Abstract
Markets are social coordination processes that are continuously evolving. As institutions are the protocols for these processes, their understanding is key to investing. When these protocols succeed and prove themselves useful over time, we can eventually identify them as legal institutions. There are two main branches of institutions: Private and public. We examine them and the role they play in the investment process. Their rediscovery is an achievement of the Austrian School of Economics.
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Notes
- 1.
There is nothing physically intrinsic to a luxury good. We demand luxury goods not because of their quality but simply because we know only a few can afford them. Owning them sets us socially apart. Luxury goods are therefore an institution, a temporal category.
- 2.
Operations using bra-ket notation require that we define a specific space ex ante.
- 3.
These comments are based on Huerta de Soto, Money, Bank Credit and Economic Cycles, 3rd English Edition, 2012. I encourage the interested reader to refer to this monumental work.
- 4.
The word deposit comes from Latin: De – Posit, to remove, to dislodge oneself from something.
- 5.
Tantundem eiusdem generis, qualitatis et bonetatis.
- 6.
As Dr Huerta de Soto points out, this ontological characteristic of the deposit institution means that an American call option and a repo contract are also deposit contracts. At any time, either the buyer of the American call option or the buyer of the repo contract has the right to demand the call’s exercise or the repurchase clause. This means that at any time, the seller of the call option and the seller of the repo must be able to honour their obligation, in an equivalent quantity and quality. In the case of a repo contract, this characteristic is what makes repo financing, also known as shadow banking, so dangerous to the current financial system. Central bankers and regulators know this, as well as the fact that the funding market is arbitraged, because repo funding is not subject to the same rules that limit fiat currency funding (for banks). Banks, in aggregate, can only lever deposits about nine to ten times, while no limits are imposed to repo funding. In 2017, one can only hope that regulators will keep this institutional aspect of the repo market in mind, when they replace LIBOR (i.e. unsecured lending benchmark rate, probably by 2022) with the Broad Treasuries Financing Rate (BTFR).
- 7.
Redeemability and, for now, fungibility are absent in virtual currencies.
- 8.
“…he resolved to make a division of their movables too, that there might be no odious distinction or inequality left amongst them; but finding that it would be very dangerous to go about it openly, he took another course, and defeated their avarice by the following stratagem: he commanded that all gold and silver coin should be called in, and that only a sort of money made of iron should be current, a great weight and quantity of which was very little worth; so that to lay up twenty or thirty pounds there was required a pretty large closet, and, to remove it, nothing less than a yoke of oxen. With the diffusion of this money, at once a number of vices were banished from Lacedaemon; for who would rob another of such a coin? Who would unjustly detain or take by force, or accept as a bribe, a thing which it was not easy to hide, nor a credit to have, nor indeed of any use to cut in pieces? For when it was just red hot, they quenched it in vinegar, and by that means spoilt it, and made it almost incapable of being worked…”. Lycurgus, Plutarch, 75 AC (trans. John Dryden, in www.http://classics.mit.edu/Plutarch/lycurgus.html).
- 9.
In 2016, the trade between Bitcoin and the Chinese yuan was an arbitrage on redeemability… and privacy.
- 10.
But money is not gold. This is not a bijective relationship.
- 11.
Banking in any fiat currency is regulated by strict disclosure requirements regarding capital, leverage and liquidity. Gold banking is not.
- 12.
“Default (even a sovereign one) is a liquidity Event”, Jeffrey Rosenberg, “US Fixed Income Situation”, Fixed Income Strategy, February 5, 2010, Bank of America.
- 13.
H. Sanguinetti, Curso de Derecho Político, 4th Edition, 2000, (my translation): Confederations are alliances of sovereign states. In a Confederation, the links among members are weaker. The legal instrument of the alliance is a “treaty”. The purpose of a Confederation is economic integration and military assistance among members. Member states remain sovereign and as such, keep the powers of self-determination. Confederated states reserve the right to nullify, reject legislation and, eventually, of secession. They may issue currency, keep customs and sustain armed forces. They lack a strong common government, although they may unify their foreign policy. In a Union, the links among member states are more vigorous. In a Union, one finds a definitive purpose to integrate the states. There is a sovereign federal government, while the states are autonomous. The states can govern themselves, have their own legislation, but these acts are subordinated to the Union’s constitution and federal laws. Secession is not allowed, although member states conserve those rights that they did not delegate to the federal government, when the Union was established.
Bibliography
Plutarch. (75 A.C.E.). Lycurgus. Translated by John Dryden. Retrieved May 2015 via The Internet Classics Archive from http://classics.mit.edu/Plutarch/lycurgus.html
Rosenberg, Jeffrey. (2010, February 5). Default (even a sovereign one) is a liquidity Event. US Fixed Income Situation, Fixed Income Strategy. Bank of America.
Sanguinetti, Horacio. (1986). Curso de Derecho Político. Buenos Aires: Editorial Astrea, 4ta Edición, 2000.
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Arisson, M. (2018). Institutions. In: Investing in the Age of Democracy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-95903-0_6
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DOI: https://doi.org/10.1007/978-3-319-95903-0_6
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