Definition:

Gresham’s Law = A monetary principle stating that "bad money drives out good"; if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable one will gradually disappear from usage.  [REF]

Deconstruction:

Referencing a British elite, this law is based on the observations of Sir Thomas Gresham, a financier in the mid-1500’s, who wrote about techniques for minting coins, and founded the Royal Exchange in London.

Gresham lived during the Tudor Era, overlapping with the reign of infamous King Henry VIII in England.  At this time, the monarchy reduced the amount of silver in the shilling, resulting in citizens hording older coins, which were worth more than their face value, due to the high precious metal content.  This revelation was the origin of Gresham’s Law.

It wasn’t until the 19th century that Scottish economist Henry Dunning Macleod formalized this term as an ode to Sir Gresham’s observations.

The concept of governments creating and circulating “bad money” is not a new one, addressed by Renaissance polymath Copernicus, Athenian playwright Aristophanes, and the historic Judaic Talmud religious teachings even further back.

Historical occurrences were a result of precious metals being used for economic transactions.  If copper and gold coins were both in circulation, then the cheaper alloy, copper in this case, proliferated as the means of exchange in the economy, with citizens hording the more valuable and scarce gold.

Overvalued currencies drive out undervalued ones primarily due to debasement.  In the past, the value of coinage was dictated by the amount and type of metal they were made from.  Official mints often tried to skimp on materials to pad the federal coffers, but citizens rooted out such monetary deception.

A Gresham’s Law scenario only occurs when both types of cash are defined as legal tender.  Typical cheaper, inferior coins are created so regimes can repay off their bloated debts.  Despite causing the problem, administrations often blame the debasement on speculators, and implement various restrictive measures like confiscation and currency controls to quell the problem.

In 1982, the U.S. Mint switched the composition of the penny from nearly pure copper to a zinc blend.  Over the next 25 years, the purchasing power of one cent dropped by 80% due to inflation, while the value of copper base metal rose 5-fold.  This resulted in pre-1982 pennies having significantly higher value than their newer counterpart.  When industrious individuals began collecting and melting this historical coin, the U.S. government put harsh penalties in place.

With Lincoln’s likeness pennies in the process completely discontinued from circulation, it will be interesting to see if the metallic composition of the nickel draws additional scrutiny.

Gresham’s observation can also be applied to other elements of finance, like loans, bribes, regulations, and mortgages.  In all these cases, poor practices, bordering on illegal, tend to infuse an industry, and are difficult to fix.  Such hybrid evidence of Gresham’s Law is associated with capitalism transgressions and financial collapse in recent history.  As a result, it’s important for regulators to incentivize and promote good behavior.

In several instances throughout American history, often during times of conflict, most notably the Revolutionary and Civil Wars, excessive paper currency got printed and debased, resulting in folks fleeing back towards tangible metal coinage as their means of safe saving.

Now that governments can print fiat bills as legal tender without any commodity backing, Gresham’s Law has returned to prominence.  Investors can switch to stronger currencies, and eschew weaker ones, to avoid the risk of inflation.  Also, more stable offerings like the Japanese Yen and Swiss Franc are preferred to weaker monies from less fiscally-sound developing nations.  Bitcoin is another realm where the concept of sound money is being espoused, as a fixed supply digital alternative.

Gresham’s Law may not be as applicable in this era of paper money, global currency, and electronic exchanges, but the core concept, now nearly half a millennium old, remains relevant.  The shift away from gold-backed currencies to fiat bills has left investors with few “good money” options.  [REF]

Definition:

Giffen Good = A low-income, non-luxury, product that defies standard economic and consumer demand theory, with desired for goods rising when the price increases, and visa versa.  [REF]

Deconstruction:

This concept harkens back to Scottish statistician Sir Robert Giffen, who noticed and documented the rising prices of basic foodstuffs during the Victorian Era.  Giffen served in various roles within the British Board of Trade for two decades at the end of the 17th century, hence his prestigious title.

Economist Alfred Marshall coined and highlighted the Griffen Good dynamic in his 1890 book “Principles of Economics”, providing the example of elevated bread prices, since consumers didn’t have enough discretionary income to purchase meat.

