Can we even speak of such things, given how widespread official intervention is?

Also, discussions of international trade tend to clash inelegantly with the issue of distinct currency zones and financial flows. The Profession doesn't seem to have that one sorted out quite yet.

I recently even toyed with the idea of separate "financial" currency from "real" currency as a means of shielding the poor, battered real global economy from the reckless global financial economy, so that nice things like real comparative advantage might predominate. I couldn't figure out how to make it work.

Wow! Steve, All these months I've been checking your blog and all I would see is that you last posted in Jan. Today, all of a sudden you have blogs in Feb, March and April? Did my browser fool me by not refreshing? I doubt it.

Enjoy reading your posts

-Donaldo

Donaldo — Thank you for checking back over my long absence. I'm very glad you enjoy my ravings. I promise there will be more, soon.

Charles — Asset markets needn't be financial markets. That is, assets needn't be claims on money. Purchasing a factory is obviously purchasing an asset, but the translation between that asset and financial returns is long and arduous (though potentially very lucrative). To rephrase your problem in a way I'd be more comfortable with, the trick is how to generate liquidity (in the sense of easy convertability to and from some other asset of ones choosing) without relying on cross-prices between everything and one, single commodity or claim, which then becomes either commodity or fiat money, both of which I consider broken. This is indeed a hard problem.

Note that housing is a speculative investment only to the degree one is not hedging. A person hedging future consumption needs really need pay not attention to changes in the housing market. If the housing services offered by a structure are worth the financing burden ad infinitum of holding the home, a crash in the housing market post-purchase ought not concern one. It is like the prototypical baker who has "lost money" by buying flour forward, and watching it crash. The baker didn't really lose money. She shed risk. She failed to take a gamble that it turns out would have worked out, but could as easily have bankrupted her. Understanding that hedging is rational even when one "loses", and that not all portfolio choices are about speculatively maximizing returns, is an important and often neglected component of financial rationality. Without that bit, theories of finance make the world into a casino in which the games are rigged against most players.

Thanks again to all for reading, through all my disappearances.

CB — That's a good point, that considering a home purchase as hedging can lead to bubbles. It's certainly a widely discussed point that it is rational for hedgers to pay more than speculators. Depending on tail risk and the risk aversion of hedgers, too many hedgers could drive prices far afield from the price that would obtain in a market filled with rational, risk-neutral-ish speculators (and could draw in speculative investment in, for example, homebuilding). I don't dispute any of that.

I also don't dispute that a home purchase needn't be considered hedging. I only argue that it can be hedging. Signing a lease at a pre-agreed rent is also hedging. If one can live with ones parents with a certainty of at least adequate housing services for a long period of time, there may be no risk to be hedged. That housing can be hedging doesn't excuse arbitrarily large mispricings in the housing market. Homebuying writ large cannot be explained by hedging when, for example, purchasing a home requires buyers to exchange a little bit of home price risk for a great deal of financial risk due to leverage, and when alternatives (like moderately priced rentals) are available for obtaining a reasonable service. Some buyers might legitimately hedge into a bubble — a purchaser with high income relative to inflated home prices who requires longer-term certainty (continuous housing services without a move) than leases conventionally provide may rationally purchase a house, despite an expectation of falling prices. But the degree to which rational hedgers writ large can inflate a bubble is limited by the cost in disruption of unexpected moves, the availability of rentals, and income of buyers. I agree that much of the recent housing bubble was driven by people who claimed to be hedgers (in the "better buy now, or I'll never be able to afford to sense"). But those were poorly informed or irrational hedges, who couldn't afford the risk of their "hedge", and who could have hedged housing risk by renting through the bubble, but were driven by a speculative canard that house prices always rise. A true hedger's working assumption is that the market price is basically right, but that the risk of fluctuations in price is too high to bear. An expectation of a future price change is a speculation. And again, by definition, no one with a mortgage they have to stretch to afford is legitimately a hedger (though they may claim to be), as they retain great risk in the face of changes in home prices and increase their exposure to economic changes that cause income volatility .

Money is indeed the traditional solution to the problem of convertability, but it's also a solution to the problem of savings ("store of value"), and a solution to the problem of evaluating ones financial position for the purpose of planning ("unit of account"). My, er, speculations on money are likely to debundle these functions, and try to find ways of making goods or services convertable without exchanging them for a conventionally-agreed-upon intermediate.

Re short-term speculation, I neither want to ban nor guarantee liquidity viz speculative investments. I think ease of convertability should in general be determined by confidence of valuation of the underlying asset. The time-related problem that has to be solved is, I think, in the definition of assets and structure of markets. Stocks, for example, having lost all pretensions of redeemability for a stream of dividend payments, are theoretically valued based on an infinite time horizon about which there is little information. That should make stocks very illiquid instruments. But in practice, there is a market that presumes stock prices move in slow random walks, so there is high near-term certainty of valuation (close to the most recent price) even though there is no medium-term certainty. Both the definition of instruments that cannot be rationally valued, and the existence of markets that take recent price as a good proxy for short-term value without reference to the underlying claims, are, I think, errors in our existing financial system.