tag:blogger.com,1999:blog-8702840202604739302.post1214006063349785915..comments2024-03-28T03:38:53.734-07:00Comments on MacroMania: Asset Shortages and Price Bubbles: A New Monetarist PerspectiveDavid Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger15125tag:blogger.com,1999:blog-8702840202604739302.post-84821974971882774842012-09-26T14:48:46.902-07:002012-09-26T14:48:46.902-07:00hey people, Play cool math 4 games<a href="http://giogamer.com/" rel="nofollow">hey people, Play cool math 4 games</a>Gio Gamerhttp://giogamer.comnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-75693004183362698342011-03-06T13:48:28.099-08:002011-03-06T13:48:28.099-08:00put this in your spring reading list, dave
http://...put this in your spring reading list, dave<br />http://books.google.com/books?id=qSs5AAAAMAAJ&printsec=frontcover&dq=us+money+vs+corporate+currency&hl=en&ei=bgB0Tfn-MIS5tgfrw8XFAw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CEEQ6AEwAA#v=onepage&q&f=falseAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-77385102468990506442010-09-16T14:27:43.723-07:002010-09-16T14:27:43.723-07:00Pani Pani...I guess it's enough when it's ...Pani Pani...I guess it's enough when it's value starts depreciating. As of this writing, yields on U.S. treasuries are still close to zero. There is a still a huge demand out there for this type of paper.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-42882603226328951082010-09-16T10:49:31.805-07:002010-09-16T10:49:31.805-07:00It's hard to wrap my head around this asset sh...It's hard to wrap my head around this asset shortage hypothesis. Are there no diminishing returns as more paper is traded for goods, at least from the Chinese perspective? How can one characterize how much paper is enough?Pani Panihttps://www.blogger.com/profile/02518606285629758795noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-5641728647169601212010-08-15T10:47:33.349-07:002010-08-15T10:47:33.349-07:00Prof J,
I certainly did not mean to imply any nec...Prof J,<br /><br />I certainly did not mean to imply any necessary link between the "specificity" of a capital good and its "liquidity" properties. <br /><br />So, for example, as I mentioned above, I believe that a legal restriction that prohibits the use of a capital good as collateral will render it illiquid (e.g., a law against indentured servitude makes human capital illiquid -- i.e., a poor collateral object). Not sure how this relates to the specificity of a particular asset. <br /><br />Ultimately, liquidity boils down to information and enforcement. Specificity will turn out to be important (for liquidity) only to the extent that it impinges on information and enforcement. At least, that's what I think right now.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-52538984675855075932010-08-12T08:15:29.101-07:002010-08-12T08:15:29.101-07:00I've read your post a couple of times now. You...I've read your post a couple of times now. You're right - it is dense. I'm thinking this should be made into a chapter in your next textbook.<br /><br />I have one more thought on Caballero. I've been thinking of his paper since you posted it. I think papers that irritate me are better than papers I like because the irritating ones get me thinking. Anyway, put together Caballero's asset shortage with your discussion about "good" collateral and I think I've got something to hang on to here. What we're really talking about is an asset shortage relative to the supply of loanable funds. Phrased alternatively, there is too little savings to support current debt. Or again the ratio of indebtedness to savings is abnormally high.<br /><br />This gets into what constitutes "good" savings, and here one can talk about various forms of government currency, stocks, bonds, etc. And, importantly (as you point out) physical capital. I would like to add a dimension to this discussion. I think it is implicit in what you are talking about, but it is important enough (I think) to give it some careful explicit though: asset specificity.<br /><br />Consider a firm that makes robotic arms for automobile assembly lines. These arms are actually fairly portable so not as illiquid as, say, the assembly line itself. And, they are somewhat fungible (GM can sell its arms to Ford if needed). But, they are not totally fungible - there are adjustment costs required to retool and get the arms set up again. This specificity reduces the value of the capital as collateral, and in a way that I don't think can be fully assigned to liquidity. But, I think this specificity idea is implicit in your discussion of liquidity.Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-31753403322292209492010-08-10T08:24:58.295-07:002010-08-10T08:24:58.295-07:00Angelo,
