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« "QE1" and Monetary Disequilibrium | Main | Calling All ECONOMISTS, Let's Answer a Serious Question »

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Hi Steve. I suspect the critical point of confusion is the AT THE CURRENT PRICE LEVEL qualification. I think armchair Austrians recoil when they hear excess demand for money, as though it was some subjective opinion like "Frank's use of profanity is excessive." They don't realize that its an objective point about the disequilibrium of supply and demand at the current price level. Also, I think some casual followers of Austrian thought reject the idea of sticky prices and wages, so they are probably missing that the analysis mirrors that of a price control.

I just want it explained how this squares with the Austrian notion that valuations are revealed in choices.

We don't care what people say their valuations are -- we don't care what they say their relative desires are -- we care about valuations revealed in actions.

Let's go the next step.

Money is on one side of every trade.

If people are trading money for goods -- which everyone does every day -- then they are revealing a preference for goods over money. They are revealing a greater demand for goods and they are not revealing a demand for money.

To be clear.

I'm not insisting that this aggregate money supply / aggregate money demand model can't be squared with subjective choice / revealed preference theory -- I just want some hin at how the squaring is done.

(And I still have the Cannon piece recommended by Selgin on my reading list).

Steven: agreed.

Greg: when there is an excess demand for money:

1. People are realising their plans to buy goods with money, (at the margin, they value the goods they buy equally to the money they give up to buy those goods), but

2. People are not realising their plans to sell goods for money, (at the margin, they value the goods they sell less than they value the money they get in exchange.

The phrase "excess demand for money" should be interpreted the way Steven says, with one additional proviso: "the actual stock of money is less than the stock people would desire to hold *if all individuals' planned sales and purchases of goods were mutually consistent*".

(Or, in non-Austrian language, it means the actual stock of money is less than the stock that would be desired at "full employment equilibrium")

To satiate your curiosity, I have posted at length at http://mises.org/Community/forums/t/22235.aspx?PageIndex=2 , where I feel more comfortable.
Dave

I don't understand why there is so much effort to make this illustration. The problem is not satiating people's demand for money. The problem is people retaining some of their income as cash balances, to spend at some point in the future; i.e. there is a fall in the volume of returning liabilities (to relevant banks).

New money doesn't go to people demanding the money (they already have bank notes to keep in their cash balances); new money would probably go through the loan market, and to entrepreneurs.

I've interpreted monetary equilibrium theory as one of maintaining the supply of money in circulation, not as one which aims to "meet an excess demand for money". I always thought that the supply/demand thing was an illustration. This post seems to suggest you take it literally. Am I missing something?

Smiling Dave,
(from http://mises.org/Community/forums/t/22235.aspx?PageIndex=2 )
"Economic shortages are related to price—when the price of an item is "too low," there will be a shortage. "
"The question is, why is the price "too low"? What happened to our good friend, the Law of Supply and Demand, which will ensure that prices go up in such a case? "

Having read your comment, I think you have missed two important components of the argument:

1. Prices do not adjust (a) instantly or (b) without cost.
2. The relative scarcity of each good is unchanged.

1a is merely to say that prices are sticky. This allows for the excess demand for money/shortage of money. Contrary to your suggestion, the terminology chosen does not imply the solution. There are, in fact, two potential solutions. First, as advocated by METs, you can increase the supply of money. Second, as advocated by Rothbardians, you can allow prices to fall (increasing the purchasing power of money).

So which solution should we prefer? Recall the two assumptions I pointed out above. The price adjustment is costly. You can think of menu/shoeleather costs if you are a fan of Mankiw. Or you can think about the costs accompanying the signal extraction problem (since prices do not adjust simultaneously). In any event, real resources are used in adjusting the price level. However, assumption 2 states that relative scarcities are unchanged. So there is no benefit associated with adjusting the price level. Assuming the right quantity of money is supplied, either price level can effectively provide the necessary information to clear the market.

Since there is no offsetting benefit, we need only consider the least cost way of remedying the disequilibrium. The solution you prefer will depend on assumptions you make about the relevant costs. METs believe that the cost of increasing the supply of money (printing notes, making an electronic entry, etc) is less than the cost of allowing the price level to adjust. Rothbardians, on the other hand, reject that this price level adjustment is costly. Some Rothbardians even deny that prices are sticky. Hence, we are never really confronted with the choice to forego the price adjustment. To me, the idea of instantaneous market clearing seems difficult to square away with the entrepreneurial process.

