The Free Banking Origins of PayPal

Radley Balko reviews The PayPal Wars, highlighting its origins in the idea of currency competition:

In the book’s first chapter, Jackson recalls a speech Thiel gave to Confinnity employees, just a few days after he began work, in which he described his hopes for PayPal to become a borderless private currency. He saw PayPal facilitating trade in currency for anyone with an Internet connection by enabling an instant transfer of funds from insecure currencies to more stable ones, such as U.S. dollars. Thiel explained to his young staff how governments had historically robbed their own citizens through inflation and currency devaluation. The very rich could always protect themselves by investing offshore. It’s the poor and middle class, Thiel explained, who get screwed. “PayPal will give citizens worldwide more direct control over their currencies than they ever had before,” Thiel predicted. “It will be nearly impossible for corrupt governments to steal wealth from their people through their old means because if they try the people will switch to dollars or pounds or yen, in effect dumping the worthless local currency for something more secure.”

The story does not have a happy ending.

posted on 29 August 2005 by skirchner in Economics

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The Political Economy of Tax Reform

There is growing impetus for a new round of tax reform, thanks in no small part to Malcolm Turnbull, who has released an important paper on Taxation Reform in Australia: Some Alternatives and Indicative Costings.  It deserves to be widely discussed.  The Prime Minister has acknowledged the desirability of further reform.  Even opposition finance spokesman Lindsay Tanner has come out in favour of a reduction in the top marginal rate, an important policy shift for the Labor Party.

The only politician seemingly lacking enthusiasm for further reform is Treasurer Costello.  Any mention of the need for tax reform is an implicit criticism of his nearly ten years as Treasurer, so his lack of enthusiasm is understandable.  Costello has recently sought to enhance his leadership credentials by diversifying the range of issues in which he takes an interest.  Yet it is fairly clear that he has nothing new or interesting to say on any of these issues either.  Costello would be better served tackling the important issues within his own portfolio if he wants to establish his leadership credentials.  At the moment, he shows every sign of being devoid of new policy ideas.

posted on 29 August 2005 by skirchner in Economics

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Contrarian Optimism versus the Doomsday Cult: A Fund Manager’s View

This blog’s position of contrarian optimism on the US and Australian economies has made it something of a lone voice amid the rather fevered gloom and doom that characterises many other economic blogs.  Much of this gloom and doom ultimately stems from a curious lack of faith in the most basic market institutions that underpin the success of the Anglo-American economic model. 

I was therefore pleased to read fund manager V. Anantha Nageswaran’s article on The Doomsday Cult, which takes the economics blogging community to task for trafficking in ‘stale conventional wisdom.’  It should be said that Dr V comes at this from what I suspect is a very different position from my own.  My impression is that he has also been somewhat partial to the views he now criticizes. As a fund manager, he has no doubt had to accept that market pricing has been particularly unkind to those who bought into these views by underweighting USD asset markets.  While I don’t necessarily share his argument or analytical framework, he nonetheless reaches some very similar conclusions to my own.

UPDATE:  More silly doomsday cultism, from Clyde Prestowitz.

posted on 27 August 2005 by skirchner in Economics

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From Impossible to Inevitable: The End-Game for the Euro

Even Anatole Kaletsky is considering the end-game for the euro:

The most plausible such scenario is Italy withdrawing from the euro, under pressure from mounting unemployment, a weak economy and imploding public finances, exactly the same combination of pressures that forced Italy out of the ERM in 1992. If the possibility of Italian withdrawal were ever taken seriously by the markets, foreign holders of Italy’s €1,500 billion public debt would face enormous losses, since the Italian Government would simply convert its bonds into “new lire” and would legally get away with this conversion…

A break-up of the euro seems highly improbable in the next year or two. But anybody who still believes that such a break-up is impossible should bear in mind the lessons from the break-up of the ERM, the sterling, franc and lira devaluations of the 1960s, the collapse of the dollar-based Bretton Woods system in the early 1970s and the prewar abandonment of the gold standard. In confrontations between politics and financial markets, events can move straight from “impossible” to “inevitable” without ever passing through improbable.

posted on 26 August 2005 by skirchner in Economics

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The Bubble in Bubble-Talk: A Disconnect from Fundamentals

More evidence of a bubble in bubble-talk:

In June, the term “housing bubble” was used 312 times in American magazines and newspapers. That’s up sixfold from a year earlier.

