Tuesday, February 21, 2012

Bristol Pounds and Bitcoin...

Quite late on the scene, please accept my apologies, we're looking at money these coming two weeks in classes, and different money systems - not necessarily in different countries either. Usually we think about different money in different countries - dollars in the US, pounds in the UK, euros in the eurozone and yen in Japan, for example. However, currencies (monies) needn't be attached to some geographical area, and Bitcoin is one example of this - it's an online currency primarily, used for online trades. The Bristol pounds that we've seen before, these are geographically limited though - just to the Bristol area.

Essentially, what we try to do as economists is analyse economic objects such as this (and the objects we look at needn't be economic either, it's worth pointing out). We boil any kind of money down to what it is, at the end of the day - some good that for whatever reason is used as money. Why do people use some goods as money? We have the three properties discussed in the lectures - medium of exchange, unit of account and store of value. If some good satisfies all three it may be used as money. Hence the example of cigarette money in WWII. It satisfied the properties required of money and hence was used in that way. It remained a good that could be consumed, but of course smoking those cigarettes meant you could no longer use them as money.

So, to what extent do our two candidate currencies satisfy these characteristics? With the Bristol pounds, it's not clear yet whether people will start using them - if they do, they will have to have begun to view them as a medium of exchange. Will Bristol folk, and Bristol enterprises, start taking up these things? There's no compulsion upon them since their alternative is to use standard, universally accepted Pounds Sterling (which, by the way, bears no reference to the Scottish town, it seems). This fact of course doesn't rule them out as becoming of great use, but provides one sceptical note on their potential uptake. There's little doubt that since the Bristol Credit Union will be backing these Bristol pounds at 1:1 with Pounds Sterling, that provided the Bristol Credit Union remains solvent both the unit of account and store of value will remain - provided also that the pound doesn't dramatically lose value in the comings weeks, months and years.

So, can you perform the same thought process for Bitcoin in your assignments?

Thursday, February 9, 2012

Trade Gap and QE

Two bits of news today relating to the macroeconomy; first the Bank of England is extending Quantitative Easing (QE), its programme of pumping more money into the economy, by £50bn. Second, the UK's trade deficit has fallen to its lowest level since 2003.

On the first, QE is an attempt by the Bank of England to stimulate the economy. This works in the way we discussed in lectures last week, as the Bank prints new money and uses it to buy government bonds and other types of assets from banks. This turns assets the banks have into liquid form, ready to be used to provide cheaper credit to the wider economy via loans. In doing this now for a number of years, the Bank has amassed a balance sheet on a monumental scale - the assets its procured are equivalent to over 20% of UK GDP (national output).

We're going to discuss much more about monetary policy later in term, but QE is not part of conventional monetary policy; the Bank of England in normal times would make use of the interest rate to influence the economy, yet currently interest rates are as low as they can practically go (we can't have negative nominal interest rates as that would imply banks deducting money from savings accounts and paying borrowers to borrow). So in an attempt to still influence the economy, it has embarked on QE.

Turning to the trade deficit, this is the balance of goods and services, or our exports of goods and services minus our imports of them. For many years now the UK has run a substantial trade deficit, importing more than it exports. Theoretically, this ought to lead to a depreciation in the pound since there's less demand for pounds, and we supply them to buy imports in foreign currency. However, that analysis doesn't include demands and supplies of pounds from the financial sector and so despite this trade deficit, the pound hasn't depreciated. In fact, it only had one, substantial depreciation in the entire period, which was at the time of the financial crisis, in 2007-08, when the pound lost 25% of its value against its major trading partners.

Such a dramatic devaluation would be expected to have impacted trade since it makes imports for us more expensive, and exports less expensive, yet for a long time there was no pick up in UK trade - the deficit remained large. This could have been because of a lack of overseas (eurozone) demand for our goods, it could have been because our exports are produced with many imported inputs, or that the price elasticity of our imports is low, or for a whole host of other reasons.

Either way, it appears that at long last, the effect of that devaluation may be filtering through. That or we're just spending less as well as those elsewhere spending less.

Sloman is from Bristol!

I've already mentioned this new initiative, launching a new currency in Bristol. You'd almost think they timed the announcement to coincide with econ101b! It turns out that the main author of our textbook, John Sloman, is a Bristolian, and on the Sloman blog he's just written a bit about the Bristol Pounds being minted as I type...

What I mentioned in the lecture was that while the Bank of England only accepts the real thing, i.e. Pounds Sterling, that doesn't mean we can't deal in our own currencies - provided when we deal with the Bank (via our own bank usually), it's in Pounds Sterling. So this little initiative can exist because the Bristol Credit Union stands behind it, willing to issue Pounds Sterling on a one-to-one basis with Bristol pounds.

Sloman refers to a few people who are justifying the new initiative because Bristol doesn't want to become like a clone town - all the other British high streets that have chain stores everywhere and look alike.

However, and please do (yet again) excuse my cynicism on this, but this is a very static argument. The Local Data Company has just released a report on the health of the retail industry in the UK and it makes quite chilling reading; in some areas as many as one in three stores in a shopping centre is empty. The high street is currently changing beyond all recognition, suggesting more than anything that the "clone" model of saturating the high street with well known brands, may not have been overly successful.

Of course, it may simply mean that stronger branded stores take over more of the empty space (e.g. Tescos and Sainsburys), but the sheer volume of excess supply means prices must come down, encouraging small local retailers to set up shop.

So an initiative such as a local currency, which restricts what its users can do with it (spend within Bristol or else!), may not be particularly useful in achieving what the market may achieve on its own!

Monday, February 6, 2012

Topical Initiative in Bristol

Just as we start lecturing on money, the BBC reports that Bristol is issuing its own currency: The Bristol Pound. The Bristol pounds, which Bristol is calling on locals to design the notes for, will be exchanged 1:1 with actual pounds (Pounds Sterling), hence operating on a fixed exchange rate system, yet will have one important, and designed, limitation - they can only be traded in Bristol.

This may sound, on the face of it, like a great local initiative, but one has to really question why this is being done, and it really begs the question of whether this will succeed. Why, if you are a Bristol trader, would you actually use these things? They have the same nominal value as a normal pound, yet you can only use them in a restricted geographical area. What happens if your suppliers are outside the local area?

The bottom line is we trade because there is a mutual benefit from doing so - both parties benefit. If someone outside the Bristol area can do something more efficiently, why not let them do it, so Bristol folk can get on with things they are good at? Why instead have Bristolians waste time and effort replicating at greater cost what others do better? Why not instead have them being innovative and thinking about new ways to add value and be creative?

Localism is an increasingly popular movement, yet it is a rather short sighted one once it loses sight of the fact that trade creates opportunity - if we all do the things we're good at, more is produced - it's not a zero sum game.

Thursday, February 2, 2012

Novel ways to measure economic activity

Following on from class discussions in weeks 3 and 4 on GDP measurement, here's an interesting post at FT Alphaville (highly recommended reading generally) on Gangster Economics - the point essentially is trying to measure the state of the economy via non-standard means - so not GDP or unemployment, but instead making use of the vast amounts of data out there online about the economy such as Google searches for pickup trucks, used cars, and even guns!

If you're not acquainted, Google Trends is a fantastic resource, enabling you to get information for how often a term is searched for on Google. You can search for multiple terms too, and hence you could search for just how often people search for Labour over Tory, and restrict it to the UK, or how often people are searching for the current Republican candidates in the US, if you're politically inclined, or sporting wise you can check how often folk search for your favourite team vs your rivals...