So I’m listening to the latest Planet Money, re: Bitcoin, and lately I’ve also been listening to FT’s Hard Currency podcast, and I’ve just got to say: foreign exchange markets are really, really weird. And there’s a reason for that – unlike other asset markets, the point of currencies is not to become more valuable, ceteris paribus. Usually, if your currency becomes more valuable it is a signal that good things are happening in the relevant political unit (if there is one), but the direction of causality here is important. Stocks are supposed to become more valuable, as are bonds, etc. But currencies are supposed to be stable. They are supposed to make all the other stuff in the economy possible.

So it’s odd to hear things like "which currency had a good year?" or "I’m long that currency" or other things like that. Forex traders serve an extremely valuable role in ensuring exchange rates reflect social information, but the mindset that leads to is in-and-of-itself a strange one. If Japanese folks decided to buy more Swiss chocolate and Americans decided to buy exactly the same amount less, the Swiss franc would appreciate against the yen and depreciate against the dollar and then the dollar would appreciate against the yen to exactly the amount that would forestall arbitrage and then Swiss and American consumers might decide to buy more Japanese stuff than they did before and so on and so forth until you get to "general equilibrium" (whatever that is) but the whole point is that if the central banks were targeting, oh, say, the level of nominal gross domestic product, none of these secular changes in consumer preferences (unless they were really huge) would have any effect on the overall level of economic output in any of these countries.

The fact that some currency goes up or down against another doesn’t really tell you anything about relative levels of inflation or prosperity. So there’s no underlying normative preference for one direction in exchange rate fluctation over another. I’m going to Turkey and Germany in September, so I really hope the dollar appreciates against the euro and the lira between now and then but if in October I get hired by a company that exports a lot to Germany then boy do I hope the dollar depreciates againts the euro. But there’s no reason to prefer one over the other from the standpoint of the overall national interest unless you’re super-dependent on a certain kind of international trade pattern.

Also, I realize I’m pretty down on Bitcoin generally on this blog, so I should say – certain things about Bitcoin are awesome, and I’m certain that whatever money looks like in 10-20 years, it will look more like Bitcoin then it does today. I’m just down on Bitcoin specifically due to Bitcoin-specific issues of trust and governance. I’d gladly use Bitcoins to transact, but I’d also gladly use Paypal or Square and be certain that the ~225 USD I sold my Pebble watch for last week can still be exchanged for the same basket of goods next week or next month or even next year, more or less. If I wanted or had to transact in BTC I’d want to get in and out of having any position in the currency ASAP, but somebody has to hold them and those people either need BTC for transaction-specific reasons or are speculating. I want to be able to hold my money (or deposits denominated in money) for long periods of time without having to feel like I have a position (although I of course do). You’ve got to have some liquidity so if the value of your currency is pretty stable it’s pretty easy to just hold cash or deposits.

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