tag:blogger.com,1999:blog-6704573462403312459.post6425540370320693027..comments2024-03-27T08:14:24.828-04:00Comments on Moneyness: Does the zero lower bound exist thanks to the government's paper currency monopoly?JP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger18125tag:blogger.com,1999:blog-6704573462403312459.post-88033824914718583732013-12-03T00:23:09.414-05:002013-12-03T00:23:09.414-05:00JP,
I don't buy the premise and I'm shoc...JP,<br /><br /> I don't buy the premise and I'm shocked that you'd entertain the idea that equilibrium interest rates could be negative. Defies everything we know about interest theory (unless you are a Keynesian). Time preference=positive, liquidity preference=positive, productivity of capital=positive. No amount of deflationary expectations could drive those negative. Anonymoushttps://www.blogger.com/profile/00200654228220228627noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-13150963253319655542013-06-29T00:19:10.957-04:002013-06-29T00:19:10.957-04:00To read comments on this (nice) post, I hit CLTR+F...To read comments on this (nice) post, I hit CLTR+F, typed "gold" and hit "Enter". <br />I doubt a free banking system would sit and wait while interest rates are sliding towards negative. The interesting case is where they - like the ECB now - would consider going slightly negative (say -0.25%). What to do? I'd simply pull my money out and put it in a non-lending bank that takes a 0.1% fee to do nothing with my money.<br /><br />Personally as long as I can buy precious metals, I couldn't care less what some private bank is doing. As they say, be your own bank. Their tricks wouldn't bother me in the slightest.Anti-Collectivisthttp://anticollectivist.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-36832913396766008492013-06-28T08:40:47.165-04:002013-06-28T08:40:47.165-04:00" The issue for today is James' original ..." The issue for today is James' original question: in any world that permits LETS to unilaterally suspend their own convertibility obligations when it's convenient, virtually everyone would want to be a LETS -- and given the volatility/unpredictability of the LETS payment/exchange instruments in such a system, virtually no one would want to be LETS customer or investor. How do you square that circle?"<br /><br />I wasn't aware that that was James' original question, but that's a good question.<br /><br />I'm not talking about unilateral suspensions of convertibility. The clause would only give the bank, or LETS debtor, the ability to suspend convertibility, (or call in cash, or penalize cash) when nominal interest rates fall below 0. It would be a conditional clause, exercisable only rarely, and not upon the issuer's convenience. <br /><br />"Correct me if I'm mistaken, but in the scenario above you seem to be adopting the term "spending" to refer to the the process whereby a "free" financial institution discharges its liabilities to its depositors."<br /><br />By spending, I mean a LETS member going into a deficit relative to the rest of the community by buying stuff from the community, something they'll be hesitant to do if they can't themselves charge negative interest rates when necessary. In a banking context, a bank will be unwilling to spend on financial assets if it can't set negative interest rates when rates of return plunge below 0%.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-19004674454353972052013-06-27T14:49:37.406-04:002013-06-27T14:49:37.406-04:00Lol to you! Correct me if I'm mistaken, but in...Lol to you! Correct me if I'm mistaken, but in the scenario above you seem to be adopting the term "spending" to refer to the the process whereby a "free" financial institution discharges its liabilities to its depositors. But simply redescribing these institutions as LETS rather than plain-old "banks" (or CHAs) doesn't do anything to answer James' original question. In a world in which individual LETS could unilaterally choose to start discharging all pending claims against them using some medium with less "moneyness" than the medium that was originally deposited/invested/committed by the LETS' claimants, the difference between a LET "note" and a LET "iou" would fall somewhere between subjective, cosmetic, and non-existent. And if LETS enjoyed such prerogatives, and presumably were similarly free to provide only as much transparency as "the market will bear," then (barring the existence of some collusive LET cartel or a global mono-LET monopoly), there would be no reason to expect that different LETS circulating instruments with varying levels of "moneyness" would be accepted or exchanged at any consistent rate. The market mechanisms that would encourage LET discipline, innovation, and stable "moneyness" preservation, would be appx. the same as those that operated during various short-lived free banking periods in the past (e.g., LET vulnerability to large and unpredictable spikes in claimant demands for liquidity/circulating instruments). Presumably the system-levels costs of such an arrangement would also be similar (pervasive LETS claimant vulnerability to total loss of claims, lower overall demand for LETS claims, lower overall LETS capacity to fund growth and innovation in the "real economy" etc.), but that's a story for another day. The issue for today is James' original question: in any world that permits LETS to unilaterally suspend their own convertibility obligations when it's convenient, virtually everyone would want to be a LETS -- and given the volatility/unpredictability of the LETS payment/exchange instruments in such a system, virtually no one would want to be LETS customer or investor. How do you square that circle? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-60835961403173879992013-06-26T09:36:10.077-04:002013-06-26T09:36:10.077-04:00Lol.
