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In 2011, hedge fund manager Kyle Bass reportedly bought $1 million worth of nickels. Why on earth would anyone want to own 20 million nickels? Let's work out the underlying logic of this trade. A nickel weighs five grams, 75% of which is copper and the rest is nickel. At the time that Bass bought his nickels, the actual metal content of each coin was worth around 6.8 cents. So Bass was buying 6.8 cents for 5 cents, or $1.36 million worth of base metals for just $1 million. To realize this 6.8 cents, Bass would have to sell the copper and nickel as metal , not coin. But liberating the actual metal from each token isn't so easy. Since 2006 it's been illegal to melt pennies and nickels down. As a regulated hedge fund manager, Bass probably isn't willing to break the law. Which means he'd only be able to realize the metal content of nickels indirectly, by on-selling them to a buyer who is willing take on the risks of melting nickels. That wouldn't be me, mind you....

I recently wrote two posts for the Sound Money Project about Swedish monetary innovation. The first is about an effort by the Swedish central bank—the Riksbank—to force retailers to accept cash , and the other is about the e-Krona , a potential Riksbank-issued digital currency. This post covers a third topic. For many years now those of us who are interested in cash, privacy, and payments have had our eye on Swedish banknote demand. The amount of paper kronor in circulation has been declining at a rapid pace. Many commentators are convinced that this is due to the rise of digital payments. Since Sweden is at the vanguard of this trend, it is believed that other nation's will eventually experience similar declines in cash demand too. But I disagree. While digital payments share some of the blame for the obsolescence of paper kronor, the Riksbank is also responsible. The Riksbank betrayed the Swedish cash-using public this decade by embarking on an aggressive note switch.  Had it cho...

Merry Christmas and Happy New Year to all my readers. And to everyone who left a comment this year, thank you. It's always fun to debate things over in the comments section and I feel it makes the blogs themselves stronger. Don't forget to check out the discussion board where we had a number of interesting discussions in 2018. The last time I published my Christmas cash usage chart was in 2015. I figured it was high time to update it: The annual Christmas spike in U.S. banknote demand is getting harder and harder to pick out in the chart. So are the monthly upticks coinciding with payrolls. Most people are getting pretty comfortable buying stuff with cards. And so they are less likely to take cash out of an ATM before the holiday chaos or withdraw grocery money after a paycheck has been deposited. Even though transactional demand for dollars is on the downswing, the stock of Federal Reserve banknotes continues to grow at a healthy pace. The slope of the black line (i.e. its g...

A few months ago Vijay Boyapati asked me to " steel-man " the bubble theory of money. The bubble theory of money, which can originally be found in a few old Moldbug posts , has been used by Vijay and others to explain the emergence of bitcoin and make predictions about its future. So here is my attempt. I am using not only an article by Vijay as my source text, but also one by Koen Swinkels, a regular commenter on this blog. Both are interesting and smart posts, it's worth checking them out if you have the time. Steel-manning the bubble theory of money and bitcoin 1. Unlike a stock or a bond, which is backed by productive assets, bitcoin cannot be valued using standard discounted cash flow analysis. And since it has no intrinsic uses, it can't be valued for its contribution to various manufacturing processes, nor for its consumption value. Rather, bitcoin is a bubble. Its price is driven by a speculative process whereby people buy bitcoins because they think that...

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...

  Of all the axioms of utility theory, the completeness axiom is perhaps the most questionable.    - Robert Aumann, Nobel Prize Winner One of the reasons you keep a well-stocked wallet in your pocket is because you don't know very much about yourself. Know thyself , as the Greeks say, and you can skimp on the amount of media-of-exchange you keep on hand. Greater self-awareness leads to a cleaner "mapping out" of an individual's tastes and the preferred timetable for the enjoyment of those tastes. For instance, a moment of self reflection might lead you to conclude that pistachio ice cream at 8:31 PM next Friday is the best possible state of the world. If a complete set of futures markets exists, you can purchase a futures contract that is time stamped to deliver pistachio ice cream at 8:31 PM Friday, guaranteeing ahead of time that your tastes will be satisfied. The problem is that introspection is difficult. We simply don't have the time, knowledge, or energy to ...

On Twitter , Noah Smith asks: @ClicheGuevara But why don't we use stock shares as our medium of exchange? — Noah Smith (@Noahpinion) June 13, 2015 He answers his own question on his blog . I pretty much agree. It's interesting to imagine science fiction worlds where people do use volatile instruments like stock as their medium of exchange. Why would people in these worlds be willing to adopt volatile media while people in our world don't? Liquidity, the world's best insurance policy against uncertainty First, we need to understand why our world has a preference for stable media of exchange. As Noah points out, people don't know exactly when they are going to need to spend money, or how much. Any individual faces the dizzying fact that any of an infinite number of events could hit them at any point in time. People have many ways to cope with this chaos, one of which is to build up an inventory of assets that can be deployed to help deal with surprises as they occur...

The upcoming Greek election has renewed interest in the idea of Grexit. This option is often presented to the Greek public as desirable given that it would restore an independent monetary policy to the nation. Beware, this is dangerous advice. The euro isn't a glove that you can take on and off, it's a Chinese finger trap; once in, it's tricky to get out. Even if Greece were to formally leave the euro, odds are that it would remain unofficially euroized, leaving it just as bereft of an independent monetary policy as before. The real trade off in a Grexit-or-not scenario is between formal membership in the euro with some say in monetary policy, no matter how small, or informal membership without any say whatsoever. The optimists, say someone like Hans-Werner Sinn , advise the Greeks to leave the euro and adopt a new currency. The value of this new drachma would immediately collapse. As long as prices in Greece are somewhat sticky, Greek goods & services will become incre...