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...

LSD tabs like these ones have an incredibly high value-to-weight ratio When bitcoin first appeared, it was supposed to be used to buy stuff online. In his 2008 whitepaper , Satoshi Nakamoto even referred to his creation as an electronic cash system . But the stuff never caught on as a medium-of-exchange: it was too volatile, fees were too high, and scaling problems resulted in sluggish speeds. Despite losing its motivating purpose, bitcoin's price kept rising. The bitcoin cognoscenti began to cast around for a new raison d'etre. Invoking whatever they must have remembered from their old economics classes, they rechristened bitcoin as the world's best store of value . Store of value is one of the three classic functions of money that we all learn about in Money and Banking 101: money serves a role as a medium of exchange, unit of account, and store of value. So presumably if bitcoin wasn't going to be a medium of exchange (and certainly not a unit of account thanks to it...

The NYSE's clearinghouse in 1898, six years after its founding Traditional financial systems often get mocked for being slow. In North America, for instance, securities markets have recently switched from T+3 to T+2 settlement. Before, if you sold a stock the cash would only appear in your account three days after the trade—now settlement has been moved to a blazing fast two days. In an age where mail is transmitted in milliseconds, this delay seems terribly old fashioned. Or take automatic clearing house (ACH) payments in the U.S. Earlier this month the ability to make same-day ACH debit payments was rolled out , an improvement over the three or four days they used to take, but still no where near immediate. The snail-like pace of securities and ACH settlement is often contrasted to real-time settlement, say like how payments using banknotes, coins, or bitcoins are finalized the moment the token leaves ones wallet and enters the destination wallet. Or take real-time gross settlem...

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...

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...

The shares of the Swiss National Bank (SNB), Switzerland's central bank, have almost doubled since July, despite there being no real news. Yep, you read that right, the SNB is listed on the stock market. There are four other central banks with listed shares: Belgium, Japan, Greece, and South Africa. I discussed this odd group back in 2013. Why are SNB shares catapulting higher? This is a staid central bank, after all, not a penny stock. Let's look at the fine print. Swiss National Bank shares aren't regular shares. To begin with, the dividend is capped at 6% of the company's share capital. The SNB was originally capitalized back in 1907 with 25 million Swiss francs, an amount that hasn't changed in 109 years. Which means that the dividend is, and always has been, limited in aggregate to a minuscule 1.5 million francs per year (about US$1.5 million). Because this amount must be divvied among the 100,000 shares, each share gets just 15 francs per year. The SNB has fa...

I recently stumbled on a new and innovative capital structure that, as far as I can tell, only exists in France. Since 2011, French beauty giant L'Oréal has been rewarding long-term investors with a loyalty bonus.  It goes like this : if you buy L'Oréal shares, register them before the end of 2016, and hold them till 2019, you'll start to enjoy a 10% dividend bonus come January 1, 2019. So if L'Oréal declares a dividend of €1.00 in 2019, anyone who has held since 2016 gets €1.10. Not bad, eh? Think of this as an obligatory transfer payment from short-term L'Oréal shareholders to long-term ones. Put differently, if you want to speculate in L'Oréal shares, expect to pay investors a fee, or tax, for that luxury. Unlike most taxes, this one hasn't been instituted by the government. Rather, it's the corporation that is decreeing this particular redistribution of income. How big is the tax? Let's imagine an investment of $10,000 in the shares of a company ...

Arnold Kling is appalled by Lynn Stout, who accuses Wall Street of providing too much liquidity: Wall Street is providing far more liquidity (at a hefty price—remember that half-trillion-dollar payroll) than investors really need. Most of the money invested in stocks, bonds, and other securities comes from individuals who are saving for retirement, either by investing directly or through pension and mutual funds. These long-term investors don’t really need much liquidity, and they certainly don’t need a market where 165 percent of shares are bought and sold every year. They could get by with much less trading—and in fact, they did get by, quite happily. In 1976, when the transactions costs associated with buying and selling securities were much higher, fewer than 20 percent of equity shares changed hands every year. Yet no one was complaining in 1976 about any supposed lack of liquidity. Today we have nearly 10 times more trading, without any apparent benefit for anyone (other than W...

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...

Blair Ferguson. Source: Bank of Canada Passive investing is eating Wall Street . According to 2015 Morningstar data , while actively managed mutual funds charge clients 1.08% of each dollar invested per year, passively managed funds levy just a third of that, 0.37%. As the public continues to rebalance out of mutual funds and into index ETFs, Wall Street firms simply won't be able to generate sufficient revenues to support the same number of analysts, salespeople, lawyers, journalists, and other assorted hangers-on. It could be a bloodbath. Here is the very readable Eric Balchunas on the topic: Because when an inv switches from active to passive, it basically means a 70% drop in revenue for industry. #DOLrule https://t.co/HntHyDi3rJ — Eric Balchunas (@EricBalchunas) April 7, 2016 Any firm that faces declining profits due to narrowing margins can restore a degree of profitability by driving more business through its platform. In the case of Wall Street, that means arm-twisting inv...