Q&A on Cryptocurrency
Updated: Sep 24
EconBuff Podcast #30 with Ryan Mattson
Dr. Ryan Mattson does a question and answer session with me in response to questions generated by his past Econ Buff episode on Cryptocurrency. Dr. Mattson answers questions about the ease of trading between cryptocurrencies. He defends the credibility of the Federal Reserve based on its historical performance in containing inflation. I push back on this defense, criticizing the FED’s performance since the early 2000s and question him on the nature of inflation containment. We explore the difference between stable and low inflation versus having any inflation at all. Dr. Mattson takes on the character of barter and trade, arguing money provides many benefits beyond facilitating a complex, modern economy. We address speculation as a property of money, with Dr. Mattson discussing the interaction between speculation and money serving as a store of value. Finally, Dr. Mattson tackles clarifying scarcity in cryptocurrency, gives a deeper explanation of how verifying transactions is a property of all money and he defends his stance on the money growth rule of cryptocurrency being primitive while pointing out that the mechanics of cryptocurrency are not primitive.
Photo by Art Rachen on Unsplash
Transcipt:
LEE STITZEL: Hello and welcome to the EconBuff Podcast. I'm your host, Lee Stitzel. With me today is Dr. Ryan Mattson. Ryan is a research associate at the Center for Financial Stability and a professor of economics at West Texas A&M University. Ryan, welcome.
RYAN MATTSON: Gladly.
LEE STITZEL: Exactly. So Ryan what happened was we put up our crypto episode and as you and I talked about before we started the episode this is a hot button issue. Right we have a lot of believers we have a lot of doubters haters as the kids say and we fielded a lot of questions and so I appreciate you coming on really short. Notice I've organized the question sort of by showing up multiple times or themes I'm going to see how far we can get through this we'll just go for an hour if you're a listener. And you posted questions that we didn't get to that you would really like for us to address I guess send them again and we'll see if I do a follow-up episode to this and so. I just overall want to say you know it's a good sign this first time that we've kind of gotten to this point on the podcast of having a big response. So I'm going to open this up with the first question so the question from our listener says given the discussion on the challenge of menu pricing with the cryptocurrency which you and I want. To I think tease that part out a lot a little bit in contrast with Dr. Mattson's comments on how easy it is to exchange between cryptocurrencies isn't there some confusion there. So start by telling us what a menu cost is which it seems like the question has it right. But I want to reiterate that and then talk about that given what it is you were saying about the ease of switching between cryptocurrencies.
RYAN MATTSON: Sure so as we kind of learn in principles of macroeconomics when you have a high inflation environment or a volatile price environment it's costly to keep changing those prices on your menu for example. So if I'm going to let's say I go to a carnival in Sierra Juárez and you know I can see the taco trucks up and you have you know some waffle places and you know. It's great but what you'll also see is you'll have these signs where you can see where the price has maybe been erased or they put a little bit of Wite-Out there and they've. Changed that well that has a cost to it's a menu cost so basically anything that a firm has to do any time that they spend changing these prices any resources that they use. And changing these prices is what is considered to be this opportunity cost that we have just based on living in a high inflation or a large deflation environment where the prices are changing. Much more quickly so a menu cost.
LEE STITZEL: Is a problem because it not only actually involves effort from the person changing the menus and I think there is like a normal there's a very mechanical way in which this is true. Like you're mentioning taco trucks that'd probably be a relatively easy situation right the easiest situation is a digital board like we would see at a gas station. But you know there are real costs if you end up changing things like menus because you have to reprint them out and refinish them that's very expensive. But I also think there's a nature to menu costs that is the expectations of your customers is also great I don't want to go to a store that's repeatedly changing prices on me. So we like that stability.
RYAN MATTSON: Yeah I mean if yeah if the taco is you know $5 for three tacos and then suddenly you're at six seven eight nine you start wondering look it's this guy's just keeps. Raising prices on me you may have the cost then of the consumer deciding that they you know forget this they don't want to shop there anymore as well.
LEE STITZEL: Yeah right okay so the second half of that comments is about how easy it is to exchange between cryptocurrencies. So one of the things in retrospect that I probably should have interjected more on is this comparison about how easy it is to change money we talked sort of in broad categories about. Hard money gold and silver about paper fiat money and then about cryptocurrency which is obviously the right thing to do anytime you get into these type of episodes and I agree with a commenter. Who's saying you made it sound easy to exchange between cryptocurrencies my personal experience as limited as it is with anything other than paper money is it's not doesn't strike me as easy to switch. Between cryptocurrencies because I'm not because I'm not in that market so it doesn't strike me as true one of the things I think you said something like. Well you got a I said a hypothetical what if your daughter found a gold doubloon in the backyard and you said. Well where would I sell a gold doubloon right and we I think rightly made the point that said. Well sure but if you actually had a gold doubloon surely the value of that would make it worth it even if I had a silver coin that's currently worth 30 something bucks it's. Still going to be worth it to swap that out given what depending on what it is that I want to do with that have you I guess expound on that do you would. You rebut the point that I'm making that I don't see it as particularly different crypto to hard money for sure and maybe if I weren't just doing my normal business if it weren't. The setting that I were in I don't know that it even necessarily be easier with paper money comment on that.
RYAN MATTSON: So I do stand by the statement that it is much easier to trade in crypto than it would be for the hard money and but I don't think that negates the existence of menu. Costs and certainly on a consumer end as well if, for example, we see you know a Bitcoin going up and up and up and up then as a consumer of that monetary service. I would have the same kind of issue with this risk in the store of value and speculation and I may not want to jump in when say it's shooting up like that I may. Want to you know if I'm using it for a medium of exchange anyway I may want for it to stabilize. So yes you can still have in my in my opinion from what I've seen you can still have menu costs these they're not you know the price doesn't go down to zero just. Because it's it's instantaneous or just because it's in an electric ledger there's there is still a cost associated with that and since this is kind of a new technology in the world we may. Not even know all of the potential menu costs that could be coming into effect that might be influencing this.
LEE STITZEL: So let me turn to the next question we got multiple questions of this I think would be predictable it's some variation of you need to defend the credibility that you assign to the to the Fed. So I'd like to do that in general I'd like you to do that in general the comments that accompany that are things like I mean we don't know how high inflation is going. To go and commenters maybe not being very impressed by whatever variation of inflation rate targeting the Fed is doing. So comment a little bit on the on the credibility of the Fed. From your perspective.