If bubble-talk rises at a faster rate than the asset price inflation it purports to describe, doesn’t that mean it has no basis in fundamentals?!

posted on 24 August 2005 by skirchner in Economics

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Greenspan’s Legacy

Ken Rogoff on Greenspan’s legacy:

although many people believe that monetary stabilisation policy has been more central than ever under Mr Greenspan, his greatest success may have come from making it less so.

This is true up to a point.  Greenspan’s personal prominence as a central banker has probably led many people to overestimate the importance of monetary policy to macroeconomic outcomes, since people can much more readily identify with the notion of an individual being in personal control of interest rates than the more abstract and complex process by which monetary policy interacts with the economy and asset prices.

Evaluating Greenspan’s legacy on the basis of macroeconomic outcomes distracts attention from his more important institutional legacy.  Greenspan should have done more to ensure that his personal credibility was transferred to the institution of the Fed and formalised in reforms to the governance framework for US monetary policy.  The credibility of US monetary policy should not have to be re-built from scratch with every new Fed Chair.

posted on 24 August 2005 by skirchner in Economics

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Ted Evans on RBA Governance

ABE has not yet posted the text (if any exists) of former Treasury Secretary Ted Evans’ remarks on RBA governance last week.  Doing a quick search for it reminded me of working in financial markets in the 1990s, when speeches by the Treasury Secretary and Treasurer would go up on the Treasury web site days after the event and important documents like the Mid-Year Economic and Fiscal Update would have release dates and times that were not even announced until the last minute, to suit the convenience of the Treasurer.  Treasury was not alone in this.  The RBA did not have a meaningful web site until late 1997!  This made Australia’s homilies on the subject of transparency directed at regional governments during the Asian crisis more than a bit rich.

Ted’s credentials on governance and transparency issues are thus not great, but he did come out with one good suggestion: reducing the frequency of the currently monthly meetings of the RBA Board.  The RBNZ makes official cash rate decisions on a six week cycle and this seems to make an important difference.  The RBNZ almost invariably changes interest rates in consecutive policy moves, which greatly reduces uncertainty and makes NZ monetary policy a much easier call than in Australia. 

Ted also suggested that the RBA should make an official statement after every meeting, regardless of whether there is a change in interest rates, something to which the RBA remains opposed, although the RBNZ manages this just fine.  The RBA and some commentators have tried to argue that the RBA presents more detailed statements when it does change interest rates than other central banks.  This is partly a function of the paucity of RBA communication at other times.  The everything-but-the-kitchen-sink statements that accompany RBA policy actions are in fact symptomatic of a poorly focussed statutory mandate.  The RBA seems determined to summarise every influence on policy when announcing changes in interest rates, which can distract attention from the inflation target, which is the bottom line for policy.  The rather terse statements issued by the Bank of England’s Monetary Policy Committee are preferable in this regard.  This does not preclude making more detailed statements on economic conditions at other times.  The quality of central bank communication is more important than its quantity.  The RBA’s Statements on Monetary Policy are notable mainly for their avoidance of any discussion of the policy outlook.  By contrast, the RBNZ fully endogenises its macro forecasts to a projected path for interest rates.

An important change that has gone largely unremarked in recent years has been the RBA’s increased commitment to making policy announcements at the first post-Board meeting dealing intentions window, which is now recognised by a brief ‘no policy change’ announcement after each Board meeting.  It was only a few years ago that the RBA routinely made unscheduled policy announcements.  The justifications for these unscheduled announcements were weak and imposed entirely needless uncertainty and costs on market participants.

posted on 24 August 2005 by skirchner in Economics

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Pundits Putting Their Money Where Their Mouth Is

Two pundits prepared to put down some serious green on the five year outlook for oil prices, with John Tierney following the advice of the late Julian Simon:

if you find anyone willing to bet that natural resource prices are going up, take him for all you can.

posted on 23 August 2005 by skirchner in Economics

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The Next Fed Chair(woman)?

Barron’s profiles some female economists who are plausible candidates for the role of Fed Chair, although most can be ruled out as a Greenspan replacement because of their Democrat sympathies.  The story quotes Alicia Munnell saying:

“A lower percentage of women compared to men are Republicans,” she notes, “which means there’s a smaller pool of women candidates with appropriate political credentials. This is especially true among academic economists, of which the majority, male and female, are Democrats.”

