The efficient market hypothesis (EMH) seems to have numerous definitions, but the general idea is that the current prices in a market (such as a stock market) reflect all available information, and that, therefore, you can’t make risk-adjusted profits in excess of the (purely theoretical) risk-free rate of return by (for example) analysing the past prices of stocks and anticipating their future movements.
The intuitive idea is this: if anyone could easily predict future prices of stocks, they would do so and attempt to profit by buying stocks that are likely to rise, and selling stocks that are likely to fall. But by doing so, such people would bid up the value of stocks that will rise, and bid down the value of stocks that will fall, moving their prices to the prices they’re predicted to have in future. So the present price should reflect the expected future price.
So if the EMH predicts that expected excess profits are impossible, it certainly predicts that guaranteed excess profits are impossible, which poses a puzzle when considered alongside this surprising guarantee. Continue reading An efficient market from different points of view
My previous article, about Ripple and its currency attracted some criticism from some in the Ripple community. And it deserved it, so here I’m going to correct and clarify what I said earlier. Continue reading Corrections and clarifications: gateways and the value of XRP
In my previous article, I talked about a potential peer-to-peer money transfer system, and the problem of how to get such a system started: Why would you be the first of your friends to join such a system? It wouldn’t be useful until you had well-connected friends to connect to the network through. I suggested that this problem might be alleviated by strapping such a money-transfer system onto pre-existing decentralized social networks.
Well, since then, I’ve read more about the recently rejuvenated Ripple, and I’ve discovered that they have a different, very clever solution to this problem. Their solution has other benefits, too, including a currency that I argue isn’t necessarily backed by debtors, as every country’s fiat currency seems to be. Continue reading Ripple and its currency
It’s been suggested to me that understanding of my fiat currency discussion might be aided by a summary of the main threads of my argument. So here goes: Continue reading Fiat currency summary
Last time in this series, we considered the effect of halving the number of New Zealand Dollars, and halving every NZD-denominated debt. In particular, would this double the value of the dollar? It didn’t seem tenable that it wouldn’t at least have the tendency to double the value of the dollar, although stickiness and other constraints may work against that tendency.
So if we accept that halving the stock of money, and all the money-denominated debts, has the tendency to double the value of money, then we might wonder whether both debt-halving and money-halving are necessary. So today, let’s consider the situation where we just halve the stock of money (in circulation and in hoards and stockpiles), without halving everyone’s debts. Would this on its own be enough to double the value of the dollar? Continue reading Is money’s value inversely proportional to how much there is?
In my previous post, I proposed a thought experiment: If all the debts denominated in New Zealand Dollars suddenly halved, and half of all the New Zealand Dollars in each person or organization’s possession suddenly disappeared, would the value of the dollar double? Today, let’s consider what it might mean if the answer is “no”; what could we conclude about what determines the value of the dollar? Continue reading Stickiness
As far as I know, every nation’s official currency is a fiat currency. This means that the government (or the European Central Bank, or whoever) doesn’t promise anything of value in exchange for their own currency.
This is in contrast to a “hard” currency; for example, before the so-called Nixon Shock in 1971, foreign countries could get an ounce of gold from the US government for every $35 they sent back; this was meant to ensure that the US dollar had a certain value.
At first, it appears that a fiat currency provides no guarantee for holders of the currency or for creditors owed money in that currency; no-one is obliged to give them anything valuable in exchange for the token coins, pieces of paper, or electronic records.
But four decades after the Nixon Shock, US dollars are still treated as if they have value, and most other countries have functional fiat currencies, too. So why are they valuable? Continue reading A fiat currency thought experiment
Earlier in my series on a (currently) hypothetical town called Jubilee, I wrote about how to allocate land, by issuing land-use rights to all residents of Jubliee, which they can use as a “currency” to bid in auctions for long-term land leases. I put “currency” in scare-quotes then, but what if the residents actually used the land-use rights as a currency for everyday transactions? Continue reading Land-use rights as a currency