RYAN MATTSON: Well so when we have the Great Moderation right this period where inflation from about I guess depending on who you talk to but going from say you know let's go ahead and start. With 70s 80s 90s into the aughts you have this very stable inflation rate so the Fed and right or wrong the Fed is taking credit for that and in what they've been doing. Since Volcker to try and stabilize that inflation rate they really went after that first rule that they had as they should have because you know Milton Friedman argues in A Monetary History of the United. States that the Great Depression was not really an issue of the business cycle the Great Depression was an issue of the Fed not doing its job that they should have been expanding the money. Supply in the face of a large aggregate demand shock or in the face of a recession people losing their jobs they should have made money easy. So people could purchase again and then we can recover the economy they seem to have done a very good job of this then they seem to have learned that lesson in the 80s. 90s and aughts I remember there's a famous Ben Bernanke speech actually commenting on Milton Friedman's I think 90th birthday where within the speech Ben Bernanke is not the chair yet. But he's on the board of governors he says yeah milton anna Milton Friedman and Anna Schwartz wrote A Monetary History of the United States you were right and we will never do it again basically.
LEE STITZEL: Well at least try not so you're saying the so the easy money that we're seeing. Right now is Milton Friedman's fault.
RYAN MATTSON: The easy money that we're seeing right now is the fault of monetary policy that's based off of Keynes Friedman Bernanke also wrote on this so let's make that point macro economist Bernanke is one. Of the eminent monetary policy scholars about the Great Depression so I think if you understand Bernanke's history his education it makes a lot more sense what it is that we saw under his. Administration well so we the Fed seems to understand its job and they wants to credibly do this credibly go after it and you know Ben Bernanke then wrote about the Great Depression of okay. I know how to solve this thing if you read his biography his autobiography which is you know thick. But worth it he's talking about it even in the first few chapters you know on the eve of the financial crisis and this Great Recession he's talking about it and I think in some. In admits to some bit of hubris with it I can fix this I can do something about this so he is now operating under this assumption that the Federal Reserve can influence inflation. Rates because they have a long history of doing that since Volcker into Greenspan and then. Now into Bernanke's chairmanship and but part of credibility is not just that okay we believe they we believe they want to do this and we believe that they're going after it so Friedman's. Of Friedman's big critiques anyway was that the Federal Reserve was defending a strong dollar and defending the gold standard and that was not within their purview that was not what they were supposed. To be doing as a central bank so Bernanke then comes in and says okay I'm going to do this the way it should have been done during the Great Depression and I'm going. To expand the money supply out and you see in M1 and M2, for example, this big explosion in M1 and M2 if you look at if you look at better measures of money. Like the Divisia indexes the Center for Financial Stability provides you actually see a contraction. Right in the money supply so there's an issue with credibility is yes we believe this is what Ben Bernanke wants to do but did he actually successfully do it and then we get. In this issue of how does the transmission mechanism function you know is the money that the Fed is supposed to be releasing into the banking system being loaned out as it should be or generating. More economic activity as it should be so the Fed has got they want people to believe they can do this they have a decent history up to about 2008 2009 of credibly saying. We can do this okay and I guess I'm of the opinion or on the position that yes I believe that Ben Bernanke you know had the right idea. But I think that the practical aspects of it pulling it off getting the logistics to work getting the plumbing to work properly we've run into a problem where the transmission mechanism doesn't function. As it should anymore where it is zero interest rate lower bound and we've been there for we're looking at what 12 years. Now yeah and so yes I think the Fed does want to target inflation but can they do it's what we in economics we talk about willingness and ability. Right yeah you have to be willing and able I think the Fed's willing since 2008 I have questions about if they're able.
LEE STITZEL: So a lot of points to unpack there and one of the things I want to raise actually let me go to the point that I would say first. So you said hey look from 70s 80s 90s up to 2008 we're doing we're doing. Well I disagree with that I disagree with that because I'm in the John Taylor camp that says this run up to 2008 one of the huge cornerstones of that being a problem is unconventional. Monetary policy that had rates too low that had easy money for too long and caused a bubble which is why I'm very critical of after you got through 2008 not rolling things off. The Fed's balance sheet not giving yourself some room to work with interest rates etc it's why you know it's it's difficult to criticize the Federal Reserve and what they've done over the last. Year not because it's not the wrong thing to do but it's like this is the type of complaints that we should have been having for 12 years before that why are you starting. Now and so yeah I did a little victory lap or two in my principles class where I said I would have been saying this for 10 years because I literally have I remember. Saying this in my phd classes 10 years ago and I was sitting in there going we're revving the engine. Right now for no reason and getting you know sort of mixed as you would expect mixed feedback in that in a graduate class. So I think let's set aside and not that this is very important to discuss and I don't want to I want to set it aside. But I don't want to do so by making it sound like it's trivial so what's happening sort of pre-Volcker area what era what's happening in the Great Depression all very important. But I do think you should spend some time defending okay I and I agree with the idea that there is stable inflation rates in that 70s 80s 90s. Well 80 period 80s not 70s but yeah why you said 70s I did say 70s I probably what was your thought process there what did I miss oh the stagflation of the 70s. Of 73 and 77. but then right yeah you'd also give a Friedman argument of the Federal Reserve was not doing its job during that time period. Okay so you're you're making the Friedman argument as presented by Bernanke there okay fair enough. So what and you've already teased it because I think you're you're saying we only nominally did the right policy I'm going to assume you extend that back to 2000. But for sure in the wake of 2008 lay that argument out for us because one of the things that I one of the things that I just said was I'd like to see. The Fed roll things off its balance sheet and the statement if you're right there's a very different prescription for that so spend a little bit of time defending the 2000s and then talk. To me about where you would break from me in terms of easy monetary policy not having actually happened versus what the implications are for the Fed in the wake of 2008 even to today. So I think.
