Expansionary Policies

Yesterday, the Unknown Family was set to go to a nearby city for an overnight trip to check out a couple of hospitals (part of the Unknown Son's treatment plan). We were getting ready to leave in the morning, and then the fun started.

Unknown Wife's experienced some leaking. We were somewhat concerned, but not much, because the the new baby wasn't due for another three weeks. We called her OB/GYN, and he told us not to bother about coming to his office - just go straight to the hospital. So, it was off to the neighbor's with the Unknown Son, off to school with the Unknown Daughter, and off to the hospital with us.

Halfway there, her water broke. We arrived at the hospital, got checked in, and then proceeded to wait. It took quite a while, because, while her water had broken, the baby was in no hurry to move to his new digs. To make a long story short, 16 hours later (at 12:20 A.M this morning), a new member of the Unknown Family made his appearance. After settling them in, I drove home to catch a few hours of sleep (I got stopped for speeding along the way, but got off with a warning when I showed the officer pictures of the new guy).

I took the Unknown Son and Daughter (along with the Unknown Mother-In-Law, who's visiting for a few days to help out) in to the hospital to see the new little guy - both he and Mom are doing fine.

Now for the dilemma - if I refer to the older brother as the Unknown Son, what do I call the new guy? any suggestions are welcome.

By the way, he weighed 6 lbs 14 ounces, and was 19 1/2 inches long.

Happy St. Paddy's Day

It's been a pretty busy week, what with the Unknown Son's medical issues, teaching CFA classes, research, and the rest of the big ball-o-crazy we call life. Regular blogging should resume presently. But in the meantime, here's a Muppets Classic (my kids love them -we've already finished the first season on DVD, and are working on the second).

Printing Currency, Not Money

This sounds like an academic distinction but it is not. Especially at times like these, knowing the difference is key to understanding the behavior of financial systems.

What is Money?
Let's start with a textbook definition of money and proceed from there. Most definitions include two parts, some add a third. According to them, money is:

1. a medium of exchange
2. a store of value
3. a standard of value or unit of account (widely but not universally accepted)

If you look closely at the first two definitions, you will see that money exists in the minds of those who use it. This is partially true for the third definition as well. (note: For all of you monetary theory geeks, please relax. These are deliberate simplifications designed to make the ideas accessible to a general audience, not a detailed exposition of precise financial models.)

1. I can exchange my money for stuff.
2. I can exchange my money for stuff later.
3. I can exchange my money for a predictable amount of stuff later.

Let's think about what is happening here. Money has value because people will give you stuff for it, both now or in the future. But why will they do that? They have to believe that they can trade it onward in turn for stuff they want. So the utility value of money is based on a set of collective beliefs - what Carl Jung referred to as the Collective Unconscious. This is the set of beliefs that are widely held by a group of people at a deep level and upon which they will act without thinking about it. One can think of this as the unstated assumptions of a society. In the US, the dollar has had a stable or relatively stable value for so long that few would ever consider NOT accepting it in exchange for stuff. The dollar as money is a deeply embedded part of our Collective Unconscious, both here and around the world.

Though there are many who are beginning to question the value of the dollar as money, the number is still miniscule as a percentage of society. Even if a person were to cease to believe in the dollar as money in their own mind, they would still accept it as long as they believed that others would accept it from them in exchange for goods. So externally, they would act as if the dollar was still money, even if they no longer held that belief. That is what puts the collective in unconscious. At some point, things deteriorate sufficiently that everyone KNOWS that everyone else is just pretending. That is the point of universal hypocracy just before the belief system breaks down.

The great Adam Smith said it well:

"All money is a matter of belief."

Printing Money?

Now we get back to the title of this entry. It is clear that from a purely physical point of view, a central bank can create as much currency (physical or electronic) as it wishes - subject of course to certain practical constraints such as logistics. But MONEY exists solely in the minds of people. It is essentially a matter of faith and faith is not something a government or central bank can print or conjure from thin air. The value of the dollar is the credibility built up over two centuries of the US Treasury always meeting its obligations. The money, is the widely held belief that the US government will guarantee that dollar holders will always be able to get things of value in return for their dollars, which is backed by generations of positive experience.

Now, please ask yourself "Does creating more currency enhance or damage that belief system?" The answer should be self-evident. The very act of creating more dollars ensures that the purchasing power of every existing dollar is diluted. There is only one scenario under which this will not damage the purchasing power of the dollar - if and only if those created dollars can be used to add a roughly comparable amount of value to the pool of available goods and services available for purchase. That is precisely the role of well-functioning credit system: to allocate capital to useful expansions of capacity and new business ventures in order to create that added value. This is why such a credit system can actually create money through credit. Because the act of printing dollars would have no such offsetting value-added, the arbitrary creation of more dollars undermines the faith which is at the root of money's very existence.

A central bank like the Fed can print currency but it cannot print belief - which is what money really is. A central bank can assist money creation by making the commercial credit system (banks) more credible with a backstop during normal times but that is a supporting role. When it takes the lead by acting unilaterally, it can only destroy money.

Printing dollars destroys money.

Forecast For Blogging - Light

It always seems strange to see someone post that they won't be blogging for a couple of days - it's like saying that your readers need your regular spewage so much that they'll have troubles without their regular fix. I have no such illusions.