Ok, forget hierarchy. Imagine that central b...Lol.<br /><br />Ok, forget hierarchy. Imagine that central banks don't exist and Local Exchange Trading Systems keep central ledgers of IOU debtors and creditors. These LETS may implement hand-to-hand currency convertible into LETS IOUs at 1:1. When the economy-wide expected rate of return plunges below 0, a given LETS member will only go into debt (ie spend) if they can charge a negative interest rate. But if this member charges a negative rate, those who hold his/her IOUs will insist that the debtor member exchange these IOUs for 0% currency. The upshot being, no LETS member will spend for fear of being in debt to the community at 0% (when the proper rate is, say, -2%). <br /><br />So even in a non-hierarchical world, LETS face pressures to avoid offering cash at the outset. Should the cash option be available, LETS may very well devise ways to ensure ahead of time that a negative rate on cash can emerge should we enter a negative rate world.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-23349188017497896992013-06-25T23:39:42.320-04:002013-06-25T23:39:42.320-04:00Since you now appear to be claiming at least impli...Since you now appear to be claiming at least implicitly that "cheese whiz" embodies sufficient "moneyness" for it to be sensibly comparable to present day circulating currencies, I hope we can look forward to some new infographics that illustrate the ever-increasing centrality of this vital petro-dairy commodity to the workings of the modern economy. Seriously,there's a big difference between acknowledging the fact that some particular, historically contingent (market) hierarchy existence today, and accepting the inherent legitimacy of that particular hierarchy as-if it were a permanent/ natural feature. Otherwise, what basis is there for the Austrian critique in the first place? James raises very reasonable questions about the practicality/sustainability of the system that you propose, and imo those questions merit an equally reasonable and serious response.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-51648631898580273672013-06-25T11:04:28.716-04:002013-06-25T11:04:28.716-04:00Base money could be gold. Or maybe the clearinghou...Base money could be gold. Or maybe the clearinghouse could issue deposits that are linked to some index like the CPI and use open market operations to enforce their target, much like modern central bank money. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-53594628984974601502013-06-25T10:45:15.201-04:002013-06-25T10:45:15.201-04:00If the central bank was a privatized clearinghouse...If the central bank was a privatized clearinghouse, what would the base money be? Gold bullion?<br />Jamesnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-56487355372949510032013-06-25T09:05:39.003-04:002013-06-25T09:05:39.003-04:00As in banking so in every industry. Consumers can&...As in banking so in every industry. Consumers can't buy cheeze whiz directly from Kraft. Only large retailers and wholesalers can. A central bank, whether it is a government monopoly or a privatized clearinghouse, will usually only offer banking product to wholesale banks, and then wholesalers to retail banks, and then finally retail to the consumer. Do you consider the fact that you can't buy Cheeze whiz from Kraft to be "cheeze whiz" fascism?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-23605971455702147932013-06-25T06:16:26.278-04:002013-06-25T06:16:26.278-04:00The scenario you describe doesn't sound much l...The scenario you describe doesn't sound much like a 'free market' in money, it sounds more like a form of banker fascism. That is, a state money system in which only banks are allowed to own state money, thus forcing everyone else to use only bank money.<br /><br />Or are you suggesting your 'free banking' system could be based on something other than state money, such as gold bullion, perhaps? If so, wouldn't that undermine the ideas you put forward above?Jamesnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-27506464374100642112013-06-24T21:57:19.568-04:002013-06-24T21:57:19.568-04:00"Over time I've realized that these autho..."Over time I've realized that these authoritarian solutions are, somewhat paradoxically, the very same innovations that competing bankers would devise in a free banking world"<br /><br />I don't think it's that paradoxical as the "free banking" world you describe sounds a lot like an authoritarian world run by banks. In this world banks apparently still have direct access to state money via central bank deposits, but no one else does. They are all forced to use bank money exclusively because the state has apparently turned into an organization that operates only to benefit bankers. <br /><br />I think if you tried to deny the population its current right to own money issued by its own government, whilst preserving that as an exclusive privilege to be enjoyed only by bankers, there would be blood on the streets in no time. Jamesnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-532795511586300022013-06-23T23:53:10.850-04:002013-06-23T23:53:10.850-04:00Diego, I'm not quite following you on your 3rd...Diego, I'm not quite following you on your 3rd para on the asset side. <br /><br />In general though I think it can't hurt to use the language of options. We know that Scottish banks circa 1750, which were freer than most, offered a conditional put option on notes, the famous option clause. Notes could be "put" back to the bank for specie, until the put was temporarily suspended by the bank. So notes and deposits with various sorts of exotic options attached to them have existed in the past, which means we needn't be constrained by the present status of notes/deposits when we try to imagine how banks might react to a plunge below 0.