RYAN MATTSON: When you're talking about 2000 talk about the recession of 2000 2001 right where we have enron september 11th tech bubble issues things like that so with that was a very garden-variety recession and so. Then the Federal Reserve sees that they see disinflation or deflation so Alan Greenspan then lowers interest rates moves money out into the system and then once that kind of we also had a fiscal. Stimulus associated with that but let's ignore that for a second you pump the money into the system you bring the prices and the wages back up by allowing banks to borrow or lend. More is by allowing firms to borrow more easily and banks to lend more easily and that gives you this the stimulative effect and then once the if we're going to talk about John. Taylor then once we hit the that say we get to that two percent inflation which we did more quickly in the wake of the 2001 recession then the Fed can say. Well I'm going to raise interest rates now and we're we're good to go now that didn't happen in 2008 and 2009 2010 2011 2013 2014 for a long time we had according to CPI. And the PCE price index which the Fed follows very closely the personal consumption expenditures price index we had little to no inflation in fact we had deflation for one of those years. Now it was it lines up with the contraction the money supply and the Fed is supposedly pushing a bunch of money out to these primary dealers and so then. Now instead of blaming the Fed I guess I'm going to blame the primary dealers here the primary dealers are large banks that are kind of seen as the ones when the Fed does a monetary. Stimulus that they get the money and then they're supposed to lend out in the financial system. Well once we get into 2008-2009 more and more banks are holding on to excess reserves in the form of these reserve deposits from the Fed. So the primary dealers are getting this money and they're not I mean they're lending out some. But they're not lending out as much as say the Fed would want so we had first round of quantitative easing with the Fed pushing out I mean I mean a trillion. Right close to a trillion on that first round quantitative easing you know two and then quantitative easing infinity eventually got that number up to about two three trillion. Right I mean is it some something like that I'm sure someone can't correct me they're doing. So much quantitative easing that they can't number it with discrete numbers anymore so yeah. So let's let's make it a nice round three trillion all right three trillion except. Now banks are holding on to about one and a half trillion in excess reserves. So we have one and a half trillion dollars sitting on the sidelines which you know the Fed has been willing to push out into the economy. But because this transmission mechanism between Fed primary dealers and banks is breaking down we actually have a contraction in the money supply. So we see say all these you know bills getting thrown out there and all these checking accounts and savings accounts increasing. But we if you look at the Divisia measures let's say Divisia M4 contracts by about four or five percent based on the fact that all the money that banks use to generate more. Monetary service is sitting in a vault somewhere as well and I'm using that metaphorically it's not literally seeing a vault. But it's it's not being pushed out to firms who would then hire people who would then use the wages to purchase things. So the implication of that is if that mechanism doesn't work we want Fed policy monetary policy to be effective which I probably have listeners who are saying do we even want that and that's. An argument I'm going to make here in a second the implication is you don't need to be rolling off your balance sheet you need to be tightening interest rate on reserves mechanism you and I were talking. About this with a colleague who also teaches principles macro here we're going to have to rewrite it's time it's time to rewrite your principles notes that say the Fed does open market operations. And pushes money and that's just not how it works since 2008. and we've been watching that closely. But of course you want to be you want to be conservative in how often one changes one's principles notes. But it's it's time it's time to do that and so I think that.
LEE STITZEL: Implication is quite different do you have a comment on that.
RYAN MATTSON: Yeah I do because then you know one kind of advantage to this is and I think this is something that the Fed I think saw coming and has been planning because they didn't. Start giving interest on reserves until 2008 which of course then if you're a bank you're like. Well I can sit on this and earn I don't know 0.25 or lend it out and let's say the risk of default is so high I just I'd rather take the 0.25%. If the Fed ever wants to do negative interest rate policies that interest on reserves I should say I don't think there's a difference between excess and required reserves that interest on reserves is I've. Just acquired something else that people are going to have a hot take on oh required is zero send us send us your send us your email about excess reserves. We'll we'll do a q a too and I'll leave with that question because we can't even do it we can't even get through an episode without inciting more no had you completed that thought. But okay reserves that's that's where you know you can you can then charge a negative rate on those and that's where that mechanism would come in without say the general public seeing oh. I'm getting negative on my bank account I think a lot of people mistake negative interest rate policy and think they're going to make my savings account a negative return no not really. But it has more to do with. The reserve balances.
LEE STITZEL: Yeah so the point that I will make is this we have an episode elsewhere on this channel I'll put the I'll put the link here on the YouTube and on the on the web. Page so you guys can circle back around to our longer discussion on all of this idea is you're you're just arming me with reasons to say why we don't need discretionary policy let's. Let's have monetary policy that doesn't end up putting a bunch of things on the Fed balance sheet and rolling them off or not rolling them off or quantitative easing or let's let's not. Do that let's let's hand the right over to a rule and I think you do have a good report there about. Okay but is the rule actually going to be expansionary or is it also going to have the same kind of errors. But we'll use Divisia and we'll solve that and then and then we don't have to worry about because. Now we're doing things that are beyond the pale in my estimation I'm just taking and putting mortgages straight on the Fed balance sheet that's nationalizing the banking sector I just can't see many. People being for that and yet here I am apparently the lone voice crying in the wind like why are we nationalizing the banking sector. Right now me and John Cochrane I guess back to back in the in the shootout. But so comments on. That why am I wrong what am I missing.
RYAN MATTSON: For any good rule I mean first of all you're going to need good data which is that the basis of the Divisia question here that William Barnett had been has been working on since. The late 1970s into the early into the 80s and 90s and on we don't have with the exception of Divisia we don't have a good measure of the money supply the Fed doesn't. Use a good measure so garbage in garbage out if we design a great rule and the measure's terrible or the Federal funds rate I'm sorry let me give another hot take here the Federal. Funds rate is just one interest rate why are we targeting that why aren't we targeting a basket of mortgage rates bond rates etc it you know you could you could latch on to Divisia. Again there and use that kind of basket of monetary services and the interest rate aggregate that they have so first of all we've got bad measures second of all the money growth rule. Or the money growth rule in any central bank has got to even without even without discretion let's let's throw discretion out we want this money growth rule to not just respond to some. You know primitive upper level that we have oh it's just going to grow this much and stop. Right here we want that money growth rule since you know we have money supply money demand you know as we have the magical x from econ. Right you know if we have price here on this axis for monetary service the demand swings can change that price even if we have something very stable in terms of money growth. So we need something a little bit more at least a little more sophisticated like the Friedman money growth rule the Taylor rule is actually just a money growth rule based on output and inflation. It has an intermediate target of interest rates but the mechanism is we push money out until we hit that interest rate target and that is then your sort of.