It doesn't matter to me which side of the issue you come down on. And I hope I have presented both sides fairly. Since I reject the continuous market clearing argument, the debate is primarily over whether price level adjustments are sufficiently painful. If so, then we'd prefer to avoid them (as there are no offsetting benefits). If not, then we'd prefer to let the price level adjust (because there are some costs of expanding the money supply). If my brief summary of the two positions is correct, neither side is making a logical error. Rather, the disagreement is empirical. How costly are price level adjustments?

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1706861

I sincerely had no problems in dealing with the concept of money demand; what I would actually criticise of monetary equilibrium theory is the idea that a market for money does not exist: if no market exists, concepts of demand and supply become meaningless.

I think that squaring monetary equilibrium with austrian economics needs the use of the concept of "monetary service" which money fulfills by its circulation. The linked paper is first an attempt.

Some of the discussion here makes the "problem" clear. The concept of an excess demand for money (or actual money balances being less than desired balances at th existing purchasing power) has nothing to do with any process by which banks might adjust the quantity of money when the demand to hold money changes. If there were no such process, the concept of an excess demand for money would still be useful for understanding the market order.

Even the concept of sticky prices has nothing to do with it. How do you understand why price levels other than the equilibrium one are not equilibrium price levels? (And you can say the same thing with the purchasing power of money.)

Even if the actual purchasing power of money always results in everyone being satisfied with with their actual money balances, how do you explain that without explaining what would be wrong with some other purchasing power of money? If the price level were higher, then there would be an excess demadn for money. If the price level were lower, then there would be an excess supply of money.

On the face of it, Ransom's point about revealed prefences seems odd. When considering a single market, we think about demand, which is the amount buyers are able and willing to buy at various prices. They don't actually buy all of those different amounts. Some of those prices are far removed from historical experience, and anyway, they refer to now, not at some other time past or future. Households only buy the quantity demanded at the actual market price, and only if it is greater than or equal to the equilibrium price. Similarly, sellers don't actually sell all of the different quantities supplied. They only sell the quantity supplied at the actual market price, if it is less than or equal to the equilibrium price. Shortages and surpluses represent gaps between the quantity supplied and the quantity demanded, but if the actual market price differs from equilibrium, the frustrated buyers and sellers are just frustrated, either the quantity demanded or supplied are implications of their plans, and not what actually happens.

If we take "revealed preference" to mean that only the actual transactions matter, then basic supply and demand (and most of economics) is out the window.

Of course, Rothbardians might be happy with this. There are only market transactions, and morally wrong restrictions on trade. All of these supply and demand schedules and curves are meaningless.

What I do, anyway, is think of them was what would happen at different prices. What would firms sell at some price _if_ they had buyers. What would households buy at some price, _if_ they had sellers. It isn't wishes. The households would have to be able to pay for the good. The firms have to come up with the product.

As Rowe points out, it is all about plan coordination. But I am thinking about basic micro. At some price, the firms make their plans. The households make their plans. Unless the price is the equilibrium price, the plans don't fit together. This entire apparatus lets us see why it is important for prices to be at the level that makes the plans fit together. How can you do this without thinking about what would happen if the prices were at the wrong level? But at the wrong level, it is impossible for the transactions to actually occur.

Further, I certainly think of the price adjustment process in terms of frustrated plans at disequilibrium prices. I don't assume that the prices really are at disequilibrium levels. It is rather that if the price were below equilibrium, there would be a shortage and buyers would be frustrated because they cannot complete plans. Sellers can make more money by raising the prices they offer. (And buyers also have an incentive to bid more.) Anyway, this brings plans into coordination. But this understanind required that I consider what the buyers would do at the lower price. But they can't possibly actually do it and reveal their preferences because the sellers won't actually sell that amount.

Economists who use supply and demand for single markets, I think, find it easy to think about an excess demand for money. You start by thinking that it is like an excess demand for anything else.

And, of course, you have to avoid confusing the demand to hold money with how much money people would take as gifts, how much income people wish they had (vs. how much they want to work and save to earn income,) and other possible usages of the term that have nothing to do with the issue at hand.

It is very frustrating when the naive respond to excess demand for money as if it means buyers are trying to accumulate too much money. It is less saying an excess demand for shoes means that household are too vain and should be happy with fewer shoes. It is about prices being too low. Not some claim about buyer's preferences.

And, of course, an excess demand for money is claim that the purchasing power of money is too low--the price level (including money incomes) is too high.

I know that my basic understanding of monetary economics focuses on a scenario where the nominal quantity of money is perfectly inelastic. My first exposure from Rothbard, and later understanding, particularly with Yeager, focus on this scenario.