As individuals spend a larger portion of their salary on essentials, this situation feeds on itself.  With no easy replacement option for these necessities, consumers focus on procuring their basic needs.  A fixed budget with a fixed caloric intake.  Even if cost of grain rises, more will be consumed because this low-income cohort can’t afford dairy products.

The resulting upward sloping-demand curve is quite rare and counterintuitive, as opposed to the typical angling-downward shape, as dictated by the classic laws of supply and demand.

This situation often materializes with essential items that don’t have the opportunity for substitution: bread, potatoes, rice, water, wheat.  In times of emergency, folks will pay any amount to simply survive, as was demonstrated during the COVID-19 pandemic.  Hording is a thing, for toilet paper, and many other items.

Giffen Goods are a subset of Inferior Goods, with the difference being the former displaying rising prices driving demand, while the latter purchasing habit changes caused by reduced consumer incomes.  Any Giffen Good must also be an Inferior Good, with buyers deciding to acquire more, making this item is a large portion of their budget outlay, rather than changing purchasing profile.

There’s a corollary term, called Veblen Goods, which also exhibit the same odd pricing power, but in the high-end product space.  For rich shoppers, factors like social status and flaunting wealth are most relevant, with no income challenges, or set timeline for acquisition.

While Giffen Goods have become much less common through general societal advancement, the advent of disposable funds has brought about the Veblen Good phenomenon.  Still, there’s a substantial segment of the global population who struggle to acquire daily essential sustenance, even in this modern, developed age.  [REF]

Definition:

Cantillon Effect = Describes how changes in the money supply can lead to uneven distribution of wealth and income in an economy, based on how newly created funds enter the economy.  [REF]

Deconstruction:

This financial term is named after early 18th century economist Richard Cantillon, of Irish and French heritage.  Little is known of his upbringing, aside from being born sometime during the 1680’s in Kerry County, Ireland.

Ironically, Cantillon leveraged his own concept to become rich at an early age, as a merchant and banker, leveraging valuable business and political connections, most notably investing in John Law’s lucrative Mississippi Company venture.  Unfortunately, when this commerce scheme fell apart, angry debtors hounded Richard throughout the later stage of life.

His seminal work on political economics was “Essay on the Nature of Trade in General”, a wordy yet generic title.  Penned in 1730 as a manuscript, just 4 years before Cantillon died, it wasn’t formalized and printed until 1755, in French, posthumously.

This dense book is considered the first complete treatise on economic theory ever published, and influenced many famous practitioners to follow, including Adam Smith and Jean-Baptiste Say.  However, the depth of Cantillon’s knowledge in the field wasn’t fully recognized until centuries later, when Henry Hull translated the paper into English in 1932.

The Cantillon Effect is very popular within the Austrian school of economics; manipulating the money supply sends inaccurate signals, leading to “malinvestment”, a term coined by renowned economist Ludwig von Mises.

This concept describes how newly created funds by the central bank flows through an economy unevenly.  The impacts of created currency ripple out from the source, often greatly benefiting the wealthy and connected, with little trickling down to the underprivileged lower classes.

Money flows from the government coffers, initially hitting the accounts of big banks, mega corporations, and allied contractors.  These operations are able to deploy this capital in the way most beneficial to their own advancement, with the cash slowly filtering down the economic ladder.  Average workers and customers further downstream experience diminished benefit from the subsidies.

Adding money to the economy will eventually spur both growth and inflation.  Deploying capital early in the stimulation cycle allows firms to profit from the rise in asset prices, however later on inflation materializes, hurting consumers of basic goods and services.  Thus, arbitrage opportunities are available for those in the know or with access.

Central bank monetary expansion typically injects funds directly into the legacy financial system.  There are often unintended consequences with regards to benefiting certain business sectors and widening the inequality gap based on how fiscal policy is executed.

The Cantillon Effect, in essence, highlights the inequity inherent with any inflationary fiscal policy.  Prices increase disproportionally, helping wealthy corporations, and hurting poor individuals, thereby widening existing divides in society.

In the United States, the Federal Reverse can provide monetary stimulus to the economy, via lowering interest rates, executing quantitative easing, or adjusting the reverse repo rate for large banks.  Similarly, Congress can create fiscal stimulus through legislative action, like tax cuts, enhanced government spending programs, and direct stimulus checks to citizens.