LEE STITZEL: Yeah intermediate targeting you're targeting inflation but not really well no you are but yeah like a scope on a gun on a gun. Right you look at the target what the target is a huge issue I don't want to get into that here. So we'll we'll anot another episode for another time I want to set that one aside. But you're right as your demand moves around you will get different prices on money. But so a good give me an account for that without the need for discretion. Right so I guess the point that I want to interject here is someone like George Selgin would say that's driven by people's desire to hold money that's also self-regulating a market outcome. So this is where I would go back to the discretion idea and say right and so if all of these things are true which you're you know I think you're making some good. Points but you're not fundamentally pushing back on that particular idea is discretion just injects uncertainty into a situation I'm not proposing oh the money growth rule can just solve everything and discretion like. Has all these other things broken I'm saying this is really hard let's not introduce new variables by. Adding discretion.
RYAN MATTSON: Well so the Federal Reserve I mean the way it's set up it's supposed to have I mean the two the dual mandate. Right you stabilize prices you maximize employment so honestly they should just be looking at output and inflation that's what makes the Taylor rules. So nice and easy right where discretion would come in is if you know if everyone knows that we behave according to this rule then we can circumvent the rule and maybe it or maybe. At some point technology changes maybe the transmission mechanism changes maybe something fundamentally shifts in our financial system where this transmission mechanism is just not what it used to be where discretion can come. In is discretion can come in and say okay we're going to look at something that's outside the system here and we're going to make a decision based on that so. Now it generates a certain amount yes of uncertainty especially if you just keep using discretion over and over and over. Again but I don't think that's what the Federal Reserve has done.
LEE STITZEL: Really oh I'm stunned I'm stunned.
RYAN MATTSON: I think they've followed a Taylor rule very well through the 90s the aughts yeah there's there's more of that hot take there. Right 90s the aughts in the teens if you look at you know what the Taylor rule interest rate should be with the exception of when the interest rate goes negative in the Great. Recession and has gone negative during the pandemic the Fed has followed that pretty closely you know you can make an argument that zero percent is actually discretion because they're keeping it higher than it should. Be so yeah I think I think that they've actually not jumped in as much as.
LEE STITZEL: They have in the past so what you're saying is you're turning the Taylor rule back around on me you're saying oh. Yeah you're upset here's all this expansionary monetary policy and you're you're over here saying. Well give us a rule and if I follow the rule you do more than what it is that you're saying I'm not sure that I'm not sure that I believe that because I think. There are other things going on than just what's being done to interest rates so. But that's another discussion for another time we've given the listeners a lot to think about here let me put one more thing in this before we go to the next question as you and I predicted. Before we started this episode we wouldn't we wouldn't get very far but we're trying. So another common comment I'd like you to evaluate your impression of the quality of such an argument is to say you and I are sort of interested I think in like stable inflation. Over time but there is a sense in which even stable consistent inflation that allows people to make a consistent set of choices. Right we're economists and so we're thinking about how do you do things that facilitate trade and exchange in a way that people are better off and some people are looking at it going. No I want money to facilitate my ability to save and even if we have year-over-year debt on the money 2% inflation year after year after year when you look back if you had a dollar. A hundred years ago it's not gonna be worth anything today and there's some truth to that right there's some there's some sense of that where I forget the numbers something in the 90. Plus range where if you had a dollar from the day that the Federal Reserve started its activity you've had you've had 90 some odd percent inflation you know your dollar is worth five. Percent or whatever that number is of what it was if you if you had held it back then what's your what's your comment on that so you know you're saying the people the people. Who once say this almost complete store of value it maintains you know what the dollar was worth in 1955 is the same amount that it should be in 1995. Or 2005.
RYAN MATTSON: Yes sure well generally speaking most macro economists agree that you want some small stable inflation or some have argued you want some small stable deflation that's that's one of the ideas behind the Bitcoin. Money growth rule, for example, so but the idea then is the level of it is not going to matter you know the fact that you know a nickel bought this back in 1955. Is not so much as important as say in the short run being able to negotiate your wages and negotiate these prices while minimizing certain menu costs you know as we talked about a little. Bit earlier in the video but the idea that being stable and stable over the long run and nothing exciting happening. So as far as maintaining you know one dollar being worth the same in 55 as it is in 95 I don't think that we can particularly hope for that in terms of in terms. Of our money I think there's some you know realistic approach in which.
LEE STITZEL: That's true but if we're taking this philosophically I mean there's a point to be made there as I'm gonna argue and you know I got some of this argument from you back in the day. So you know I want to give credit where credit is due we're about to say money is a service I mean this is literally the next question and my addition to that and what. I write on the board in class is that moves consumption through space and time if you have inflation it's moving consumption through space and time inefficiently. Right it's saying here's a dollar that I earned today I mean let's take the most ridiculous not ridiculous the most extreme example of this which is hyperinflation we have stories where people want. To get paid twice a day so that they can go buy a sandwich because prices will be different at dinner time than at lunch time and they gotta take a wheelbarrow full I think. You said a what was it a barrel of German francs or something won't buy you a loaf of bread. Yeah right yeah Deutsche mark thank you and francs that's that's a bad mistake and you've got the European union on YouTube I just said let's. Yeah we made it the euro now it's on the other side of the ocean whatever I don't differentiate no oh that was a bad mistake. But now that ability for it to move consumption through space and time reliably is compromised and you laid out some reasons. So I don't want you to reiterate yeah I don't want you to reiterate why you think we need the inflation. But like comment on just that philosophical nature of money as a service and inflation.
RYAN MATTSON: So yeah I totally agree you know movement of consumption across time and space I used to joke with my money in banking class that money is actually a time machine you know you can. Do things you know with it across space and then through time but what links it for that store of value and that consumption moving over time is that interest rate and that's where you know. That's that's the whole point of the financial system of that you can put your money into this bank or financial firm that will over time pay a certain amount of interest based on what. They do with it so they I don't know you deposit a hundred dollars at Amarillo National Bank and Amarillo National Bank loans me I was going to say 90. But now no reserve requirements right okay an Amarillo National Bank loans me a hundred dollars and I go out and start a business or write a book and get a return and pay. Off that loan that is transitioning you know the current consumption that you didn't need into the current production that I would not have otherwise been able to do and so that maintains your store. Of value there so I see I see the point that yes you know inflation is going to be you know eating into this over a long period of time. But part of expanding the idea of money is as being a service instead of a good or commodity is that there are different forms of money with different emphasis on each of those services. Whether it's the store of value the medium of exchange or as I understand from the questions.
