Economics 2.0


IF there is dumb, there’s dumber; smart, smarter; thievery, plunder; good, saint; plain Jane, invisible; pretty, beauty; etc.

The point is that we can use these gradations to better understand economics.

When you do things for status, that’s social order driving the economy.

But what kind of good is status? It’s not rival, because you can’t eat it; but it’s exclusive. A club good?

Citizenship is a club good. So is formal education. So is the opinion of your peers. We strive for and shed these things, depending.

And that makes the economy, micro or macro, somewhat unpredictable. Yet, understandable.

Perhaps status is an informal club good, akin to Groucho’s inexistent club. And as an informal club good, status is like fiat money, valuable only on the prevailing whim of a society that confers that value.

But unlike fiat money, status can’t just be printed. There is no central bank that can create status.

This kind of thinking leads us nowhere, doesn’t it? Still, better to know that we’re not anywhere, than to pretend we’ve arrived.

Will Bitcoin crash and resurrect?

NOT BITCOIN but better.

One use of Bitcoin is for anonymous transactions, i.e., as a substitute for ordinary cash or bank notes.

The problem is that the currently available bitcoins fluctuate in value. The ideal is a bitcoin that is stable for at least a certain determinate or even indefinite time against a major currency, such as the US dollar. In short, we want or need an alternative bitcoin that is like a dollar banknote. We imagine this alternative works better than keeping banknotes under the mattress or in a safe deposit box, because it avoids thievery and the transaction costs of going to the safe deposit box.

It can be done. The easiest is for the US Fed to do it. It would allow anyone to buy something we might call the official bitcoin dollar in exchange for a guarantee that bitcoin dollars are exchangeable into US banknotes. If this works, it will be because it would reduce the costs now paid by the central bank for printing currency and going after counterfeits. In this scenario, the blockchain ensures that counterfeit official bitcoins cannot exist.

Another way is for a major private bank to ‘create’ its bitcoin dollar. Imagine that Chase does it, and calls it the Chase bitcoin dollar. All it is is a special debit card account where Chase guarantees to make the Chase bitcoin dollar exchangeable for cash. The guarantee is in effect a promise that Chase will honor Chase bitcoin dollar liabilities ahead of its any other liabilities. To ensure such a guarantee, Chase would enter into a ‘currency board’ arrangement with the US Fed by maintaining Fed fund balances in a separate special account solely for the purpose of redeeming Chase bitcoin dollars. In short, the fractional nature of the private banking system will not apply to bitcoin dollars.

The blockchain also allows Chase to ensure that no other entity can create Chase bitcoin dollars. The ‘supply’ of Chase bitcoin dollars will always be the same as the demand for such dollars.

Any other private bank would be allowed to participate in a ‘branded’ bitcoin currency. I can imagine HSBC issuing special debit cards for HSBC bitcoin dollars, HSBC bitcoin euros, or HSBC bitcoin yen. They may be allowed to compete through enhancements on convenience of use, allowing for fee-free global transfers, or even the payment of interest.

One important enhancement would be US consumer protections against fraud now being given to users of credit cards. Any merchant declining to honor a bitcoin debit card would be presumed to be up to no good.

The similarity with bank notes will have to be carried to an extreme that meets certain anonymity and privacy standards. The issuer of a bitcoin dollar will have to honor the bearer of the account provided that said bearer satisfies identity requirements.

At the same time, the use of such accounts will have to be protected by bank secrecy rules, but subject to money-laundering limits. For example, bitcoin dollar transactions in a particular account cannot exceed $10,000 per day, and a bank cannot allow a depositor more than one bitcoin dollar account. A maximum-balance limit of, say, $100,000 per account, could be imposed, in parallel with limits now applied under existing deposit insurance schemes.
Central banks could also impose limits on how many bitcoin dollar accounts an individual can have. To protect banks from money-laundering, bitcoin dollar accounts would not be available to corporations.

Will the advent of such official or private bitcoin dollars kill the existing bitcoins? It could, especially if bitcoins continue to be more attractive as speculation vehicles than as means of payment.

But bitcoin exchanges could create ‘hybrid’ bitcoins whose ‘mining’ or supply-side arrangements are fully transparent, and whose value could be stabilized in some fashion desired by the bitcoin holder. In short, there could be different bitcoins for different purposes. Caveat emptor and ‘know your customer’ rules would still be needed. However, such bitcoins would remain without guarantees similar to deposit insurance, and they may still be vehicles for speculation.

My best guess: Bitcoins will evolve, i.e., the fittest will survive. The Dutch tulip variety will become extinct. As of now, they’re pretty much as primitive as Dutch tulips.

