Monday, August 31, 2015

CBB Response to Question on "Moneyness"

From Bruce: "You commonly refer to "moneyness" in your columns.  Wikipedia defines it as:

"In finance, moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option."

Is that the sense in which you are using the term, or do you have another definition?"

CBB response: I stress that contemporary money rests upon perceptions of safety and liquidity.  Money is something that folks believe is a safe and liquid store of (nominal) value.  This perception essentially creates unlimited demand - with all the associated issues (over issuance! and the myriad effects of monetary inflation).  "Moneyness" is a perceived attribute of safety and liquidity (typically from government assurances/support) that creates a degree of extraordinary and self-reinforcing demand - especially for risk assets (stocks, fixed-income, derivatives) Moneyness is fundamental to credit and market bubbles.  Bubbles falter when the marketplace inevitably questions (perceptions shift) the safety and liquidity of the underlying credit and financial instruments.