LEE STITZEL: People got upset with me for saying speculation yeah let's just go there let's just go there let's jump over a couple questions and go straight to that so more than one comment went. Something like that one person said it's outright insidious to include speculation as a property of money another person accused you of equating speculation with the store of value. So comments on that is speculation part. Of the money service let's just.
RYAN MATTSON: And both great points I'm nothing if not insidious okay so all right so the store of value yes the speculative mechanism that I'm that I'm seeing money serving is generated from that store. Of value but it's different if I go and deposit a value into a savings account or money market mutual fund or certificate of deposit then I am looking for a very secure store. Of value but I could also take that hundred dollars and go to a foreign exchange market and I could start gambling with it and say. Well I think the euro is going to do this the yuan's going to do that or I think Bitcoin is going to do this or Dogecoin is going to do that it's it's. Not I'm not saying that this is you know okay we've defined money as this is a behavior that people have through their own choices and their own actions started to demonstrate with money. And it's something that goes far back you know there's always the stories of John Maynard Keynes was currency speculator not a very good one. But he did it you have Isaac Newton losing money on silver right I mean he also was kind of caught up people are looking for speculation and yes you know we can find. It in equities and equities aren't really a money we can find it in you know commodity trading and things like that but we also find this in just the very exchanging of currencies. Back and forth trying to chase a certain amount of whether it's what does it also students the arbitrage opportunities and this speculation and now I want to go with the insidious point here. Because this is this is a really good point a lot of people will look at speculation and just think. Okay this is bad you're going into Vegas and you're gambling right this is vice this is not. Well speculation and all of the tools that we've created to speculate I think you had a you had Dr. McKeon talking about the GameStop what this speculation has actually been able to do is help. Stabilize some of these prices the kind of speculation that you get with Bitcoin is the kind of wild speculation that I think is what we saw kind of at the beginning of you know. Gold and silver transitioning into money and bonds and things like that you start to see very volatile amounts. But the more instruments that people come up with and dream up with in finance the more ways we can kind of flatten out that risk and then increase our return. So I'm I'm not I think both commenters have a good point the store of value and the medium of exchange allow for this speculation and I think we need to recognize that in a currency. And that's why I've added that on we all talked about you know you've got to change your principles textbook or money in banking this is something that when I teach my students I say. Okay this is not in the text but I want to separate this because in the same way I separate cash which is almost purely medium of exchange especially with inflation I mean I guess. In a no inflation environment you could have a store of value but cash is definitely medium of exchange more. So than it is store of value as you've pointed out with that previous question as well a savings account is supposed to be more store of value than medium of exchange and a money. Market mutual fund or a short term treasury bill like a three-month treasury bill which the Center for Financial Stability includes that in the Divisia M4 measure as a as a kind of money. Because there is some medium of exchange properties that it has they're more so the store of value. But people also will speculate on these things and they're going to be those tools you know I can I can take Bitcoin and it's it's the wild west man it's great too. But I can take Bitcoin and speculate with it that's that's what I'm thinking about I want to get high returns on that Bitcoin that I bought actually the morning we did the first. Podcast yeah I'm looking for high returns I'm not looking for store of value right I'm looking for that speculative aspect of it which a lot of people are doing. So we have to recognize this as something distinct from the service of the store of value.
LEE STITZEL: And medium of exchange so there's a couple things that come to mind one is you know if you're if you're teaching keynesian theory I mean that's that's one of the things that comes. Out right there why are you holding money large purchases emergency right so against a rainy day and speculation I think there might be a fourth one shame on me for forgetting it but so. I think that goes I think that goes in there with what with what you're saying and I think if I can try to anticipate what the follow-up would be would say somebody that's. Going to comment about the nature of speculation interacting with money as a store of value is going to say that's not a money I want a part of that's not a money that a government. Should be should be using it's not a money that's not that's not facilitating good behavior within an economy if people are out here you know rolling the dice with the rest of us. Bank savings right yeah oh okay so you're saying if we can gamble we're we're not going to behave is I'm I'm proposing I think people would say you don't want to be using. A money that people are using in this manner and so it shouldn't be like systemically approved. Right it shouldn't be in the top downstairs so they probably don't have a problem as much as the complaint that I'm raising they're not doing this I'm trying to anticipate what the follow-up. Question would be they're gonna say well I don't have my I don't have my 401k I don't have my next mortgage payment saved up in Bitcoin. Right and so for whatever reason speculation is also a property of money if that's in fiat currencies then I don't want that either. What would you make of a comment like that.
RYAN MATTSON: Well again money has different services and you know you and I get paid and so then we separate out our value into different things we have this value going to the medium of exchange. Because we need to go buy groceries so that goes in your checking account on your debit card or you put it in you know cash and little envelopes however you want to do that then. This amount is going to go into your savings account and your retirement plan so what I'm saying is then there's this that's going into speculation and this speculation I would say is a bonus. It's it's an advantage it's a good thing because if there is this amount of higher return area here with the speculation that can help feed into the store of value issue here I mean. People go back and forth between portfolios with bonds and portfolios with stocks for that store of value service Bitcoin was designed just to be the medium of exchange if you go back and you read. Satoshi Nakamoto's paper it is supposed to be a medium of exchange and what it has turned into far from the intended consequences of the author and the programmer is this speculative asset it's. It's going to happen anyway there is some demand for it people want it now whether that makes it a good or a bad money the money growth rule for Bitcoin was designed to try. And dissuade this speculation and instead it's one of the most speculated currencies I've I've seen if you account for okay people will gamble with it then I would rather have you set up. A currency and say okay here's here's this kind of market here's that kind of market and you know what then there's this kind of market where you can speculate and you can experiment. Financial innovations have always been this particularly exciting aspect of monetary economics I know again I'm gonna just throw another hot take here mortgage-backed securities hey if you were if you were in 2004-2005. There was a lot to love about mortgage-backed securities okay I mean you had people who normally wouldn't get a home suddenly they have it then you have this generate this generator of the store. Of value and speculation that you can get higher returns from but yes now we run into the problem of when that gets bubbly and then crashes we lose that value and so you know. When you say that they're saying yeah he's he's admitted we're right so we've done very. Well with speculation with the dollar for you know a few hundred years speculation is going to be an aspect of this and even if you if you get even if you get even. Stricter and even if you go to a gold standard I think you'll see what exactly we've seen with Bitcoin we see a very high volatility in the price because a lot of people. Are jumping in.