Per Austrian economics, a return to sound money with the currency backed by gold, solves the injustices of an unsecured fiat system, where the amount of circulating currency can be expanded at will.

The growth of M2, a reference point for total money supply in American, corresponds directly to growth in net worth of the top 0.1% of asset owners in the country, while the bottom 50% of citizens have lagged significantly.

There’s also concerns regarding governmental grift, especially with fiscal stimulus, as the legislators making the rules have inside information they can leverage for personal benefit.  This element is increasingly evident considering the aged and rich politicians inhabiting Washington, DC in recent years.  Cantillon’s astute economic observation from 3 centuries ago remains relevant to this day.  [REF]

Definition:

Lindy Effect = The longer a non-perishable item has been around, the further it’s likely to persist into the future, with every additional period of survival implying an extended remaining life expectancy.  [REF] 

Deconstruction:

Rather than referencing a person, this term is named after Lindy’s Delicatessen, located just south of Central Park in Manhattan, NY.  This kosher restaurant, named after owner Leo “Lindy” Lindemann, was actually a pair of adjacent operations near Broadway and 50th Street.

Established in 1921, this iconic NYC spot, famous for its cheesecake, existed in the deli format until 1969, when it was unceremoniously converted to a steakhouse.  Over the nearly 5-decade tenure, Lindy’s served many a famous personality, including entertainer Harpo Marx, Mafia boss Arnold Rothstein, and actor Woody Allen.

Comedians performing here purportedly made jokes that the longer running a show became, the more likely it was to continue on.  Acts were most at risk of cancellation in their first few debut nights.

The belief was coined Lindy’s Law, based on an article published in “The New Republic” by Albert Goldman in June of 1964.  This initial version was slightly different than the modern definition, espousing TV personalities with limited comedic material to use their jokes sparingly in curated special appearances, rather than committing to a regimented weekly programing cadence.

This informal observation was subsequently confirmed mathematically by various statisticians, most notably polymath Benoit Mandelbrot, who redefined the theorem in 1982, as part of his sophisticated tome, “The Fractal Geometry of Nature”.  He expressed formulaically that the future potential of a performer was proportional to their prior work.

Famed essayist Nassim Nicholas Taleb introduced and redefined the Lindy Effect, in his popular book “Antifragile: Things That Gain From Disorder”, as the “distance from an absorbing barrier”, and expanded the concept beyond people to inanimate objects.  In his subsequent work, “Skin in the Game”, Taleb refined the notion, liking fragility with disorder, and concluding survival over time demonstrates the ability of anything, from an object to a thought, to be resilient.

Counterintuitively, for things exhibiting Lindy-like properties, mortality rate decreases with time.  As a result, this is a difficult topic for humans to grasp, as it doesn’t apply to living beings, but instead non-perishable goods.  The inherit longevity of an item is based on continued resistance to change, competition, expiration, function, obsolescence, or relevance. 

This rule is useful for screening the validity and adoption of new technologies.  It’s also relevant in terms of content consumption; old books that are still in print contain timeless wisdom, while daily news blurbs are fleeting and soon obsolete.

Unfortunately, the always-turned-on, over-the-top, nature of social media these days promotes the exact opposite behavior to what the Lindy Effect espouses.  Insights that persisted over a long time offer up more educational value to the user, provided one chooses to seek out such curated knowledge.

This concept is somewhat counterintuitive in this modern age of perpetual technological disruption.  However, while novel in form factor and execution, most recent inventions leverage evergreen systems from the past.

The Lindy Effect has recently returned to public perception due to the Bitcoin revolution, with postulation that the longer this recently-invented cryptocurrency remains relevant in the financial realm, the higher likelihood of widespread adoption.  As with many elements of life, only time will tell.  [REF]

Definition:

Triffin Dilemma = Tension between short-term domestic economic policies, and long-term international objectives, for countries whose money serves as the global reserve currency.  [REF]

Deconstruction:

Also known as Triffin’s Paradox, this concept is named after Robert Triffin, a professor at Yale, who was born in Belgium during 1911.  After graduating from Harvard in 1938, with a doctorate in economics, he began a productive career working at the United States Federal Reserve, International Monetary Fund, and European Economic Co-Op, where he helped execute the financial tenants laid out in the Marshall Plan.