Nevertheless, some weeks just need to be mentioned. The last cycle of the Unknown Son's chemo went fairly well – by the end of the week, they’d figured out the right mix of drugs to knock down the nausea, and he was doing pretty well. He had minimal nausea or other issues in the day or two later.

This time, it’s a different story. First off, the cocktail he’s on this time had to be infused over a 7-8 hour time frame (instead of the 4 hour infusion time last cycle), so it involved us getting there by 9 and not leaving until about 5 o'clock. Add in the 1 hour commute each way, and it made for a very long day. In addition, this time around, the chemo cycle only ran over three 3 days of infusion, so we did it on Tuesday, Wednesday and Thursday of last week. Come Thursday, we were thinking "This is a snap. No problem."

Advice to self - don't say or think that. Just don't - it tempts fate.

Then the fun started.

Friday morning, we had to go bring the Unknown Son back to the clinic for repeated nausea and vomiting. He got IV fluids and some anti-nausea meds, and we were out by 2:00. Then we had to go to the local Emergency Room (it's 10 minutes away versus an hour, so it made sense) Saturday night at 9 for a repeat performance. Sunday was fairly uneventful, with a little bit of nausea in the early afternoon. He had one or two more episodes later that afternoon, but his new medication Marinol , which is a synthetic form of the active ingredient of marijuana) seemed to work. After taking it, he slept for a while, and woke up quite hungry (in other words, he got stoned and ended up with the munchies). A warm bath, and another dose before bed, and he was out like a light.

At 4:00 this morning, we were back to the vomiting. So, it’s off to the clinic once more (the Unknown Wife is there now). With luck, they can get a handle on this – he’s lost about 4 pounds this week, and unlike his dad, he can’t spare the weight. He'll spend the night there, and Unknown Mom will stay with him (unfortunately, I have a commitment I can't get out of tonight). If he requires a second night, I'll relieve her after my night class tomorrow night.

Luckily, the Unknown Mother-in-Law (who is a saint, by the way) can come over to stay and help out with the Unknown Daughter.

So, blogging might be light for the next couple of days.

This Is Pretty Much True For Most First Drafts

This is true for my first drafts, and even more so for most grad students.

Sad, but true.

What's The Probability of a Big Market Decline?

Soorry ab out the short post with nothing more than a link in it. I thought I'd saved it as a draft, but goofed (it's a chemo week, and people shouldn;t blog when tired). In any event, check out this piece by Eric Zitzewitz who's guest posting at Freakonomics. He's one of the sharpest guys around on prediction markets (he's also done some nice mutual fund research).

In any event, he usues the intuition developed in Breeden and Litzenberger (1978), who demonstrate how you can create "Arrow-Debreu" securities by comparing the prices of options at adjacent strike prices. For the unitiated (i.e. less nerdy) among you, an AD securitiy pays $1 if a certain event occurrs and zero otherwise. It's basically what the betting contracts at Intrade are. The nice thing about traded AD securities is that the logical price for one is approximately the marginalk trader's probability of the even occurring. So, the prices tell you what "the market's" estimate is of the likelihood of the event).

Zitzewitz uses this intuition to calculate the probability of a large market drop (like the S&P going to 2500 by the ned of next year).


Definitely a cool piece. Read the whole thing here.

The elimination of the consequences of bad behaviour continues

From today's Wall Street Journal:

Citigroup Inc. announced Tuesday a new program aimed at addressing the latest challenge facing the mortgage industry: unemployed homeowners.

Under the program, Citigroup will temporarily lower mortgage payments to an average of $500 a month for certain borrowers who have recently lost their jobs and are at least 60 days behind on their mortgage payments. Borrowers will be allowed to make the lower payments for three months. Citigroup will waive interest and penalties during this period.

n January, the New York bank bucked the rest of the industry and endorsed legislation that would allow bankruptcy-court judges to modify the terms of troubled mortgages. Citigroup executives have said that move, which could take a toll on the company's bottom line, was designed to win favor in Washington.

...Mr. Das said the federal government "had no role at all" in the company's latest loan-modification effort. The new program "was created by us, developed by us and is now being implemented by us," he said. "There was no pressure at all."

It sometimes appears like we're moving towards a society where the costs associated with taking risks are slowly being eliminated. That means that eventually, so will be benefits.

And somehow I doubt there was "no pressure at all" That could be my inner Conspiracy Theorist (he lives in my head next to the little Game Theorist) talking, but the timing seems (as Artie Johnson would say, "Verrrrrryy Innntereshting"

Ironically, the article was in the "politics" section.

This Week's Another Big Ball-O-Crazy

Posting will be light this week, since life is far over the line into CrazyTown:

• It's a chemo week for the Unknown Son, so every day I'm either teaching or (on my non-teaching days) taking him to chemo.
  
• I've got a conference deadline tomorrow (for the Southern Finance Association meeting)
• In addition, I'm teaching two nights this week in a professional program.
• Somehow in the midst of all this, I have to write an exam for my case course.
  

Finally, in case I forgot, when I wake up tomorrow, I'll probably have to shovel upwards of a foot of snow before I take Unknown Son to the clinic for his chemo?

Ah well - I guess I'll have to plan on sleeping Friday night. By then it'll all be over.