LEE STITZEL: To speculate on it so last question on this before we turn to the next thing. So a single Bitcoin is worth something in the ballpark of $65,000. $57,000 this morning. So that's that's in the that's in the ballpark of median income and I'm not gonna I'm not gonna put you on the spot about what your salary is here. But just suppose that West Texas A&M University comes to you tomorrow and says okay starting in the fall we're not dealing in this dirty fiat money anymore we're all Bitcoin all the time. We want to renegotiate your contract you're a tenured professor so that you know you'd have some leverage here and they say we want to give you however many bitcoins is equal to your current. Salary are you taking that what kind of premium do you need in rough ballpark to sign that contract knowing that what happened you're screwed if two years from now they can pay you in bitcoins. That are worthless what do you think is there a number that would satisfy you.
RYAN MATTSON: Okay if I take this how long how long are we are we doing this because we rewrite.
LEE STITZEL: Your contract you're a tenured professor I'm saying you're a tenured professor they just rewrite your contract.
RYAN MATTSON: Bitcoin the rest of the way baby Bitcoin the rest of the way oh that's that's a tough one because I would have to say you know if it's been this year I would. I would definitely take it up on that I'm not certain about three years from now we can put a pin in that and come back and revisit I mean. But this is a part of the point right as we're talking about store of value over a long period of time are you are you it's I assume you're gonna be fine getting. Us dollars for that this is a menu cost because I have to spend time thinking about it yes and if I have to spend time thinking about it that's very telling that I'm. Sitting here thinking well wait let me honestly I what I want to when I get paid all I want to be thinking about is okay what am I going to buy what am. I going to save and which bills do I need to pay I don't want to have to think I personally don't want to have to think about speculating on the dollar yes. So that my wages maybe artificially higher or officially low I like that stable wage coming in now I'm perfectly happy to take out you know $300 to $500 and gamble with it and that's. Probably you know the taste of Bitcoin that I'll that I'll do it's fun whether you know is it something that's going to replace the dollar no it won't. So.
LEE STITZEL: Let's flip that now so in the fall WT comes to you and says we want to rewrite your contract in.
RYAN MATTSON: Gold bars can you no you just no so you think about it yeah you know you're going to ask me to lug gold bars to and from campus no I especially don't want. To think about what happens if you know yeah though if any criminal elements realize that I've got gold bars in the trunk of my 2010 Honda accord no that so they'll they'll armor. Truck it to.
LEE STITZEL: Your bank of choice and put it in their vault okay I'm trying I'm trying to you know I'm not I'm not asking this question about transaction costs. Right yeah it's a huge transaction cost if somebody knows today's the day.
RYAN MATTSON: That Dr. Mattson gets his gold bar and he's going to have to be in his office on campus to retrieve it for like you're getting robbed I mean that is how that's going. To go I guess yeah I'm saying no.
LEE STITZEL: The armored truck tran you know it's insured they take it to your bank yeah you know it's it's in the vault where you can get it now it's up to you to figure. Out some way to trade that into whatever medium of exchange you want to take to the pizza store no I'll take dollars. Okay so you're dollars over gold bars but you know at. Least think about the crypto I yeah oddly enough right huh I did that yeah I'm not sure I'm not sure I'm on the same I'm not sure I'm on the same page with you I find. The first question very difficult I encourage all the listeners you guys can get in the comments below and say my current salary is x and I would take you know 1.1 times x. To go to Bitcoin completely let us know let me change lanes a little bit because we've kind of been in the same groove and so I want to get some variety in here. One of our comments is why is barter so bad so I'm going to go out and reiterate a little bit what I said in the first podcast I don't think barter is a bad. Thing I think trade is good I like here in Amarillo for some reason we have a very strong what we would call secondhand market really that's just bartering. Right and not all of it is bartering in some sense right she's buying something secondhand for money. But like I don't have any problem with barter I think the point is that I would make is it's difficult to have an economy structured the way that we have it to the complexity. Level that we currently have if it's based completely on barter as I've argued in other podcasts at other times that I do so in class all the time one of my favorite examples. If I've got a golf a set of golf clubs and my neighbor has a lawn mower and he'd rather have the golf clubs and I'd rather have a lot let's just trade. Right.
RYAN MATTSON: Yeah and you know it's a good example actually thinking of lawn mowers my neighbor was out mowing his lawn yesterday and I he's in the middle of mowing. So I didn't interrupt him but our neighbor back in the day same house we actually just had a deal of sorts and he would mow you know every second week and we'd mow. Every fourth week or whatever you know every other alternating every other week and because it's you know easy to do each other's front lawns. So then I mow once a month but I get my lawn mowed twice a month and the idea there is it's actually quite a bit easier if you've got the fixed cost out. Of the way of firing up the mower that the variable cost of the number of steps that you're taking around the lawn is not that much higher especially because we don't have an especially. Large yard so you know maybe my new neighbor and I should get that kind of deal going I think that's an excellent.
LEE STITZEL: Example of barter so why did you have the larger yard or did he have the larger.
RYAN MATTSON: They were identical I think if they're not identical you couldn't tell I mean look at it I could get you have a nice standardized barter there one service versus yes.
LEE STITZEL: Yes okay so why is barter so bad then since you're you're teasing us with the standardization argument.
