tag:blogger.com,1999:blog-8897997766931633186.post2277733678797483284..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Miles Kimball on Electronic MoneyBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger18125tag:blogger.com,1999:blog-8897997766931633186.post-91729605130151761412016-09-17T14:59:53.035-04:002016-09-17T14:59:53.035-04:00https://www.bestchange.com/?p=39776 monitors autom...<a href="" rel="nofollow">https://www.bestchange.com/?p=39776</a> monitors automatic electronic currency exchangers. The service permanently monitors the largest and most reliable exchangers for you to always know at what exchanger you can exchange one electronic currency for another at the best rate. The exchange rates and currency reserves are updated every 5 seconds for all exchangers in the list.Anonymoushttps://www.blogger.com/profile/02054420113648841443noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-60900680329906269192012-11-08T10:36:42.948-05:002012-11-08T10:36:42.948-05:00I'm with Max. If I have a $1 debt, I have the ...I'm with Max. If I have a $1 debt, I have the right to extinguish it with a $1 bill. It says so, right there on the bill. I think you'd first have to redeem those bills for new ones with a little asterisk beside the value, and a whole new disclaimer. I don't see why you couldn't do that though. Germans had to give up their Bunds for Euros whether they liked it or not. Khttps://www.blogger.com/profile/09226058602565040485noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-40261508071697020932012-11-08T09:55:18.261-05:002012-11-08T09:55:18.261-05:00If you owe somebody $100, and the government won&#...If you owe somebody $100, and the government won't redeem your FRNs at face value, then a $100 FRN won't settle the debt. That's a default on the FRNs.<br /><br />You are only looking at it from a deposit holder point of view. I agree there's no default on deposits.<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-6181584277399342052012-11-08T09:43:43.161-05:002012-11-08T09:43:43.161-05:00Bill, Max,
I get it. I had assumed that paper mon...Bill, Max,<br /><br />I get it. I had assumed that paper money would return to par when rates were positive. It doesn't. Here's the key bit of Miles' paper:<br /><br />"In a recession, this would mean that the discount for paper dollars would gradually widen, but in good times (when real interest rates tend to be higher) the discount would narrow until the paper dollar was again at par with electronic dollars, where it would stay until the next recession."<br /><br />The way I would put it is the log exchange rate is given by the integral of the spot rate from the time the spot rate first goes negative until the *integral* returns to zero. At all other time the log exchange rate is zero (exchange rate is one). The derivative of the log-price (the profit rate of holding dollars) during periods of non-par exchange is r, as is required for all risk free assets.<br />Khttps://www.blogger.com/profile/09226058602565040485noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-88822802147992407552012-11-08T09:40:56.186-05:002012-11-08T09:40:56.186-05:00Default of what?
Who is obligated to accept FRN f...Default of what?<br /><br />Who is obligated to accept FRN for deposit at par?<br /><br />Par means that the price is equal to the face value. Discount means the price less less than the face value. Premium means the price is more than the face value.<br /><br />For Kimball, these prices are in terms of deposits. Par means that a $1 deposit is exchange both ways with a Federal Reserve note denominated as $1. Premium means that $1 Federal Reserve note is exchange both ways with a deposit of more than $1. Discount means that a $1 Federal Reserve note is exchanged both ways with a deposit of less than $1.<br /><br />In the olden days, premium, discount, and par would refer to gold. Redeemability would keep FRN at par with gold. 10 $1 Federal reserve notes would be at par with a $10 gold eagle. If the Federal Reserve notes were at a discount, for example, if redeemability had been suspended, then each FRN would would be at a discount relative to gold. In practice, what happened in similar circumstances, is that gold coins would trade at a premium relative to their face values.<br /><br />Anyway, with a gold standard, a discount on paper money is a kind of default. And it happened quite frequently. But rather than liquidation, contractionary credit policies would be followed until the paper money rose back to par. <br /><br />But there is no gold standard and FRNs aren't redeemable for anything. On the contrary, deposits are redeemable for FRNs, and no part of the proposal involves anyone redeeming a $1 deposit with anything less than a $1 Federal Reserve note.<br /><br />Mayor Bill Woolseyhttps://www.blogger.com/profile/15439136665155575382noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-59598451427066775132012-11-08T09:31:26.502-05:002012-11-08T09:31:26.502-05:00I didn't say it would be a default on deposits...I didn't say it would be a default on deposits. It would be a default on the FRNs. Yes, you can default on currency! "This note is legal tender for all debts, public and and private." It doesn't say "at face value", but that is obviously implied.<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-26895820294725452722012-11-08T09:17:48.253-05:002012-11-08T09:17:48.253-05:00Incidentally, since this scheme allows currency to...Incidentally, since this scheme allows currency to earn interest (at any rate less than or equal to Fed Funds), it means that Milton Friedman's "optimal quantity of money" can be achieved at any inflation rate (rather than requiring deflation at the Fed Funds rate).