Thursday, 19 October 2017

Author Archives William Luther

The Regression Theorem: In Light of Bitcoin

Posted by William Luther
July 18, 2017
in Blog

In three previous posts, I have described the regression theorem, discussed its practical applications, and considered some misconceptions. In this post, I will consider the regression theorem in light of bitcoin. The discussion around bitcoin and the regression theorem usually focuses on whether bitcoin has some intrinsic worth (read: non-monetary use). If bitcoin is intrinsically […]

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The Regression Theorem: Misconceptions

Posted by William Luther
July 13, 2017
in Blog

In two previous posts, I described the regression theorem and discussed its practical applications. In this post, I will discuss some misconceptions. Misconception 1. The regression theorem only applies to a barter economy. In a recent article, Laura Davidson and Walter Block argue that the regression theorem is only applicable in a barter economy. It […]

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IRS Summons of Coinbase Undermines Privacy, Discourages Innovation

Posted by William Luther
June 7, 2017
in Blog

The IRS is expected to respond to a recent Congressional inquiry into its summoning records from Coinbase, a San Francisco-based digital currency intermediary, by June 7. The inquiry, sent by House Ways and Means Committee Chairman Kevin Brady (R-TX), Senate Finance Committee Chairman Orrin G. Hatch (R-UT), and House Ways and Means Oversight Subcommittee Chairman […]

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The Politics of Bitcoin

Posted by William Luther
May 26, 2017
in Blog

David Golumbia has a new book titled The Politics of Bitcoin: Software as Right-Wing Extremism. It has received less than stellar reviews from Duke University’s Mike Munger and Bitcoin Magazine’s  Giulio Prisco. So, perhaps I am just piling on. But pile on I must. Here’s the short version: Many see bitcoin as a clever piece […]

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The Regression Theorem: Practical Applications

Posted by William Luther
May 23, 2017
in Blog

In my last post, I offered a brief summary of the regression theorem and provided some historical context to explain why it is an important idea.  In this post, I will trace some practical applications of the regression theorem. Commodity monies can emerge naturally. The first practical application of the regression theorem concerns commodity monies—that […]

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The Regression Theorem: Summary

Posted by William Luther
May 19, 2017
in Blog

In the late 1800s, three economists working independently radically transformed the way we think about value. Classical economists had struggled to explain why water is typically much cheaper than diamonds, despite being more useful on the whole and, indeed, crucial to one’s survival. Then, William Stanley Jevons, Carl Menger, and Léon Walras offered an elegant […]

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Reserve Holdings and the Size of the Fed’s Balance Sheet

Posted by William Luther
May 8, 2017
in Blog

In a recent post at FT, Sam Flemming documents growing concerns among some former Fed officials that the Fed “risks political interference and losing its independence if it maintains a large balance sheet in the longer term.” I’ve discussed the increase in the size and composition of the Fed’s balance sheet before.  More recently, George […]

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Cash and the Zero Lower Bound

Posted by William Luther
March 22, 2017
in Blog

This is the fourth (and, perhaps, final) post on Ken Rogoff’s The Curse of Cash. As summarized in an earlier post, Rogoff argues that the benefits of banning cash (e.g., preventing crime, enabling effective monetary policy) exceed the costs (e.g., a reduction in financial privacy). He does not attempt to estimate the benefits and costs […]

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Cash and Crime

Posted by William Luther
February 21, 2017
in Blog

This is the third of several posts on Ken Rogoff’s The Curse of Cash. As summarized in an earlier post, Rogoff argues that banning physical cash has two major benefits: reducing crime and enabling effective monetary policy at the zero lower bound. In this post, I will address the first of these supposed benefits by […]

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How Much Cash is Used by Criminals and Tax Cheats?

Posted by William Luther
February 7, 2017
in Blog

This is the second of several posts on Ken Rogoff’s The Curse of Cash. In this post, I consider Rogoff’s estimate for the extent to which cash is used by criminals and tax cheats. If you have not yet read the book, I offer a brief summary in a previous post and I will consider […]

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The Curse of Cash

Posted by William Luther
February 1, 2017
in Blog

As I mentioned in an earlier post, I have been reading Ken Rogoff’s new book, The Curse of Cash. Rogoff is a very smart guy who has been thinking about this proposal for roughly two decades. It deserves serious consideration and I intend to give it such. I have organized my comments as follows. In […]

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Bitcoin and the Bailout

Posted by William Luther
January 25, 2017
in Blog

A few years ago, Cyprus announced it would accept a €10 billion bailout package on condition of imposing a one-time levy on bank deposits. The initial agreement, which included a 6.75 percent levy on deposit balances less than 100,000 euros and a 9.9 percent levy on deposit balances in excess of 100,000 euros, was largely […]

