tag:blogger.com,1999:blog-6704573462403312459.post7523323821796571757..comments2024-03-29T02:53:03.321-04:00Comments on Moneyness: Explaining Stephen Williamson to the world (and himself)JP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-6704573462403312459.post-62488893812644231332012-11-29T21:26:01.553-05:002012-11-29T21:26:01.553-05:00I shouldn't have said either/or. I meant its v...I shouldn't have said either/or. I meant its value comes from some combination of curiosity/liquidity. But a liquidity premium would be vulnerable to short selling, so I think the liquidity premium must be very low, not enough to make short selling profitable.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-18138348076585805192012-11-29T18:49:28.894-05:002012-11-29T18:49:28.894-05:00I don't think it's either/or.
Bitcoin...I don't think it's either/or. <br /><br />Bitcoin's value can be decomposed into that portion that arises from its value as a thing (say a curio) and a second portion that arises from value in monetary trade. Sounds like I'll have to have another bitcoin post soon. Let's see what I can cook up. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-91464630189422482292012-11-29T16:54:47.358-05:002012-11-29T16:54:47.358-05:00Well, yes, in certain crazy markets it's hard ...Well, yes, in certain crazy markets it's hard to sell short. For example you mentioned that bitcoin has interest rates ranging from 25%-200%, so short selling is hard. But the market for silver is not crazy, and people have been issuing silver IOU's for probably as long as they've been trading silver. Historically, more trades have been effected using wooden tallies, clay tablets, etc., than using actual silver. <br /><br />While I'm at it, a word about bitcoin: It's value comes either its monetary usefulness or from its curiosity value (sort of like baseball cards, rare stamps, etc.). If it's monetary usefulness, then that's vulnerable to short selling. If it's curiosity value, then that's not vulnerable to short selling. So remember how you asked me if I thought that long term bitcoin=0 and I said yes? Well I take it back. Because of that short-selling argument I now think that bitcoin has value for the same reason as baseball cards, so I think that long term bitcoins will act like long term baseball cards. <br /><br />My grandparents never expected that a piece of paper with Honus Wagner's picture on it might one day be worth a fortune, just like I never expected that a certain arrangement of computer bits might someday be worth something.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-27661473307580123302012-11-29T13:14:35.372-05:002012-11-29T13:14:35.372-05:00Hi Mike,
In an ideal world I'm sure there wou...Hi Mike,<br /><br />In an ideal world I'm sure there would be no liquidity premium. But if we assume limitations on short-selling then the effect would arise. Have you ever tried sell a teapot short? There's not much of a market for that. You should give the Kreps-Harrison paper a lookover, I mentioned it <a href="http://jpkoning.blogspot.ca/2012/11/another-liquidity-premium-sighting.html" rel="nofollow">here</a>. They forbid short sales to help create a liquidity premium effect.<br /><br />You're also assuming that a silver IOU will necessarily compete with underlying silver as a medium of exchange. It seems to me that liquidity is sticky... it doesn't easily migrate to other similar objects. It takes a lot of work, or a lot of luck, to make your IOU liquid.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-57951408384150245612012-11-29T11:15:16.447-05:002012-11-29T11:15:16.447-05:00JP:
But a liquidity premium creates a profit oppor...JP:<br />But a liquidity premium creates a profit opportunity for short sellers. If silver gets a premium, short sellers just start selling IOU's promising the delivery of 1 oz of silver or an equivalent value of copper. Those IOU's start to be used as money and silver loses some of its premium. Then the short sellers deliver the oz (or equal value of copper) and take their profit.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-50371420809312271542012-11-28T10:53:25.739-05:002012-11-28T10:53:25.739-05:00Thanks, Nick.
We've debated this before so yo...Thanks, Nick.<br /><br />We've debated this <a href="http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/10/the-quick-and-dirty-way-of-putting-money-into-macro.html?cid=6a00d83451688169e20133f5137084970b#comment-6a00d83451688169e20133f5137084970b" rel="nofollow">before</a> so you know I'm not a huge regression theory fan. But I do agree with you on your point that unlike others, Mises didn't try to duck the problem.<br /><br />In theory it seems like we could all spontaneously start using worthless objects as mediums of exchange, but given the fact that we rarely see this occur (bitcoin is the only example I know) I lean to the idea that we need some object to already have some fundamental value before we start to trade it. A liquidity premium gets built on top of this fundamental value... it's this portion of an item's value that might be influenced by Mises's backward expectations. A liquidity premium seems to me like a Schelling focal point. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-37666634763125948332012-11-27T22:09:10.905-05:002012-11-27T22:09:10.905-05:00JP: very good post!
Minor quibble. Whether you li...JP: very good post!<br /><br />Minor quibble. Whether you like von Mises answer or not, it is an answer to a question that other models duck. Even if you build a demand for the medium of exchange into the model, there is always a second equilibrium in which the price of fiat M is zero, so it can't be used as a medium of exchange, so nobody demands it.<br /><br />Could we all just spontaneously start using some worthless object as medium of exchange? How do we pick one equilibrium vs the other? History is a very big Schelling focal point.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com