<br /><br />If that matters. :-)<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-11811985412529892542012-11-08T08:54:25.822-05:002012-11-08T08:54:25.822-05:00"I hold the position for two years, collectin..."I hold the position for two years, collecting 5% interest per year, then convert my paper dollar back to an e-dollar (at par again) and repay my loan."<br /><br />You can't convert back at par. There is no par. So you are losing more than 5% a year on the paper currency, and you never get it back.<br /><br />Again, this couldn't be applied to existing FRNs because that would be a default. It would be a completely new currency where the face value means nothing in terms of dollars...although the conversion rate could, sometimes, be 1.0, purely as a mathematical convenience (not because it's a dollar bond!)<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-63591483803420366092012-11-08T08:51:31.882-05:002012-11-08T08:51:31.882-05:00When you pay back the loan, each FRN in 2 years wi...When you pay back the loan, each FRN in 2 years will be worth about 90 cents.<br /><br />Borrowing FRNs and holding them would provide no benefit. <br /><br />By the way, rate of price decrease in FRN's is supposed to be lower than the interest rate at which they can be borrowed.<br /><br />I think Kimballs notion would be that the Fed begins debiting banks reserve balances at 5% a year. Members of the general public who want to have e accoutns at the Fed have those debited by 5.2 percent each year. And the price of Federal reserve notes fall a 5.4% each year.<br /><br />If you can get a bank to lend you a dollar at -4%, then you could withdraw a $1 FRN. It's price would be dropping at a 5.4% rate. After a year, its price would be 94.6 cents. You could deposit it for a 94.6 cent e account balance or a 94.6 balance in your checking account. Then, you would owe your banker 96 cents.<br /><br />You have lost 1.6 cents. <br /><br />When interest rates are back in positive territory, say the policy rate is .5 percent, then the price of the Federal Reserve notes would start to rise from the current, below par, values at a .1% annual rate. Eventually, they return to par.<br /><br />When the policy rate is back up to 5% (positive 5%,) then the FRS price would be rising at 4.6 percent per year. Before long, they would be back to face value. And then they are left alone until next time the policy rate gets below .4%.<br /><br />Mayor Bill Woolseyhttps://www.blogger.com/profile/15439136665155575382noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-18111410631552880362012-11-08T08:43:51.839-05:002012-11-08T08:43:51.839-05:00The key is the redeposit value.
First, think a...The key is the redeposit value. <br /><br />First, think about a $1 deposit. If you do noting with it, when interest is negative, it gradually drops in value as negative interest is deducted. Say, after 2 years, it is down to 96 cents. Then, for a time, the interest rate is no longer zero, but zero. And so the balance stays 96 cents. Then, the interest rates become positive again. The balance starts rising. Suppose it is one percent. After about 4 years, it is back to $1. Of course, if you leave the money in the bank, it would be $1.01 after another year, but forget that part.<br /><br />Now, we make the dollar value of currency do the same. The currency has a $1 face value (it looks like a FRN.) During the period interest rates are negative, the price drops 2% a year. After 2 years, the price is 96 cents. Then, when interest rates are zero, it stays 96 cents. Then when interest rates are positive 1 percent, the price of the currency rises gradually. After 4 years, it is back to $1, the face value. <br /><br />Currency had a growing discount, reaching 4%. It stayed steady for a time, and then the discount gadually falls over time-- 3%, then 2%, and after 4 years it is 0%, no discount at all.<br /><br />What allows this to happen is how much currency is accepted for deposit into bank accounts.<br /><br />I take out one dollar today. I have a $1 FRN. My balance at the bank is down $1. The price of the currency is dropping at 2% per year. What that means is that after 6 months, if I choose to deposit the dollar back into the account, I don't get a dollar balance, I get a 99.5 cent balance. If I wait one year, it will be a 98 cent balance that I get for depositing my $1 denominated Federal Reserve note. After two years of leaving the FRN in my sock drawer, if I deposit it, I get a 96 cent balance. (I am ignoring compounding.) <br /><br />Now, if I wait long enough, then eventually my $1 FRN in the sock drawer will give me a $1 deposit. But if I had a one dollar balance in my bank account all along, it would eventually return to $1. It would decrease as long as interest rates are negative and then increase when they turn positive again.Mayor Bill Woolseyhttps://www.blogger.com/profile/15439136665155575382noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-23917572359556000222012-11-08T08:33:09.956-05:002012-11-08T08:33:09.956-05:00It is a bit odd to talk about redeeming FRN at any...It is a bit odd to talk about redeeming FRN at any value. The status quo is that deposits are redeemed with FRN at face value.<br /><br />When a discount is placed on FRN, then extra FRN are being provided. To say that you can buy a $1 FRN at your bank for a 99 cent deposit means than you can withdrawal about $1.01 in currency for a $1 balance. Hardly default on the deposits. <br /><br />And FRN aren't redeemable into anything now. <br /><br />Still, the point of the proposal is to start thinking in terms of deposits, and so your $1 FRN won't buy a $1 deposit, but only a 99 cent deposit.Mayor Bill Woolseyhttps://www.blogger.com/profile/15439136665155575382noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-7354935888563898022012-11-08T08:23:02.214-05:002012-11-08T08:23:02.214-05:00Max,
I never said you could do that.