Sure, there's something to said abou...Angelo, <br /><br />Sure, there's something to said about that. You could have replaced "collateral" with "money" in that statement. <br /><br />On the other hand, the set of objects that end up circulating or serving as collateral do not appear to be chosen arbitrarily by self-confirming belief. Money/collateral is almost always in the form of debt, for example. <br /><br />Also, I'd like to know the answer to why GoC bonds were accepted as collateral, but CMHC were not. Sounds like an interesting case study.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-70681132311363160012010-08-09T11:15:37.034-07:002010-08-09T11:15:37.034-07:00What makes good collateral? How about the belief ...What makes good collateral? How about the belief that others will accept it as collateral?<br /><br />During the crisis, bonds issued by the Canadian Housing and Mortgage Corporation, which (unlike Fannie Mae and Freddie Mac in the US) carried explicit guarantees by the Federal government for full and timely payment, demanded a 100bp premium over Government of Canada bonds of the same maturity. It was hard to understand why "blue" bonds should require a higher rate of return than "red" bonds--their risk characteristics seemed identical. It looked like an obvious and glaring failure of arbitrage and probably was (the Dept of Finance offered to buy up the CMHC bonds from banks in its IMPP program, paying for it by issuing GoC bonds, and made a nice little profit for a while). <br />I was told by someone who worked in the financial industry, however, that there was an important difference between the two obligations: GoC bonds were accepted as collateral but CMHC bonds weren't. Of course that raised the obvious question...Unknownhttps://www.blogger.com/profile/05275756267506370076noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-50961585480674837252010-08-08T08:46:20.013-07:002010-08-08T08:46:20.013-07:00Prof J:
In response to your observations on Cabal...Prof J:<br /><br />In response to your observations on Caballero's piece:<br /><br />[1] I'm not sure how one is supposed to measure a "saving glut" in the data. I think of it more as a theoretical construct that might help interpret the data. But I will ponder the evidence you cite.<br /><br />[2] I suppose there is no single well-defined notion of bubbles. I like what you have to say here.<br /><br />[3] Yes, you are absolutely right. Except for one small caveat. In my "inalienable rights" paper, I provide a polito-economic rationale for imposing such restrictions.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-10824420104805446652010-08-08T08:37:18.350-07:002010-08-08T08:37:18.350-07:00Pedro:
Well, if you buy the argument for treasuri...Pedro:<br /><br />Well, if you buy the argument for treasuries, you'll have to buy it for currency too because, as I said in the post, I don't think that the composition of government debt matters a whole lot (for the points I am making).<br /><br />Anyway, I don't think I ever said that the government should be the "optimal" issuer of currency. In the model I had in my mind, government debt is allowed to compete with private debt. Would you be against the government issuing currency that competed with private currency?<br /><br />Your second point is a very good one. In fact, here is a paper that makes precisely your point:<br /><br />Charles M. Kahn & James McAndrews & William Roberds, 2005. "Money Is Privacy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 377-399, 05David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-57522665599342772022010-08-08T08:28:54.946-07:002010-08-08T08:28:54.946-07:00Franco:
I did not express myself as well as I co...Franco: <br /><br />I did not express myself as well as I could have. Let me try to resolve the apparent inconsistency.<br /><br />I was, in my mind, considering two hypothetical worlds. In one, there was zero enforcement (hence, zero taxation). Government debt can (theoretically at least) exist in this world in the form of zero-interest-bearing fiat (a pure bubble). In the second world, the government has limited ability to tax, so government debt may have some backing (I was not thinking of debt here representing claims to fiat, more like claims to goods, acquired by tax). Even in this world, however, government debt may trade above its "fundamental" value -- it will have a "partial" bubble.<br /><br />I am aware of an older literature that stresses the lawful tender (slightly distinct from legal tender) aspect of government money as supporting its value. (And it sounds like you might enjoy this paper by Dror Goldberg: The Myths of Fiat Money). For a while, this was the way I thought of things too.<br /><br />But then I realized that monetary theory was not about explaining the existence of fiat money instruments. Instead, it is all about understanding why some asset classes have a "fiatness" about them. With fiat money, the fiatness is 100%. With my own personal IOUs, the fiatness is 0%. The fiatness of large cap stocks is higher than that of low cap stocks. In short, its all about understanding "liquidity premia," or maybe even asset price "bubbles."David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-33050470504996165972010-08-07T07:00:01.205-07:002010-08-07T07:00:01.205-07:00David,