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-8231182014058351572013-06-23T23:30:45.883-04:002013-06-23T23:30:45.883-04:00Gene, I think what Max meant to say is that crawli...Gene, I think what Max meant to say is that crawling-peg paper currency might yield a positive return at some point in time, and at another point in time yield a negative return. But not simultaneously. <br /><br />If the banker needs to encourage depositors to continue holding deposits when the deposit rate falls below zero, they'll set the crawling peg so that cash is penalized. When the deposit rate rises back above zero, they may set the crawling peg such that cash earns a positive return. Setting a positive return might be a good policy insofar as it allows the bank to steal note share from competitors who only pay 0% on notes.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-91236776983127492892013-06-23T10:44:26.036-04:002013-06-23T10:44:26.036-04:00BTW, one "inefficiency" might be behavio...BTW, one "inefficiency" might be behavioral. That is, it may have to do with an "irrational" fear of falling below par, even though the put that prevents that from happening is costly.Diego Espinosanoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-16729086549303630682013-06-23T10:30:29.438-04:002013-06-23T10:30:29.438-04:00JP,
Cash convertibility is like a put option. It ...JP,<br />Cash convertibility is like a put option. It allows a holder to "sell" deposits for cash at par. The question is, would a free banking regime operate without that put? <br /><br />On the liability side, if my free bank offered that put and competitors didn't, I would attract all deposits and become the monopoly issuer. Or I could charge a premium for the put and earn economic rent.<br /><br />On the asset side, its more complicated. The existence of the put would mean that I could not match lending rates when other banks took them below zero. This is like a call on borrowers to buy their loans in exchange for a zero-rate one. Since they know I own that call, borrowers may want a discount on the loan. This would prevent my monopoly position.<br /><br />We have a put and a call. Is there a market inefficiency that makes one more likely than the other? This is the same as asking whether cash exists out of some previous technological constraint, or whether a system gravitates towards the put and not the call for some other reason. I'm not sure of the answer. Judging from the behavior of depositors and borrowers in regimes that allow penalization of safely-stored wealth, I would venture to guess that the cash put is a feature that emerges from a complex system. Diego Espinosanoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-2586569037095038392013-06-23T01:23:35.267-04:002013-06-23T01:23:35.267-04:00"Suppose that a crawling-peg paper currency i..."Suppose that a crawling-peg paper currency is introduced that pays positive rates of interest as well as negative,"<br /><br />Ok, Konig clearly knows what you are talking about, so I assume you're making sense, but you do realize that for most of us, the idea of something paying both positive and negative rates of return is a little puzzling, don't you?gcallahhttps://www.blogger.com/profile/10065877215969589482noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-76578624320847181132013-06-22T13:15:30.597-04:002013-06-22T13:15:30.597-04:00That's a good point. Most of the discussion ab...That's a good point. Most of the discussion about the crawling peg concerns what happens when returns go below zero, but if they are above zero, which they usually are, then any currency which offers a small return on top will out-compete the field.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-78919233005771284842013-06-22T01:21:17.206-04:002013-06-22T01:21:17.206-04:00"Withdrawing cash, penalizing it, or limiting..."Withdrawing cash, penalizing it, or limiting conversion will put an end to, or at least diminish, the circulation of US paper dollars overseas."<br /><br />Maybe not. Suppose that a crawling-peg paper currency is introduced that pays positive rates of interest as well as negative, i.e. a consistent small interest spread (just enough to cover costs). That could make U.S. currency more popular overseas, since the carrying cost would almost always be lower than any competing currency. Plus, overseas users could use the paper currency as their unit of account rather than U.S. electronic money, eliminating point of sale conversion math.<br />Maxnoreply@blogger.com