Assume the...Max,<br /><br />I never said you could do that. <br /><br />Assume the Fed is at 0% and then announces it's going to cut the policy rate to -5% for two years and then back to non-negative rates. So I borrow one e-dollar and convert it at par to a paper dollar. I hold the position for two years, collecting 5% interest per year, then convert my paper dollar back to an e-dollar (at par again) and repay my loan. <br /><br />You can't just set rates *and* the price of paper dollars (bonds) where ever you want without permitting arbitrage. The price of paper dollars has to be exp(-rT) where T is the time at which rates return to zero, and r is the (negative) yield up to that date.<br /><br />The example holds whether the conversion at the beginning and the end is par or 0.99. It has nothing to do with it. I make 10% interest for free over the two year period. Khttps://www.blogger.com/profile/09226058602565040485noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-53807600395515285972012-11-08T07:29:09.148-05:002012-11-08T07:29:09.148-05:00Another great post! Hope you don't mind me li...Another great post! Hope you don't mind me linking to your blog at fifthestate.coFifth Estatehttps://www.blogger.com/profile/09713442538071999308noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-22074836984100112972012-11-08T00:40:33.448-05:002012-11-08T00:40:33.448-05:00K, "discount" doesn't have any meani...K, "discount" doesn't have any meaning if the money is not redeemable at face. You can't buy a $1 bill for $0.99 of base money and then convert it to $1 of base money. You can only convert it back to $0.99 of base money. It's a permanent change to the currency/base exchange rate.<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-60022362585943935232012-11-07T22:56:15.805-05:002012-11-07T22:56:15.805-05:00Bill,
I did read it, but I don't get it. You ...Bill,<br /><br />I did read it, but I don't get it. You can see my comment to Myles on his blog. Basically I don't understand what monetary operations he is proposing, and I don't see what he can do to control the value of hand-to-hand currency. Without stamping it (negative interest) I don't see why it would trade at a discount. If paper money trades at a discount I'll buy it in unlimited quantities by borrowing at negative rates and make big arbitrage profits. It has to trade at a premium equal to the discount factor (greater than 1) up to the time when rates go positive again. What am I missing?<br />Khttps://www.blogger.com/profile/09226058602565040485noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-44617593859103160342012-11-06T22:29:49.644-05:002012-11-06T22:29:49.644-05:00Not redeeming the existing FRNs at face value woul...Not redeeming the existing FRNs at face value would be legally problematic - it would be a kind of default.<br /><br />But I suppose you could create a brand new currency that works this way, with a dollar exchange rate which *permanently* changes every day at the rate of interest (forget about "returning" to 1:1, just let it go whereever it goes!)<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-80067998767177479072012-11-06T13:07:34.589-05:002012-11-06T13:07:34.589-05:00Read the article. I might be wrong, but I read it ...Read the article. I might be wrong, but I read it as below:<br /><br />I think that the deposit price of currency is supposed to drop at a rate slightly more than the negative nominal interest rate on electronic money.<br /><br />Next week, a one dollar bill has a price of .99. Then it is .98, and so on.<br /><br />You can buy a paper dollar from your bank at that price. You can deposit that amount and get a dollar balance in you deposit account.<br /><br />The rate of capital loss on currency would equal the negative nominal interest rate on electronic money.<br /><br />When interest rates turn positive again, then the price of currency would rise at a slightly lower rate than the positive interest rate.<br /><br />This week is is 78 cents per dollar bill. Then it is 79 cents. Eventually you get back to $1 per dollar bill.<br /><br />The face value of the currency is constant. The value in terms of deposits falls and then rises.<br /><br />A growing and then shrinking discount.<br /><br />It is peculiar. Everyone wants currency because it is a great store of wealth when interest rates are negative. And rather than the price of currency rising relative to deposits, it falls.<br /><br />What drives this is that the currency will only be accepted for deposit at the falling and then rising price.<br /><br />Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-6037875724767978082012-11-06T12:41:16.849-05:002012-11-06T12:41:16.849-05:00Bill,
I assume you (and Miles) mean that hand-to-...Bill,<br /><br />I assume you (and Miles) mean that hand-to-hand currency will trade at a premium, not discount. It has a higher coupon. <br /><br />KKhttps://www.blogger.com/profile/09226058602565040485noreply@blogger.com