Typography

Issued a little less than a year ago, Zimbabwe's bond coin is one of the world's newest monetary units. The bond coin is designed to solve one of the most venerable problems in the pantheon of monetary conundrums; the big problem of small change —a nice turn of phrase coined by economists Tom Sargent and François Velde (excuse the pun). Some background first. When Zimbabweans spontaneously ceased to use worthless Zimbabwe dollars in 2009 they simultaneously adopted a ragtag collection of currencies including the South African rand and U.S. dollar. Unlike cash, coins are heavy—shipping them over to Zimbabwe from the U.S. is prohibitively expensive. So while Federal Reserve banknotes have tended to be used in large value transactions, rand coinage from neighbouring South Africa has been recruited for use in smaller transactions. Unfortunately, there has never been enough coins to conduct trade. The demand for small change is so large that items like gum or candies or IOUs have o...

Thanks to a floating exchange rate and one of the longest undefended frontiers in the world, the U.S.-Canada border is the thoroughfare for what may be one of the world's most popular ongoing consumer arbitrages. Canada and the U.S. interlist all sorts of goods, services and financial assets. We both sell McDonald's hamburgers, we both offer tickets to NHL games, and we both list Valeant Pharmaceutical shares. The relative price of Valeant shares, which trade in New York and Toronto, will rapidly adjust to any change in the exchange rate. If not, then upon an appreciation of the U.S. dollar an investor will be able sell Valeant short in New York at an artificially high price, buy Canadian dollars with the proceeds, and acquire shares in Toronto on the cheap, using those shares to cover the short position in New York at a profit. Exploitation of this opportunity will realign Valeant's New York and Toronto share price until the window closes, thus cannibalizing the potential ...

After last week's post on the relative benefits of renting versus buying a home, Ryan Decker  sent me to his earlier post on the subject. In it Ryan mentions an interesting concept I'd never heard of before; lifecycle investing .  Developed by Ian Aryes and Barry Nalebuff ( pdf ), the idea is that investors in their twenties can reduce risk and improve returns not only by investing all their savings in the stock market, but by going one step further and taking out a loan to buy stock. Odd advice, right? But there are good reasons for this. Aryes and Nalebuff's thesis begins with the idea that we all own something called a "human capital bond." This is the present value of our lifetime stream of saved wages. Imagine a young investor with an average tolerance for risk who has just entered the labour force. He/she possesses a human capital bond that is currently worth, say, $500,000. Let's assume that this bond is expected to be quite stable in value, maybe be...

Ted Nasmith, An Unexpected Morning Visit "Why not just get a mortgage and buy the place rather than throwing money away on rent?" That's what people often say to folks like me who rent rather than buy. This post is my response. Let me start off by saying that I'm neither a housing bear nor a bull. I have no idea which way Canadian real estate prices are going to go. My decision to choose renting over ownership has to do with other factors. I don't have enough resources to buy a house or condo without getting a mortgage. Those who tell me I'm throwing my money away on rent and should buy are implicitly counseling me to take on a lot of leverage. Let's pretend that I'm comfortable accepting that level of debt. Why should I purchase a home with the borrowed funds and not buy some combination of the Vanguard Total World Stock ETF and the Total International Bond ETF? To favor a home over the Vanguard ETF option is to assume that the risk-adjusted total r...

 Would it make sense for Apple to peg its stock price at $1? If so, how would it go about doing this? From the perspective of shareholders, there's an advantage to a firm's shares being valued not only as a pure store of value but also as useful in trade, or as money. All things staying the same, the increase in demand that is created by the monetary usefulness of a share will ratchet up the multiple applied to a firm's earnings, resulting in a higher market capitalization and richer (and happier) shareholders. As long as the costs of making shares more moneylike aren't too high (I'll assume they aren't), Apple will prefer that its shares be ubiquitous and pervade all corners of an economy, much like a U.S. dollar note or a bank deposit. The problem is that people aren't fond of unstable exchange media (see here & here ). Bills and deposits tend to show low price variability. And because retailers keep prices sticky in terms of the unit of account, a $1...

One of Gustave Doré's illustrations of The Rime of the Ancient Mariner , plate 4 The minsicule bid ask spreads we see in financial markets today indicate that stocks and bonds have never been more liquid. At the same time, skeptics worry that the odds of a sudden evaporation of this liquidity has never been higher. This Jekyll and Hyde world of ultra liquidity coupled with heightened risk of liquidity famines is one of the core themes running through a great series of posts on market liquidity from Liberty Street , the NY Fed's blog. See here , here , and here . To protect their portfolios, investors need to be able to look beyond the incredible amounts of potentially superficial liquidity coursing through markets and plan for future illiquidity crisis. For this sort of preparation to be possible, what investors really need is a market in long-dated liquidity-related financial products. Central banks have historically been the chief providers of liquidity-related financial prod...

Sticky prices illustrated, from Eichenbaum, Jaimovich, and Rebelo ( link ) What makes ride sharing firm Uber interesting is not just its use of new technology to mobilize unused car space, but the method it uses to price its services. Uber's surge pricing algorithm varies cab fares dynamically. To get from A to B, the car that you hired this morning for $10 could end up costing $100 this afternoon. How unlike the traditional taxi fare it is displacing! In their 2004 paper on sticky prices, economists Bils and Klenow found that taxi fares tended to remain at the same level for 19.7 months before being adjusted. Getting from A to B pretty much costs you the same price day-in-day-out for almost two years. In our internet age, are prices getting less sticky?  At first glance no. Alberto Cavallo , who along with Roberto Rigobon created the Billion Prices Index (the bane of all inflationistas ), has analyzed scraped data from the websites of retailers who continue to sell mostly thr...