RYAN MATTSON: Oh barter's terrible okay harder so bad we've been having this conversation for a while barter is barter is just an awful idea terrible and there's again one more one more thing for people. To write in about okay so you have a standardized you know yard there your neighbor I'm assuming was probably you know male your age and good health. Yeah so not really yeah so what if instead though you know what if your neighbor ended up being older maybe not as healthy maybe they had what if they had some health issues. What if your yard was bigger than there you are this is where that unit of account part where you know I love this part in money in banking because you know we always. Kind of we focus so much on medium of exchange and store value and the unit of account though is extremely important because having that gives us a more I'm not going to say. Completely objective but a more objective measure of what something is worth and it increases our ability to negotiate and trade with other people because it's understood I know I know you know I pay. The guy and now I can't even think but I don't know let's say $30 for my yard and then you know he takes that $30 and he goes and he buys. What he wants you know if I have chickens that make eggs he may not value those eggs money allows him to go out and buy from someone else with that transfer of wealth. Back and forth now so my issue with barter is that unit of account which is very important and I don't want to lose that on top of that if there's a disagreement between. The value of something if you and I make an exchange and then you know suddenly I'm I'm unhappy about the exchange and I want a certain value back. Well let's say you know it was eggs the eggs have gone rotten I can't get those specific eggs back or whatever over time or over space that value can change and having a standard. Unit of account can enforce if there is a conflict between two people who have who've made an exchange and they can go then to an independent arbiter like a you know court of law. Or a judge of community and say no Lee stitzel has wronged me these eggs were worth this and this I demand some kind of compensation. Now and the last big issue I have with barter is it opens the door for a larger amount of inequality based on enforcement of a transaction I am you know I'm a short. Guy not too strong but if someone comes in and says hey you know Dr. Mattson I'll trade you this book for your laptop you know I'm like no I don't borrow that no. Thanks if someone comes in and they physically threaten me or threaten me with violence then. Yeah I'm trading yes what money can do by standardizing in our heads the value of everything we can see how much I've lost from that crime and on top of that with money. I have something I can fall back on and say are you crazy this book is like $5 and the laptop has got to be you know $500. So no I'm not going to engage in that barter can create a power vacuum that the generally stronger can move into so it always kind of it always kind of entertains me in a terrible. Way when I hear people talking about you know money is creating this kind of evil within society and we should all go back to bartering I don't think people realize the problems that are inherent. In a total bartering economy going and exchanging knickknacks is one thing and it's fun and you know lord knows I love going on my Facebook neighborhood page and seeing oh this person needs. You know such-and-such amount of lumber and I have listen this amount of you know plumbing piping that I'm not using or okay back and forth that's fine. But on an economy-wide scale you're you're just asking for all kinds of problems in trade.
LEE STITZEL: So I think your unit of account idea is useful but I think you do want to separate that from facilitating trade. So money does something really important in facilitating trades that don't have to be perfectly bilateral all the time I teach economics and I record the podcast I couldn't possibly trade that for the right. Number of eggs and dishwashing machines that I want that's almost certain to be true. But so money is an important go-between and as a medium of exchange I think that is really important I'm not sure that I totally buy the unit of account argument and here's why. I think in a pre or non- money society I don't think people are befuddled by the value of the various things. Right so like if we keep it simple and say you know laptops and books or chickens and things of lumber I don't think people look at those and go man without a dollar. Sign how can I possibly value these I think people know and I think at trade and a platform in a marketplace money does an important facilitation in the ability to unit of account. I don't know that I buy that in the sense of like an individual person is lost without a dollar or Bitcoin amount to compare.
RYAN MATTSON: Oh no and I don't mean to say that an individual person is lost or befuddled by it but there can be a fundamental disagreement on the value of something I'm not saying you know. I know my price and you know your price right but internally those prices may be very different I don't need diapers anymore for my kids. So I don't value diapers right now at all I think with the age of your new one you probably have you put a premium on those diapers very valuable in my house. Yeah extremely yeah and that can that can bring in a lot of uncertainty issues and trade. So it doesn't have to be that we need the unit of account because we don't know. But it could we need the unit of account to express it and standardize it you know I know what this book is worth to me and I may be willing you know you and I we've. Got phd textbooks which usually are valued I mean north of sixty dollars per book. Right that'd be a cheap book yeah 60 would be cheap for it I think people who haven't gone through a phd program or through university at all would be shocked at how expensive. Some of these books are my neighbor isn't.
LEE STITZEL: Maybe in a barter well that's curious let me think my way through this and maybe not shocked maybe. So my neighbor has a lawnmower and I have a Cameron and Trivedi micro econometrics textbook. Right here it's worth more than the lawnmower most likely assuming he hasn't got a new fancy nice lawnmower or it's similar in value anyhow he's not trading for that in a in a barter. Society but just suppose I really needed the lawnmower I don't maybe I don't buy that argument. So I was I was going to go down this line of reasoning in a money economy and he can trade for the book and then you know. Yeah but now the book or something excellent right it's no longer bilateral right yeah. So yeah maybe barter economy has less trouble sorting that out than I initially because you said oh. Yeah sure no problem I'll take this you know book is a silly example so let's go with you know this stack of lumber that I know is worth twice as much as the lawnmower. Even though it's not worth twice as much to me right and then I'll go trade that lumber and turn it into two lawn mowers and you know trade that other lawnmower for something. I do want you know let's get those golf clubs after all he's got a lot more and golf clubs because he traded for the lower. So yeah it's more work and there's a lot of transaction costs involved there as opposed to just taking it and money and that's why I'm differentiating between the unit of account and facilitating. Trades so the non-bilateral trade thing is very important but so I'm really trying to hone in on that unit of account idea that you're proposing. Yeah I guess I don't I guess I don't I see what you're saying and I'm not proposing that's that's useless. But I don't think that's such a big strike against barter oh yeah I'm trying to think what was the other thing I wanted to circle back to the one other point that you made. About inequality so you're proposing that the use of money does something to facilitate like rule of law yes and judgments that we couldn't do in a barter economy to argue that you need. You'd have to be standing on saying look like money economies I'm doing something to improve over a long history of.
RYAN MATTSON: Well it's even I'm jumping into my speculative service here for academics where I can speculate in that okay. So this is a nice parable that I have it's a nice way to talk about some of the issues with barter it's you know it's very cute and as with all you know. Kind of cute anomic examples you know I probably should be more careful with this but with the history of money as it is as you go back you find that you know people. First decided okay we need some kind of standard and there was a reason for that there was a reason that people going back and saying. Okay we need to standardize this money and you have money evolving around the same time we have rule of law really kind of or at least paper money I should say as we have paper. Money starting to evolve as we have kind of this rule of law evolving and the importance of suddenly. Now we have this representative piece of paper and even before that this representative coin or this representative little ounce of gold we had to find some system to give it credibility and give. It transparency give it have it be measured in a certain way which is important measurement is extremely important to economics we need to know how big this effect is how small this effect. Is etcetera so having that unit of account allows for things that a barter economy would borrow maybe it would maybe would allow for it but it would be very difficult to do we have the barter. System of you know maybe you know all of these different prices depending on which trading you know with who and with who and how. But at the same time sorry you have all these different prices of different products. Right but you also have different people and different people with different values different morals different ethics different desires and with a barter economy it's much easier to slip through the cracks on some. Of this soft power or hard power influencing of whether or not a transaction takes place. So it's actually a good jumping off.
