Monday, September 21, 2015

Remember That Time We Christened A Post By Izabella Kaminska "The Theory of Everything"?

In August 2011 we posted "The Theory of Everything" which linked to FT Alphaville and which I intro'd with:
Okay, maybe not everything but quite a bit of what is important.
You've got your comparative advantage, your manufacturing technology, mercantilism as policy, why the U.S. and Japan parted ways in 1990, inflation pressures, negative real interest rates and domestic asset bubbles along with hope and fear for Africa and what's up with China.
From Izabella Kaminska at FT Alphaville:..
Then I had to take a breath.
As it turned out the theory, which she never proposed as a theory of everything, that being my locution, was still being fleshed out.

In May 2013 Professor Cowen at Marginal Revolution posted "Izabella Kaminska’s counterintuitive model of the modern world" which we linked to in "UPDATED--Tyler Cowen on Izabella Kaminska's "Counterintuitive Model of the Modern World".

The updates during those three days in May were: "My Second-to-Last Comment on Izabella Kaminska at Tyler Cowen's Marginal Revolution" and "My Last Word on Izabella Kaminska at Tyler Cowen's Marginal Revolution"

In September 2013 we see: "Marginal Revolution's Tyler Cowen: '...Kaminska Wins'"

There's more fleshing out to be done.
For example, triggered by last week's Andy Haldane's comment about Central Banks using crytocurrency:

From Dizzynomics:

Official emoney is only as good as the carrying value of its float
Some of the reasons I’ve always advocated official emoney (by which I mean digital base money issued by a central authority) include that it would be a good way to overcome the negative interest rate problem, would help ease the shortage of safe assets in the system and be a good way of distributing and controlling for the inflationary consequences of a basic income, if it was ever introduced.

The problem with official emoney, however, is that it would essentially nationalise/monopolise the job of payments and safe liquid asset provision.

While I’m still pro the idea of exploring a digital base money, I’m increasingly mindful of some of the harmful/complicated consequences.

A market where official emoney is available — i.e. one where I’m happy  being a risk-free cash investor who doesn’t expect any interest on my money –theoretically allows me to store an infinite amount of wealth as liquid digital cash forever.

Yet, this very possibility is problematic for a number of reasons. One. It sees the central bank undercutting the banks’ own deposit services, because they can’t compete with an institution which has no restriction on base money production (apart from inflation). Two. It potentially underemploys capital in the economy. Three. It transfers the cost of payment provision onto the national balance sheet as a seigniorage input. And four. Par value protection becomes a national real-time concern (national equity instead of bank equity).

Think of if it this way. In the old model your rights to liquid national equity redemptions (by which I mean spending in the real-economy) would be deposited in a private institution which would make certain assumptions about the rate at which you were likely to drawn these claims down.

The overall presumption behind that framework, however, relates to the idea that the total liquid stock of the land — the float –is constantly changing (decaying and being replenished) in line with national productivity and consumption. The overall size of the float may stay pretty constant, but its internal composition is dynamic. This means any time period you forgo/delay your float redemption rights until tomorrow is a wasted opportunity for the system.

Banks lend what you choose not to consume today to someone else who needs it for a price (the interest rate), whilst promising you the option to change your mind if you so desire it.

This scenario allows for a much more efficient use of total liquid capital because it means nothing that is produced by the economy goes to waste. The problem is that banks can only ensure the profitability of this set up by making an extraordinary judgement — akin to a punt — about your real rate of consumption vs your entitlements. If they get this wrong bad things happen.

For example, if they over assume your consumption intentions, they compromise their potential profitability by keeping more liquid capital on reserve than necessary. If they under assume your consumption intentions, they can be left with a liquid capital shortfall and a bank run....MUCH MORE

It's worth your time to keep reading until you get to these bits:

...Savings, in a nutshell, have to be offset with some sort of non perishable asset if they are to hold their value. The best non perishable assets are social promises since they have no physical carrying cost.
They do, howeveer, come at the cost of someone else’s leverage. If nobody in the economy is prepared to borrow, then the only real option savers have is putting their savings into non perishable assets that they perceive will always have some future value to society or themselves.

But that’s quite a punt. You simply cannot guarantee that by the time you are ready to cash in your non-perishable gold/commodity for consumption goods, that the market will have the will or capacity to service your consumption desires with useful product....
...Yes you do have that right. But you don’t have the right to insist that your money retains the same purchasing power it has when you earned it....

...So basically emoney doesn’t necessarily solve the negative interest or safe asset problem at all. It potentially makes it worse....