton Friedman, an old-fashioned monetarist, was an occasional exponent of the idea that all assets are to some degree money-like. I like to call this the moneyness view. Typically when people think of money they take an e...

Kurt Schuler was kind enough to host a Mike Sproul blog post, which I suggest everyone read. I think Mike's backing theory makes a lot of sense. Financial analysis is about kicking the tires of a issuer's assets in order to arrive at a suitable price for the issuer. If we can price stocks and bonds by analyzing the underlying cash flows thrown off by the issuer's assets, then surely we can do the same with bank notes and bills. After all, notes and bills, like stocks and bonds, are basically claims on a share of firm profits. They are all liabilities. Understand the assets and you've understood the liability (subject to the fine print, of course), how much that liability should be worth in the market, and how its price should change. Mike presents his backing theory in opposition to the quantity theory of money . But I don't think the two are mutually exclusive. Rather, they work together to explain how prices are determined. By quantity theory, I mean that all t...

Today's go-to advice for the small retail investor is to invest in passive ETFs and index funds. These low cost alternatives are better than investing in high-cost active funds that will probably not beat the market anyway. There's a lot of good sense in the passive strategy. Here's another idea. If you're a small investor who has a chunk of money that needs to be invested for the long haul, consider investing in illiquid stocks rather than liquid stocks, ETFs, or mutual funds. Pound for pound, illiquid stocks should provide you with a better return than liquid stocks (and ETFs and mutual funds, which hold mostly liquid stocks). Because you're a small fish, you won't really suffer from their relative illiquidity, as long as you're in for the long term. Here's my reasoning. Take two companies that are identical. They begin their lives with the same plant & equipment and produce the exact same product. Say the risks of the business in which they operat...

Hand operated rolling mill, for putting the edge impression on to coins I've been reading about the medieval monetary system lately. What a fascinating and complex mechanism, and a good reminder that we should not be using the word medieval as a synonym for primitive or unenlightened. Medieval coinage, I've come to discover, is also a highly confusing subject. A quote that John Munro attributes to Karl Helleiner seems apropos: "There are two fundamental causes of madness amongst students: sexual frustration and the study of coinage." Studying odd, imaginary, or historical monetary systems is rewarding not only because of the aha! moment that understanding provides, but also because of what these systems reveal about our modern one. Readers may have noticed that for the last two months I've been posting rather obsessively on monetary policy, a topic I've typically avoided. Here's my attempt to combine monetary policy and medieval coinage into one post,...

The lever on which a central bank pushes or pulls in order to keep its target variable (say inflation) on track is commonly referred to as the central bank's policy instrument . The policy instrument is the variable that is under the direct control of a central banker. The classic story is that the pre-2008 Fed conducted monetary policy via its policy instrument of choice—the federal funds rate. By pushing the fed funds lever up or down, the Fed could change the entire spectrum of market interest rates. I think this is wrong. The fed funds rate was never the Fed's actual policy instrument. Now this isn't a novel claim. Market monetarists tend to say the same thing. According to folks like Nick Rowe, the quantity of money has always been the Fed's true policy instrument. The fed funds rate was little more than a useful shortcut (a communications device ) adopted by the Fed to convey to the public what it intended to do. I'm sympathetic to the market monetarist's ...