With single goods, of course, my basic understanding focuses on positively sloped supply and negatively sloped demand curves. Perfectly elastic and perfectly inelastic are special cases.

Oddly enough, while I start with the special case of perfectly inelastic supply for money. My ideal is the opposite special case, perfectly elastic supply of money. I suppose that even for a single good, there is a sense in which perfectly elastic supply reflects a better ability to adjust production to meet consumer demands.

One more thought...

Patinkin came to mind. (I am so old fashioned.)

Perhaps revealed preference should apply to individual experiements. And, of course, it is all about what someone would do at different constellations of prices. These various alternatives don't really exist.

Then, we do the market experiment. And see whether it all fits together. Applying revealed preference to that makes no sense. It is a market experiment. There is no individual to reveal preferences.

An excess demand for money refers to the market experiment. Not everyone's plan to hold money at some price level is simultaneously consistent with the existing quantity of money.

And it is with the market experiment that the price level is either too high or too low (the purchasing power of money is too low or too high.)

What Bill said.

Leonardo: "what I would actually criticise of monetary equilibrium theory is the idea that a market for money does not exist: if no market exists, concepts of demand and supply become meaningless."

In a monetary exchange economy, *every* market is a market for money. With n non-money goods, plus money, there is 1 market in which each of the n goods is traded, and n markets in which money is traded.

Start in equilibrium, where all plans are mutually consistent. Now burn 10% of each person's stock of money. At existing prices there is now an excess (stock) demand for money (i.e. the actual stock is less than the desired stock). Each individual changes his plans to try to rebuild his actual money stack back to the desired stock. In each of the n markets, there is now an excess flow supply of each of the n non-money goods, matched by n excess flow demands for money.

I think several commenters on this thread would greatly benefit from reading Leland Yeager's work, especially "The Essential Properties of the Medium of Exchange."

This Alan Rabin article is also very helpful:

http://findarticles.com/p/articles/mi_hb5814/is_n3_v31/ai_n28629512/?tag=content;col1

I think Rothbardian monetary theorists are hypocritical when they criticize the quantity theory of money for being mechanical(I agree it can be viewed in a rather mechanical way, but that's not my point), but on the other hand they view price level adjustments in the downward direction due to a cut in the money supply(or deficient money supply in a MET viewpoint) just as "mechanically."

The_Orlonater,

There is no such view in MET. You either understand only what you want or you've never seriously tackled MET.


The problem with the concept of "excess demand for money" only arises on account of what you - MET theorists- usually imply by it. That there is not enough money to go around to satisfy this growing demand.

Now please don't respond back by lecturing me about MET now. I'm just pointing out to you why it turns on red alerts and "master caution" indicators to most people even just a little familiar with Misesian economics. One of Mises' most contributing insights, although it is not originally his, is that there is only one difference between the money commodity and other commodities: More of it does not confer any social benefit.

Thanks Nick. That helps a lot.

I had vague thoughts along such lines, but your wording of it really crystallizes the insight for me.

An excess demand for some money-item is not a tough idea to understand.

What I question is those like Beckworth and Woolsey who superimpose their particular idea on reality and claim to observe that on Jan 21, 2011, an actual excess demand for money exists, and that this justifies QE2.

I think they significantly overestimate their ability to isolate such a phenomenon. Finding significant excess demands in the real world is difficult; competing entrepreneurs do a decent job of it. Legally-enforced monopolies like the Fed, and economists who hypothesize as-if they were in charge of these monopolies, lack the proper incentives and will do a poor job. As such I don't give much credence to anyone who says there's an excess demand for money.

The key thing here for me is the _flow_ dimension.

Plans and relative prices will be continually adjusting, and a single trade won't re-establish a rough equilibrium (even though in each individual case of an exchange on the market, money is being given up for goods -- even despite the fact that by assumption every trader has an "excess" demand for money).

But here's the kicker -- the increase in demand for money was in the first instance caused by the dawning realization that long term production and consumption plans were incompatible -- and money assumptions were illusory -- in many instances when people discovered they were insolvent or that their near monies or stores of value where illusory (e.g. housing value crash, mortgage security value crash).

In part, the increase in demand for money comes as a response to the prior FAILURE of plan coordination, even in the domain of money plans.

We have a jumble of screwed up plans, compounded by addition plan coordination failure caused by shifting demands for money stocks.

In such an environment, we may want to alleviate as much plan coordination failure caused by monetary disequilibrium as possible. However, it can't be fully known where inject that liquidity in such a way as to help mesh currently botched coordination of production and consumption plans going forward.

