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George Selgin Profile picture
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26 Jun, 4 tweets, 1 min read
The fundamental flaw in @nntaleb's "proof" that Bitcoin is "really" worthless consists of his utter failure to recognize what Keynes called "bootstrap" equilibria, in which agents' prophesies, however badly founded at first, become self fulfilling. jstor.org/stable/4180201…
Such equilibria can be perfectly stable; indeed, in so far as they rest on powerful network effects, they can be extremely..."antifragile." Many models of fiat money treat its postive valuation as such an equilibrium, so this is not some esoteric notion in monetary economists.
And it makes no difference what the basis is for agents initial expectations. That enough of them believe that X will become money may suffice to make it so. (The same idea is implicit in Menger's theory of commodity monies.)
Those early beliefs may appear ludicrous to some, perhaps to most. Yet they can turn out to be "right for the wrong reasons." I;m not saying this will happen in Bitcoin's case. But it might. And that suffices to refute Taleb's argument.

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More from @GeorgeSelgin

George Selgin Profile picture
28 Jun
The big one, though, was financial instability. Far from achieving a "stable means of exchange," the Civil War interventions set the stage for the great currency panics of 1884, 1893, and 1907. It was owing to these that the gov't went about reforming the currency all over again.
Robert glides over this inconvenient part of history, saying only that "In time – after a half-century, more or less – we ended up migrating the Greenback to a new central bank, hence today’s still-green Federal Reserve Notes." (For "greenback" again read "national banknotes.")
Of course his limited space but also, one supposes, his aims, wouldn't let him mention the politics behind the FRA"solution" to the problem of financial instability, including the way better options were passe up to please the big NYC banks. cato.org/publications/p…
Read 11 tweets
George Selgin Profile picture
27 Jun
Let's by all means see if history can teach us anything about the merits of private vs gov't currencies, digital or otherwise. But doing so means knowing that history--not just the bogus myths that circulate (so to speak) concerning it!
Of antebellum currency-issuing banks, Robert writes, "If you liked this sort of thing – you wouldn’t – you called the banks ‘free banks’ and their currencies ‘free banknotes.’ ...If you were more sensible... you called the banks ‘wildcats’ and their notes ‘wildcat currencies’."
That dichotomy misleads in all sorts of ways. First, it misleads by confusing antebellum banks in general with (so called) "free banks." Second, it misleads by confusing "free banks" with "wildcat banks."
Read 47 tweets
George Selgin Profile picture
27 Jun
It's worth noting that the paradox that an inconvertible, non-interest-bearing exchange medium should command value today despite the certain knowledge that it will eventually cease to be valuable, has long puzzled monetary economists.
In _Logik des Geldes_ (1912), Bruno Moll called it "the problem of the end." _The Value of Money_ by Dutch economist Tjardus Greidanus (cdn.mises.org/The%20Value%20…) has a nice discussion of it. Here's an excerpt, starting w/ a quote from Moll:
"The certainty of the individuals to be able to pass on the money rests in the end on the trust-whether conscious, half conscious or unconscious-that even the last owner of the money, who cannot pass it on, has in his possession something of value."
Read 6 tweets
George Selgin Profile picture
25 Jun
Having asked this question, but not having gotten an answer, I will answer it myself, and invite criticisms. To anticipate: I conclude that, if one wants an "optimum quantity of money," a corridor system, not a floor system, is the way to go.
Let's start with the original Friedman-rule ideal: a rate of deflation sufficient to reduce the nominal interest rate on "bonds" to zero. Such deflation, Friedman argued, would eliminate the opportunity cost of money holding, thereby leading to "optimum" money holdings.
For those who consider deflation undesirable in itself, Friedman's solution is obviously unappealing. (I don't wish here to get into the merits of this view.) But there's an alternative that's theoretically equivalent: have money bear the same nominal interest rate as bonds.
Read 14 tweets
George Selgin Profile picture
25 Jun
Anyone who thinks the Fed didn't hasn't started tightening has been hoodwinked.
Despite having switched to a "floor" operating regime in October 2008 (and permanently in January 2019), and thereby all but ending interbank lending on the fed funds market, the Fed continued to maintain the pretense of "targeting" the fed funds rate.
But in reality, it no longer used open-market operations to keep a freely-fluctuating interbank funds rate close to its targeted value. Instead, it adjusted its policy stance by altering the interest rate it paid on bank reserves (IOR rate).
Read 16 tweets
George Selgin Profile picture
24 Jun
Thread: It's worth contrasting Bill Dudley's recent claim that, under the Fed's "floor" operating system, the fed funds rate "no longer plays a meaningful role in the economy, and requires occasional fiddling to keep it in line," with his earlier defense of the the floor system.
Back in 2018, he argued for retaining that system on the grounds that "it is operationally much less complex than a corridor system" since "the setting of IOER is largely sufficient to maintain the federal funds rate within the FOMC’s target range" newyorkfed.org/newsevents/spe…
Now, he has belatedly admitted having praised the system for hitting a "meaningless" target! In fact, it given how the fed funds market now works, it can hardly fail to hit it! And yet it must still tweak its administered rates to do so!
Read 4 tweets

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