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Rogoff on Seigniorage

Posted by William Luther
January 11, 2017
in Blog

In his book, The Curse of Cash, Harvard economist Ken Rogoff offers an excellent discussion of the modern seigniorage process: Instead of having the government print money and buy things directly, modern-day seigniorage is a three stage process. In stage one, the government spends beyond its means (its tax revenues) and issues interest-bearing debt to […]

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Disappointing estimates of the natural rate

Posted by William Luther
October 5, 2016
in Blog

At the recent Jackson Hole meetings, John Williams, president of the Federal Reserve Bank of San Francisco, argued there has been a  “significant decline in the natural rate of interest, or r* (r-star), over the past quarter-century to historically low levels.” Regular readers of this blog might recognize the view, as I have expressed it […]

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Macro Musings Podcast

Posted by William Luther
June 27, 2016
in Blog

If you are a fan of podcasts, let me recommend this relatively new one hosted by David Beckworth at the Mercatus Center. David’s views on the Great Recession are quite similar to those expressed by me and others on this blog. His list of guests to date includes John Taylor, John Cochrane, George Selgin, Scott […]

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Is gift exchange necessarily kinder, gentler?

Posted by William Luther
June 14, 2016
in Blog

In a recent Alt-M post, George Selgin calls attention to a post at The Atlantic discussing David Graeber’s gift exchange hypothesis. For those of you unfamiliar with Graeber’s book, Debt: The First 5,000 Years, the basic idea of the gift exchange hypothesis is as follows. Prior to monetary exchange economies, many societies relied on gift […]

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Decline in the volatility of bitcoin

Posted by William Luther
May 25, 2016
in Blog

Bitcoin is widely considered a highly volatile asset. Both the Consumer Financial Protection Bureau and National Association of Attorneys General have cited volatility as a significant risk of holding bitcoin. One might debate the extent to which volatility is a problem for routine users, but there is no denying that volatility has declined significantly. Eli […]

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The monetary challenges of bitcoin

Posted by William Luther
April 14, 2016
in Blog

On Tuesday, the Cato Institute hosted an excellent conference on Cryptocurrency: The Policy Challenges of a Decentralized Revolution. I had the pleasure of discussing the monetary challenges of cryptocurrencies in general and bitcoin in particular with George Selgin, Director of the Center for Monetary and Financial Alternatives at the Cato Institute, Perianne M. Boring, Founder […]

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Central bank independence and monetary reform

Posted by William Luther
April 4, 2016
in Blog

Most modern economists believe we’d be better off with an independent central bank. If the monetary authority were beholden to the fiscal authority, the latter could cover its expenditures via the inflation tax. But, in doing so, it would subject the economy to costly price hikes with no offsetting benefits in the long run. Experiences […]

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Tall Paul Volcker

Posted by William Luther
March 21, 2016
in Blog

The Institute for Economic Education at East Texas Baptist University has produced a funny music video titled The Legend of Tall Paul. Paul Volcker, of course, is widely credited with getting monetary policy under control in the 1980s, ushering in a period in US economic history known as the Great Moderation. Enjoy!

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On ‘Reimagining Money’

Posted by William Luther
March 14, 2016
in Blog

In a recent article at The Atlantic, Douglass Rushkoff waxes romantically about local currencies and time banks. He thinks both will shift the focus from wealth to trust. I disagree. As I explain below, both local currencies and time bank coupons are worse monies than those we commonly use. Moreover, they do not “encourage admirable […]

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More quantitative easing?!

Posted by William Luther
March 2, 2016
in Blog

I am often met with astonishment when I express what seems to me the rather obvious point that monetary policy was effectively tight beginning in 2008, transforming what might have been a rather routine recession into the Great Recession. “What about quantitative easing?” they ask. “Yes, the Fed expanded its balance sheet,” I reply. “But […]

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13 Things Bernanke Believes (That I Don’t)

Posted by William Luther
February 22, 2016
in Blog

Ben Bernanke is obviously a very intelligent guy. And I am inclined to believe he is a good person (i.e., honest, well-intentioned, etc.). So it is a bit unsettling to find that we seem to disagree on so many fundamental issues. In what follows, I will list several. Some of our disagreements are about the […]

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Expectations under growth and level targeting regimes

Posted by William Luther
February 9, 2016
in Blog

In general, I prefer a rules-based monetary policy to discretion, but not all rules are created equally. Today, I want to consider two types of nominal income targeting rules in the hopes of identifying their relative merits for anchoring long run expectations, enabling long run  and thereby promoting long run economic growth. 1) Nominal Income […]

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Selgin on real and pseudo monetary policy rules

Posted by William Luther
January 4, 2016
in Blog

In a recent post, I discuss the long run benefits of adhering to a monetary policy rule. Not all rules are created equally though. There are good rules and bad rules. George Selgin offers an excellent summary of the issues in his presentation at the Cato Institute’s 33rd Annual Monetary Conference.  