LEE STITZEL: Of whether or not a transaction takes place so it's actually a good jumping off point for one of the other comments that we got is whereas I thought your definition of money as you know. A transaction history verified transaction history was pretty good this commenter doesn't like that and they say. Well if you purchase something with an ounce of gold the verification is what's in your hand. So comment on that as you know the I think you should also talk about the Fed serving to verify money and what's what's the point that a commenter saying. Well the goals in my hand might be missing because I think this transitions very nicely from what you were just saying.
RYAN MATTSON: Yeah so to kind of get to that there's this verification mechanism where we'll be at Bitcoin you know we do this with the Fed also I we talked about the chess thing back. And forth and we write a check the Fed as a central bank is set up to have this ledger of these verified transactions and in terms of gold. Okay so you know you put the gold in your hand you trust this person that you got the gold from and okay there we go. But are you going to really trust that little rock in your hand is actually gold you'd want to take it to a money changer or someone who can examine and say why yes. That is indeed gold because people have an opportunity to deceive if they can counterfeit. Well enough this I'm sorry I like parables and fables and stories so you can think of archimedes who you know this particular story is great because you know that this is the eureka. Story where he's in the bathtub and he finds a way or he finds a way to tell if a gift given to the king that he's working for is real gold or not. By how much water is displaced when you put it in and he figures this out. So it's a great story but I think I'm going for a different area of that it took one of the greatest inventors alive to verify if a crown was actually gold it took. You know a king who I'm sure is very used to seeing a lot of gold and deal hey it's in my hand it's verified. But even then there is the possibility of counterfeit even with gold even with silver. So that's that's the first part of that verification that I think that is might be where some of that misunderstanding is coming from the second part is okay you verified in your mind. With the guy that's fine but as we go into paper currency and checking and things like that there needs to be some proof of transfer because then again if and we talked about. You know if a deal goes bad and someone wants compensation again there needs to be some verification that you gave this person the good or the service that you gave them for that little. Bit of gold.
LEE STITZEL: That's fascinating and I think that's a good I think that's a good retort to that so it'd be interesting to see if we get a follow-up question there we're at an hour. Right about now so I want to play us out with one last question which is you made the comment that the money growth rule for crypto is primitive I got a comment that basically. The I'll I'll synthesize here cryptocurrency is modern and cutting edge and it's taking over the world software it's the world idea all that good stuff. So it's it's wrong to say crypto is primitive so I want to give you a chance to comment both on one you said money growth rule not cryptocurrency which is my was my knee-jerk. Reaction to this but the reason I wanted to give you a platform here to read this out is crypto primitive or just crypto's money growth real primitive.
RYAN MATTSON: So I would say that okay blockchain is not primitive that the technology that underlies these exchanges know that's not primitive it's brilliant what Nakamoto wrote about when he had this is it's fantastic. And it is revolutionary in many ways in terms of transactions the money growth rule that he wrote into the program though is based on the number of transactions that are going on you know. Growing to a certain level and then you only get 21 million Bitcoin and this is yes an extremely primitive naive money growth rule. So if we go by this kind of hierarchy of money growth rules will have this very you know. Okay it's fixed to some arbitrary level because it's the growth rate really that matters for inflation. So we'll just put it at an arbitrary level but then you get you get what's been built on from that and it's primitive because Friedman then comes in and says. Well actually no that level isn't what's what's important it's just the growth rate so kind of the funny thing is Dogecoin having no limit is actually a more sophisticated growth than Bitcoin. Now I'm sure the technology underlying there's a whole difference there but that money growth rule is slightly more sophisticated in that we understand that money growth is what is money growth and money. Demand or what are driving inflation as opposed to you know some level 21 million 21 million doesn't mean anything you can go even further than with the Taylor rule which builds into it not. Just hey it'll grow until this level that builds in a financial system through those short-term interest rates. But those short-term interest rates are determined by the weight we want to give output GDP and the weight we want to give inflation and this goes back to Irving Fisher's famous equation the money. Circulating in the economy MV is the mathematical part of it is equal to the value of goods and services transacted in the economy or P times Y price level times output and so. That what you see from that very basic equation that m then is dependent on what's going on with transactions and we want to stabilize those prices or if we want to stabilize those prices. Then we can move them up or down depending on what people need now this is the basis also for some really interesting stuff on nominal GDP targeting which I think have we ever. Discussed yeah we've actually touched on that yeah you can you can take other targets from this nominal GDP targeting would also be I think anyway a really good more sophisticated rule I would. Say if you want to save Bitcoin and you want it to be a medium of exchange if you want it to behave as Nakamoto intended in that paper although I don't know maybe. He didn't it's not his real name so how much can I trust the guy you haven't verified him I have not verified him I haven't. Yeah I would say you know go in and change the money growth rules so that we look at say market capitalization of Bitcoin or growth in a certain basket of prices and you can. Change that algorithm Ethereum is already Ethereum Ripple are already doing something similar Dogecoin is I think closer to a Friedman growth rule than the other ones I've seen. So what I'm saying is give me a Fed coin and discretionary policy away and give me a Taylor coin output gap full stop. Right output inflation that's all we care about and they give me a Sumner coin and let's NGDP target or Beckworth coin whoever is your favorite NGDP targeting guy and let's just compete in the marketplace. Of ideas and see which currency see which currency rules will give us give us nice fancy you know discretion versus rules we get all the variations of rules and whichever takes over the world.
LEE STITZEL: Fascinating about that is who selects into what yeah.
RYAN MATTSON: Exactly I mean I would buy I buy was it Beckworth and Sumner coin right.
LEE STITZEL: Yeah the NGDP targeting for transactions and medium of exchange yeah but I'd buy Bitcoin for speculation. Right well I understand leave Bitcoin as it is let's put the let's put the us dollar out to pasture and just have Fed coin Taylor coin Sumner coin and Bitcoin and just go. To town and I mean we can have Mattson coin and you can be like it or Divisia coin whatever you want to call that yeah I think that'd be a good one. Okay My guest today has been Dr. Ryan Mattson. Ryan, thanks for joining us on EconBuff.
RYAN MATTSON: Thank you.
LEE STITZEL: Thank you for listening to this episode of EconBuff. You can find all previous episodes on YouTube at EconBuff Podcast. You can check out our website at econbuffpodcast.wixsite.com/mysite. You can contact us at econbuffpodcast@yahoo.com.
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