Typography

Despite its odd denomination, the above is a genuine banknote. Ne Win , Burma's military dictator from 1962 to 1988 and the man pictured in the note, was convinced that his lucky number was nine. So he had notes issued in multiples of nine, including the forty-five and ninety kyat notes (which also each add up to nine 4+5=9, 0+9=9). But I'll get to this story later. This is a continuation of a post I wrote earlier describing how central banknotes aren't mere bits of intrinsically useless paper. The standard view among economists is that banknotes are bubble assets. Because they are intrinsically valueless, the fact that paper notes earn a positive value can only be explained by the fact that the market expects them to have value in the future, much in the way that a ponzi scheme or chain letter is perpetuated. This view goes back to Paul Samuelson ( pdf ), who described how a "grand consensus" might be arrived at whereby society could contrive to have "obl...

A page from   Van Court's Bank Note Reporter and Counterfeit Detector (1843), showing multiple prices for various dollars. Notation: do =ditto, same as above | par =no discount | 20 = 20% discount | 1 = 1% discount | no sale = 100% discount | fail'd =failed bank, 100% discount | clos'd =bank closed, 100% discount For the past year or so, US dollars deposited at the MtGox bitcoin exchange haven't been considered to be particularly good dollars. The problem is that they are illiquid. Due to a number of reasons (see Konrad Graf ), MtGox has limited the ability of users to convert MtGox dollars into conventional dollars issued by the likes of Bank of America, Wells Fargo, and the US Federal Reserve. Withdrawals are slow, uncertain, and red tape abounds. Current holders of "bad" MtGox dollars would very much like to make their dollar-denominated wealth more liquid. Unfortunately the only reliable route available to them is to exchange their bad MtGox d...

I'm going to use a stock market analogy to work out the costs of manufacturing liquidity premia. In addition to paying dividends and providing price appreciation, stocks provide an amenity flow in the form of expected exchangeability , or liquidity. Like any other consumption good & service, the provision of such an amenity requires an outlay by the supplier. In the same way that a widget producer won't sell widgets below marginal cost, the marginal seller of stock, the issuing firm, won't manufacture new liquidity if the cost of production exceeds the benefits. Say that a firm can hire an entire investor relations department for next to no cost. The IR team, full of eager promoters, will double the price that the marginal investor is willing to pay for the liquidity services thrown off by the firm's stock. They go about improving the stock's liquidity services by evangelizing the firm's "story", thereby widening the base of investors who deal in t...

The Cider Mill, by Robin Moline In general, the real price of land has been increasing all over the world, especially since the early 1990s. (Japan and Germany are the exception). The recent credit crisis hurt this trend in a few countries like Ireland, Spain, Netherlands, and the US, but in other countries like Belgium, Canada, Sweden, and Australia the secular rise in housing prices remains intact. A popular explanation for the rise in land prices are the various versions of the secular stagnation thesis advocated by folks like Paul Krugman and Larry Summers. According to Krugman , if the natural rate of interest has become persistently negative—i.e. new capital projects are expected to yield a negative return—then investors will look to existing durable assets like gold or land that yield no less than a 0% return. The prices of these goods will be bid upwards, bubble-like. Or, as Summers puts it, if the return on capital is below the economy's growth rate, then intrinsically va...

2010 Bank of England note signed by Andrew Bailey , former Chief Cashier of the Bank. A few years ago, Peter Stella and Åke Lönnberg conducted a study that classified national banknotes by the signatories on that note's face. They found some interesting results. Of the world's 177 banknotes with signatures (10 had no signature whatsoever), the majority (119) were signed by central bank officials only. Just four countries issue notes upon which the sole signature was that of an official in the finance ministry: Singapore, Bhutan, Samoa, and (drum roll) the United States. Stella and Lönnberg hypothesize that the signature(s) on a banknote indicate the degree to which the issuing central bank's is financially integrated with its government. The lack of a signature from a nation's finance ministry might be a symbol of a more independent relationship between the two, the central bank's balance sheet being somewhat hived off from the government's balance sheet and vi...

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...

The building that housed the original Swedish Riksbank, the earliest European issuer of banknotes In my previous post on bitcoin, I noted offhandedly that I don't consider modern central bank-issued banknotes to be fiat but classify them as liabilities of the issuing bank. By fiat, I mean unbacked, intrinsically valueless, inconvertible, unenforced bits of paper. In the comments section , monetary operations whiz ATR (who blogs here ) challenged me to clarify the nature of the IOU attached to paper currency, and whether that IOU had any value. It would be cheating to point out that the world's 160+ central banks all list banknotes as a liability on their balance sheet. The deeper reason that I prefer to classify banknotes as liabilities (i.e. IOUs, promises, claims, or obligations) rather than fiat bits of paper is the "fine print". The best place to find the clauses governing the IOU nature of banknotes isn't on their face, but rather in the various acts and leg...