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The long run benefits of a monetary policy rule

Posted by William Luther
December 21, 2015
in Blog

When teaching undergraduates or talking with non-economists, I usually argue that, while the Fed can affect aggregate demand (or nominal spending), it has no effect whatsoever on aggregate supply. If economic output declines because productivity growth is lower, there isn’t anything the Fed can do. Output is lower than it would have been with higher […]

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The Wicksell Club

Posted by William Luther
November 26, 2015
in Blog

I was pleased to see David Henderson call out Bill Poole for claiming the Fed sets the federal funds rate. It doesn’t, of course. Welcome to the Wicksell Club, David! We don’t have ties or t-shirts. But our common cause is worthwhile. Many of my economist friends get annoyed when I insist they refer to […]

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Does bitcoin have a big volatility problem?

Posted by William Luther
November 18, 2015
in Blog

Jim Harper recently described purchasing power volatility as “a well-recognized impediment to the success of Bitcoin as a currency.” It is well recognized, but also overplayed. There’s no denying that the purchasing power of bitcoin is relatively volatile (though less so over the last year or so) or that a volatile exchange rate makes bitcoin […]

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When should the Fed raise its federal funds rate target?

Posted by William Luther
October 27, 2015
in Blog

Everyone seems to have an opinion on when the Fed should raise rates (including Fed officials). Many of theses views are as misguided as the common notion of what it is that the Fed actually does. As I have explained before, the Fed doesn’t set the federal funds rate. It merely chooses its federal funds […]

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The moral obligation of monetary policy

Posted by William Luther
September 14, 2015
in Blog

Sound money advocates frequently invoke moral arguments. Some refer to Deuteronomy 25:15-16, where Jews were instructed to have “honest weights and measures” because “the Lord detests anyone who … deals dishonestly.” Some mention Juan de Mariana’s assessment of debasement as an “infamous systemic robbery.” Some recall Murray Rothbard’s view that the government “is supposed to […]

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The gold standard

Posted by William Luther
August 10, 2015
in Blog

The gold standard is a commodity money standard where gold and gold-redeemable assets serve as money. The monetary unit is defined as a particular weight and fineness of gold. For example: $1 = 1/20 oz of gold. Here’s an excellent video on the gold standard featuring Lawrence H. White. Sometimes the gold standard is described […]

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On cryptocurrencies

Posted by William Luther
August 5, 2015
in Blog

Cryptocurrencies are digital monies (or, potential monies) that rely on cryptography to keep transactions secure and govern the supply over time. The most popular cryptocurrency to date is bitcoin. There are many others (usually referred to as AltCoins), including ripple, litecoin, and dogecoin. Following bitcoin, most cryptocurrencies are based on a publicly viewable ledger known […]

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Commodity and commodity-backed currencies

Posted by William Luther
July 15, 2015
in Blog

A commodity money is an item that individuals consume (or otherwise make use of) that also functions as a commonly accepted medium of exchange. Commodity monies can be contrasted with fiat monies like the modern dollar, euro, yen, etc., which function as commonly accepted media of exchange but are not used for any non-monetary purpose. […]

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Interest rates, profits and competition

Posted by William Luther
July 9, 2015
in Blog

Over at the Wall Street Journal, Greg Ip sees a lack of competition in corporate America. He notes that: Competition forces companies to invest in new products and new capacity to hold on to customers and capture new ones. Less-intense competition may thus explain some of the puzzles that hang over the U.S. economy. Profits […]

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Why are real interest rates so low?

Posted by William Luther
June 17, 2015
in Blog

In a recent blog post, Alex Salter discusses the problem of reasoning from a price change in the context of interest rates. Simply put, observing a low interest rate does not necessarily mean that monetary policy is loose (or tight!). Instead, we should consider what caused this price to change. Low real interest rates could […]

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Ben Bernanke, Austrian macro economist

Posted by William Luther
June 1, 2015
in Blog

The Fed and its officials take a lot of flak from those working in the tradition of Mises and Hayek. I’ve been known to dish the dirt (occasionally with the likes of Peter Boettke and Steve Horwitz). And, given its track record, criticism is certainly warranted. But self-styled Austrians should be careful not to go […]

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Sound money macro: A follow up

Posted by William Luther
April 13, 2015
in Blog

In a recent post, I discussed sound money insofar as it enables macroeconomic stability. I emphasized one argument made by George Selgin and others concerning the information content of prices over time. Every economist fortunate enough to have a grandpa has had to explain at one time or another that, even though one might have […]

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Hidden costs of Federal Deposit Insurance

Posted by William Luther
April 1, 2015
in Blog

Everyone loves government-provided deposit insurance! Well, not everyone. But nearly everyone. It makes them feel secure knowing that, if their bank goes belly up, the Federal Deposit Insurance Corporation will swoop into action. What’s not to love about that? Co-blogger Thomas Hogan and I have argued that, contrary to standard models of deposit insurance, FDIC […]