Interestingly enough, the two women that have served on the Bank of Japan policy board in recent years have invariably been the most hawkish in their voting behaviour.

posted on 23 August 2005 by skirchner in Economics

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Putting Your Money Where Your Bubble Is

We have previously pointed to HedgeStreet’s house price contracts for major US cities and politely suggested that those who think US house prices are experiencing a bubble might want to put their money where their mouth is.  See the Hedge Street home page for a short clip from a CNBC segment on these contracts, with the bubblicious Jane Wells.  The Hedge Street contracts are small enough that the old ‘the market can remain irrational longer than I can remain solvent’ excuse just doesn’t cut it anymore.

posted on 23 August 2005 by skirchner in Economics

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Bubbles in Everything

This Harry Dent Jr title is surely the best evidence yet that the term ‘bubble’ has become so widely abused as to be meaningless:

Bubble After Bubble in The Ongoing Bubble Boom: Oil Bursts, the Housing Bubble Fades and Now Stocks Emerge Into a Greater Bubble that Finally Ends in 2010.

This title sells for 49 cents, which is 25 times the two cents this sort of opinion usually sells for.  A Greater Bubble indeed.

posted on 22 August 2005 by skirchner in Economics

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Howard-Peacock Rivalry

As a veteran of the Howard-Peacock wars of the 1980s and 1990s, I could not help but notice the juxtaposition of these two stories:

PRIME Minister John Howard tonight becomes the first Australian to receive a prestigious American public service award.

It will be the first time anyone outside North America or Europe receives the Woodrow Wilson Award for Public Service.

* * *

Former federal Liberal Party leader and ambassador to the United States, Andrew Peacock, has been charged with drink driving after a crash in Sydney.

Mr Peacock will face Waverley Local Court on September 13.

posted on 22 August 2005 by skirchner in Economics

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Fundamentals of House Price Inflation: ‘Bubbles’ as Rational Ignorance

For all the talk of a housing ‘bubble,’ very few seem willing to put this proposition to the test.  An exception is Craig Depken over at Division of Labour, who has some interesting empirical results relating housing ‘overvaluation’ to a few simple fundamentals for the US.

The IMF’s 2003 Article IV consultation with Australia was notable for hedging its bets on whether Australia was experiencing a house price ‘bubble.’  A look at the accompanying Selected Issues paper suggested why.  IMF staff modelling showed only a small deviation in the relative price of housing compared to that implied by a simple fundamental model.

Most ‘bubble’ talk is based on casual observation and the failure of observed valuations to conform with people’s prior beliefs and prejudices.  An obvious explanation for this is that most people are rationally ignorant about the underlying fundamentals (how many people could tell you the net inbound migration stats for Sydney over the last 12 months, for example).  The cost of acquiring this information exceeds its value for all but a handful of people.  Behavioural finance theories are often invoked to explain bubbles, but it is just as likely that the widespread belief in ‘bubbles’ is itself a behavioural finance phenomenon.  This is harmless enough in the hands of most people, but dangerous when it becomes the basis for public policy.

posted on 20 August 2005 by skirchner in Economics

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The Rise and Fall of Monetary Targeting: A Postscript

A postscript to my review of Simon Guttmann’s The Rise and Fall of Monetary Targeting in Australia.  Apparently, the publisher has withdrawn the book on legal grounds, which will make what was always going to be an inaccessible title even more so.  Given Australia’s draconian defamation laws, the withdrawal and pulping of books is not uncommon, although one would have thought that publishers would be sufficiently alert to these risks by now to avoid this sort of outcome.

As I indicated in my review, I don’t think Guttmann properly acknowledged the role played by the post-war revival of monetarist thought and the monetary targeting experiments of the 1970s and 80s in the evolution of contemporary monetary policy theory and practice.  For a work of both intellectual and economic history, this is a serious flaw.  Other readers evidently had their own, more personal, objections to Guttmann’s version of history. 

Who said monetary targeting had to be dull!

posted on 19 August 2005 by skirchner in Economics

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It’s a Kirchner Thing

When it comes to cleaning-up central banking, a Kirchner’s work is never done:

‘…Kirchner Fires Central Banker…’

posted on 19 August 2005 by skirchner in Economics

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