Clearly, this gentleman was well educated, and well versed, on governmental fiscal policy, before became a lecturer at Yale starting in 1951.

His seminal moment came in October 1959, when Dr. Triffin testified at Congress’ Joint Economic Committee that the Bretton Woods system, established in the wake of World War II, to rebuild the global economy, was doomed to fail.

While generally ignored at the time, this prediction proved prescient, as the scheme collapsed in 1971 during the “Nixon Shock” under the U.S. President of the same name.  As a result, Triffin’s insights also earned a surname moniker.

The professor followed up his legislative testimony with “Gold and the Dollar Crisis: The Future of Convertibility” in 1960, a treatise laying out the components of the Triffin Dilemma.  In the text, he accurately projected the lack of available bills, which he called a “dollar glut”, and a subsequent international run on gold from the U.S. Treasury reserves, that happened just a decade later, causing cancellation on conversion of bullion at the fixed $35 USD per ounce price.

Core tenant of Triffen’s hypothesis is that any global reserve currency, like the U.S. dollar currently, will require the host country to accumulate an ever-growing balance of payments deficit.  This couldn’t be more accurate, as America has continually racked up larger and larger monetary imbalances with other nations over recent decades.

John Maynard Keynes, a famous British economist, also grasped the challenges of a lone supreme currency.  Part of the original Bretton Woods negotiations, he proposed an alternate system, dubbed Bancor, that wouldn’t be tied to any single nation.  This scheme was not adopted at the time, but continues to remain a possibility to provide future stability to the worldwide financial system.

There’s a heated economic debate if being the global reserve currency, the primary medium other countries hold and transact in, is a blessing or a curse.  This honor has been dubbed the “exorbitant privilege” by a former French Finance Minister in the 1960s, highlighting the challenge of such status.

In this situation, there’s contradictory monetary policy goals between domestic and international interests.  Cheap loans and lower interest rates from foreign nations, due to a steady influx of funds, is required to spur growth, but higher inflation and uncompetitive exports at home, can lead to issues with internal employment and growth.  As a result, the U.S. Treasury Department is perpetually trying to balance short-term economic stability with long-term financial risk.

Other countries end up with lots of U.S. dollars as a result of trade imbalances, a surplus they then use to buy U.S. bonds.  That’s why America has a huge balance of payments shortfall, which continues to grow annually.  However, there aren’t any easy solutions to this complex problem, with no viable alternatives for the global reserve currency at this time.

With the massive national debt currently, America can’t handle paying higher interest rates on its loans, which would inevitably occur if the reserve currency status was lost.  Also, the perpetual trade imbalance, with American consumers demanding cheap products from emerging market countries, makes this flow of funds unlikely to diminish.

The International Monetary Fund, formed as part of the Bretton Woods system, could issue and manage a safe-haven currency, backed by gold or other physical commodities.  The IMF already offers special drawing rights, or SDR’s, which are an alternative form of international payment.

There’s also potential for a multipolar scenario, where each economic zone uses its own medium of exchange, backed by regional currency, gold, oil, or even digital money.  However, this would result in a much more fragmented and inefficient worldwide trade landscape.

The Triffin Dilemma has reemerged in relevance recently as a result of the ongoing tariff wars initiated by President Trump.  While policies are constantly in flux, the administration’s efforts to reduce global trade imbalances will influence both the current account deficit and the U.S. dollar valuation.  The worldwide economic system may be on the verge of another major transition.  [REF]

Details:

• Comprehensive overview of the Lindy Effect origin and interpretation.  [REF]

• Consequence of the Triffin Dilemma on global reserve currencies.  [REF]

• Giffen Good pricing examples with tables and graphs.  [REF]

• Explanation of the Cantillon Effect from an Austrian Economics perspective.  [REF]

• Description of why Gresham’s Law happens with several relevant historic quotes.  [REF]

• Educational podcast of the same title which explores many of these economic concepts.  [REF]