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On regulating bitcoin

Posted by William Luther
March 17, 2015
in Blog

There’s a lot of discussion about regulating cryptocurrencies like bitcoin these days. The New Jersey Legislature’s Assembly Financial Institutions and Insurance Committee had a hearing on February 5th. In the same week, the New York Department of Financial Services’ released a revised draft version of the BitLicense proposal. One can hope that, regardless of whether […]

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What is sound money? A macroeconomic perspective

Posted by William Luther
March 9, 2015
in Blog

The term “sound money” means different things to different people. Some stress the stability of purchasing power over time. Some stress the money’s ability to facilitate exchange. Some stress the money’s ability to promote macroeconomic stability. And, at least historically, some have stressed the sound a money makes when clinking against a glass or dropping […]

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Inflation targets and expectations

Posted by William Luther
February 25, 2015
in Blog

This month’s unemployment figures—which were much better than expected—prompted many to speculate that the Fed would begin raising its interest rate target in the near future. Some, including Vox’s Matt Yglesias, object to such a policy on the grounds that inflation remains below the Fed’s stated goal of 2 percent. There’s no denying that inflation […]

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The Silk Road trial

Posted by William Luther
January 28, 2015
in Blog

On October 2nd, 2013, FBI agents arrested Ross William Ulbricht as he sat—computer open— at the Glen Park Library in San Francisco. Alleged to be Silk Road founder, Dread Pirate Roberts, Ulbricht has been charged with narcotics conspiracy, engaging in a continuing criminal enterprise, conspiracy to commit computer hacking, and money laundering conspiracy. According to […]

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The political economy of Bitcoin

Posted by William Luther
December 10, 2014
in Blog

I have a new paper with Joshua Hendrickson and co-blogger Thomas Hogan titled The Political Economy of Bitcoin. Here’s the abstract: The recent proliferation of bitcoin has been a boon for users but might pose problems for governments. Indeed, some governments have already taken steps to ban or discourage the use of bitcoin. In a […]

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The MIT Bitcoin Project

Posted by William Luther
December 3, 2014
in Blog

The MIT Bitcoin Project plans to give $100 worth of bitcoin to every undergrad at MIT. Ignoring any overhead, the program will cost a little less than half a million dollars. Why would they do that? Payment vehicles like bitcoin are subject to what economists call network effects. That means individuals are concerned not only […]

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Unconventional monetary policy: not all assets are created equal

Posted by William Luther
November 26, 2014
in Blog

In a recent post, I considered whether the Fed’s massive expansion of the monetary base is unconventional. It is certainly unprecedented. Nonetheless, I concluded that it was business as usual: the Fed expanded the base as it always has, by purchasing assets. Today, I will explore one of the ways in which recent Fed policy […]

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Unconventional monetary policy? Or, asset purchasing (only more so)

Posted by William Luther
November 20, 2014
in Blog

You’ve probably heard it said that the Federal Reserve resorted to unconventional monetary policy to deal with the so-called Great Recession. Usually, discussions of the Fed’s unconventional monetary policy center on whether it has been effective. I’d like to consider a different angle: Was the Fed’s monetary policy unconventional? To assess whether the Fed is […]

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Deflationphobia strikes again!

Posted by William Luther
November 3, 2014
in Blog

In last week’s briefing, The Economist magazine worries that current spending on consumption and investment will fall if individuals believe money will be more valuable in the future. There are several issues with this position. First, focusing on deflation obscures the real concern. Deflation is not a cause, but a consequence. Yes, central banks might […]

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Does the Fed set the rate?

Posted by William Luther
October 23, 2014
in Blog

It drives me nuts when people say the Federal Reserve sets the interest rate. Ditto for claims that the Fed raises or lowers the rate. Basically, any mention of rate setting by the Fed causes the whistle in my head to blow, as steam pours out from my ears. (Unless, of course, they are referring […]

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Currency union concerns in Scotland

Posted by William Luther
September 15, 2014
in Blog

I was pleased (though not surprised!) to see co-blogger Nicolas Cachanosky dismiss “concerns” arising “because the British government says that it won’t come to an agreement with Scotland about the use of the GBP in the new independent territory.” Unfortunately, many fail to dismiss such claims. Take this Feb. 22nd article from The Economist, for […]

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Friedman vs. Hayek on currency competition

Posted by William Luther
August 22, 2014
in Blog

In a recent post, co-blogger Jerry Jordan refers to the “new monetary scheme” offered by Friedrich Hayek in the mid-1970s. Hayek outlined his proposed reform in Choice in Currency (1976) and Denationalisation of Money (1976). Milton Friedman and others were quick to point out its shortcomings. I’ve written a bit more on the exchange between […]

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