I will respond to your post in another com...David,<br /><br />I will respond to your post in another comment, but I first wanted to make some comments about Caballero's paper.<br /><br />First, it seems that a big part of Caballero's story is some sort of global savings glut. This is a common story, but it never actually existed during the period he's talking about. According to the IMF, global savings/GDP ratio has been right around 20% from 1980 through 2005. The composition, by country, has shifted as emerging markets savings have picked up while savings in high-income countries has gone down. Maybe this composition differential is what he's talking about, but that wouldn't imply a general shortage.<br /><br />Second, his definition of "bubbles" leaves a lot to be desired. He seems to want to say that any financial asset priced on capital gains instead of dividends is a bubble. Unless you take a very broad view of dividends, this is simply wrong, and ignores how corporations (and mutual funds, etc.) disperse earnings to their shareholders: buybacks. Stock buybacks are generally much more desirable than dividends for returning earnings to shareholders, for various institutional reasons (esp. taxes).<br /><br />Third, any time I hear "shortage" I think frictions. Either price ceilings, or artificial restrictions on supply or artificial demand creation. This seems to come up in Caballero's discussion of global imbalances when he talks about the lack of appropriate institutions in various countries that make it so people do not want financial assets supplied by the country in question. This is fine, but then the policy conclusions should really be: establish property rights and stop expropriating wealth (I'm looking at you, Chavez!)<br /><br />Now, maybe the problem is that I need to read Caballero's other papers, so if I'm off in my commentary, please set me straight.Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-46434592206493787992010-08-06T22:02:30.543-07:002010-08-06T22:02:30.543-07:00A wonderful read. I come for the post, I stay for ...A wonderful read. I come for the post, I stay for the comments. I appreciate the simple model examples in the comments forwarded by many regulars around here, as it helps rationalize and ground the "econospeak" of the post. (Nothing against its format implied.)jessehttps://www.blogger.com/profile/02155122147972263497noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-65962364277221830552010-08-06T16:29:39.950-07:002010-08-06T16:29:39.950-07:002 small points. I don't think either affects w...2 small points. I don't think either affects what you've said.<br /><br />1) I might buy the argument for Treasuries, but I don't see why you choose Government as the optimal issuer of currency.<br /><br />2) Even if record keeping is cheap, there is always some demand for privacy - cash provides this.Unknownhttps://www.blogger.com/profile/10157532183094712816noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-73769636346688950962010-08-06T16:16:34.474-07:002010-08-06T16:16:34.474-07:00You say:
The market price for fiat currency ... ...You say:<br /> <br />The market price for fiat currency ... consists entirely of a liquidity premium (the fundamental value of fiat money is zero...). To the extent that treasury debt is not fully backed by future taxes, [part of its fundamental value is also zero.]<br /><br />Is this internally consistent? It seems like if treasury debt has value derived from tax-backing, then the thing you need to settle tax liabilities (i.e. fiat currency or the equivalent) must also have value. <br /><br />It seems to me that both are ultimately backed by human capital. People accept cash in part because they know that, even if private parties stop accepting it, they or someone will still need it to give to the IRS under threat of imprisonment. <br /><br />Putting aside the legal niceties, if a sufficiently entrenched loan shark issued (an appropriately modest amount of) scrip that he would accept in lieu of vig at par, it would seem that that is effectively backed by kneecaps and could circulate as a dollar-substitute even among non-borrowers. Is fiat currency different?<br /><br />I feel like I must be wrong somewhere, and would be delighted to be set straight.<br /><br />[Please note that my metaphors are not intended to express any equivalence between the IRS and loan sharks; I'm merely trying to highlight the "backed by human capital"-ness I think is present in both cases.]Francohttps://www.blogger.com/profile/18060380816300517474noreply@blogger.com