EC 11. Special HW on the stock market

Imagine that your grandparent willed you P1 million. You have decided to invest this inheritance in the Philippine stock market, specifically in only one company.

Your homework assignment is to choose that one company, and report at how much you acquired the stock (any price at which it traded in the PSE will do) in an email, and to give a short explanation for your choice.

A second part of this assignment is to report at the end of the semester how your investment did, and to give a brief explanation of how or why the outcome came about. Try to answer the following questions, based on your readings and your experience in this imaginary experiment: Are stock market investors who win just lucky? To what extent do diligence and smarts matter?

The first part is due by Friday, February 5, 2016. The second part is due on March 20.

The Holy Grail of investments – Part 3

The problem of survival

In two earlier posts, I outlined the problems of the little guy trying to survive in the stock and bond markets. The problem is that markets are notoriously variable, even turbulent at times, and difficult to predict. This must be so because if the markets were predictable, the efficient markets theory would be reality, and there would be no practical point in investing/dis-investing. Stock and bond prices would reflect the best information then available, and on average investment returns ex ante and ex post across all asset classes would be equalized. The historical experiences of individual investors would differ, but this can be attributed to plain luck or lack of it.

Despite the markets’ inherent unpredictability, still, some rules of thumb have worked historically.

Continue reading “The Holy Grail of investments – Part 3”

The Holy Grail of investments – Part 2

In an earlier post, I outlined the conventional wisdom on what drives the business cycle, and how stock and bond markets react to the cycle.

What if the stock market can by itself induce the business cycle?  In this case, the conventional wisdom no longer holds.  The business cycle now depends on stock market sentiment, and the stock markets will have lives of their own.  Stock markets could be spooked by the same animal spirits that Keynes claimed would drive the business cycle.

Continue reading “The Holy Grail of investments – Part 2”

Investment advice

from a columnist, Chuck Jaffe, on C.

There’s a nod to the Great Buffett:

But as Warren Buffett once noted, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” [1]

The key sentence in Chuck’s missive seems to be:

Following Warren

Citigroup is clearly no better than a “fair company” and might be a whole lot worse.

Law school question of the day:  In the Philippines, did Chuck J commit criminal libel?

Short-form answer:  Corporations are persons, so they have a right under the libel laws to their “honor.”  But Citi is also a public figure, and has to prove malice.  Chuck J has a qualified privilege under the Constitution as he was merely exercising his freedom of expression, with an apparent view to giving his readers investment advice.  (Qualified privilege means that the presumption of malice, or malice in law, in libel does not lie.)  But if malice in fact is proved, then Chuck J is guilty of libel.  There is however jurisprudence and good authorities to the effect that malice is very difficult to prove, particularly in a criminal case where proof beyond reasonable doubt is needed to convict.  It is submitted that Chuck J did not commit libel.

The answer given above provides legal “cover” for those who write in the business pages of Philippine newspapers that, for example,  a certain company, say X, is not a good buy in the stock markets. X cannot use the libel laws to stifle public discussion of its business prospects.


[1]  Buffett seems to say that a wonderful company at a fair price is a better bet than a so-so company at a “low” price.  What is a fair price?  Usually, it means a P-E ratio that reflects the fundamentals of the company.  If it is wonderful, it should grow over the long term, so it has a high but fair P-E ratio.  A so-so company is one whose prospects are perhaps just average, and it will have an average P-E.  I take this to mean that when the so-so company has a below-average P-E, that’s a wonderful price.  But this means that the return on the wonderful company will be average, because others like Buffett supposedly will have driven the P-E ratio to a high level.  And the return on the so-so company will be above average, because it will start from a “pessimistic” view by folks like Buffett, and the price will return to normal at some point.  So, is Buffett kidding us?

The Holy Grail of Investments

Looking for Sir Galahad

There is a latent sentiment “out there” that there is something wrong with mainstream economics, at least insofar as it is used for generating investment advice. Keep in mind that in the land of the blind, a one-eyed man is King, and he can keep it all quiet just like a trade secret.

The conventional wisdom on the capital markets starts with the idea that the real economy has a life of its own, following something that some economists call the Real Business Cycle, or what Keynes called “animal spirits.”   Stock markets try to anticipate the business cycle, which is why pundits joke that stock markets have called up “ghost” recessions whenever they tank but the economy remains good.  Bond markets also have lives of their own, which means that they are difficult to predict.  But nonetheless bond markets tend to lead stock markets because of portfolio considerations:  when bond yields rise, bonds become more attractive, so that a stock market boom tends to lose steam.  There is a self-reinforcing character to this conventional story because a rise in interest rates tends to slow down investment and thereby also the broader economy.

Continue reading “The Holy Grail of Investments”