This is the Hayek Paradox, isn't it?

We don't want to sustain the unsustainable -- yet we do want to want adjust the supply of money so as to sustain as much plan coordination via trade as is feasible.

Then Buchanan & Boettke step forward and inform us that -- bet your life -- the political process and not plan coordination will direct the new money right to where those with the pull want it, usually exactly where the most unsustainability already exists.

Nick writes:

"In each of the n markets, there is now an excess flow supply of each of the n non-money goods, matched by n excess flow demands for money."

I've just ordered Yeager book. No, I didn't own it.

The stock of bank issued money does not have any necessary connection with the level of the interest rate or savings and investment decisions. Consider, for example, if all debt financing of projects was carried out by non-banks who financed themselves by issuing shares and commercial paper, and if all banks invested primarily in commercial paper. In this situation, the interest rate on commercial paper vs. the interest rate on demand deposits would represent the price (opportunity cost) of holding bank-issued money, and the stock of and demand for holding bank issued money would be worked out entirely through investors allocating their portfolio between bank demand deposits and commercial paper.

So the question is, given that the banking system and bank-issued money appears to be best understood as simply intermediating whatever portion of savings and investments is viable to intermediate (or alternatively, whatever proportion there is customer demand to hold in this form at the price the banks are willing to supply it), why should so many people be so concerned about or assume that this process affects the interest rate, the supply of savings, the demand for investment, or the prices of consumer goods?

It also raises the issue of, if the market for bank issued money, and the stock of bank-issued money is independant of the market for saving and investment and the interest rate, how these, and interest rate level, are best understood.

Plan coordination failure in the first instance causes the collapse of shadow money and with it disaggregated shifts in the supply and demand of money across non-homogenous individuals.

The question is, can we helpfully view this coordination proplem simply as an aggregate unmet demand for money problem.

The problem is we have discovered a real misperception of value in some sectors relative to others -- dumping more money into those sectors consumes value rather than producing it relative to other sectors.

By "expanding money" to big players in value destoying sectors, you actually don't solve the money discoordination problem, you make it worse.

Call me obtuse, but I'm not sure there is a good comparison here. Mises drew a distinct difference between demand for money and demand for money substitutes.

But monetarists only ever talk about money substitutes.

Why is this important? Because central bankers are perpetually reducing our cash holdings, constantly, by devaluing the currency. It becomes difficult to have a meaningful conversation about demand for money because Austrian guys want to have a discussion about comparative wealth, and Monetarists want to have a discussion about either the price level, the "interest rate" (in a non-Austrian sense), or NGDP.

The Austrian guys want to have a discussion about "comparative wealth?" That is a new one on me.

Steve Horwitz:

"Of course the idea that we hold a portion of our wealth as real cash balances was central to Mises's monetary theory. This means that the concept of an "excess demand for money" is not nonsensical in Mises's system."

Ludwig von Mises:

“Every piece of money is owned by one of the members of the market economy. The transfer of money from the control of one actor into that of another is temporally immediate and continuous. There is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in “circulation.” It is unsound to distinguish between circulating and idle money. It is no less faulty to distinguish between circulating money and hoarded money. What is called hoarding is a height of cash holding which—according to the personal opinion of an observer— exceeds what is deemed normal and adequate. However, hoarding is cash holding. Hoarded money is still money and it serves in the hoards the same purposes which it serves in cash holdings called normal. He who hoards money believes that some special conditions make it expedient to accumulate a cash holding which exceeds the amount he himself would keep under different conditions, or other people keep, or an economist censuring his action considers appropriate. That he acts in this way influences the configuration of the demand for money in the same way in which every “normal” demand influences it.”

Ludwig von Mises, Human Action, pp. 401-403.

"As the operation of the market tends to determine the final state of money’s purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or a deficiency of money. Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small. changes in money’s purchasing power generate changes in the disposition of wealth among the various members of society. From the point of view of people eager to be enriched by such changes, the supply of money may be called insufficient or excessive, and the appetite for such gains may result in policies designed to bring about cash-induced alterations in purchasing power. However, the services which money renders can be neither improved nor repaired by changing the supply of money. There may appear an excess or a deficiency of money in an individual’s cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment. (Of course, one must not fall prey to the popular confusion between the demand for money for cash holding and the appetite for more wealth.) The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do."

(Ludwig von Mises, Human Action p. 421)

LvM:

"There may appear an excess or a deficiency of money in an individual’s cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment."

SH:

"If our actual holdings are greater than our desired holdings, we get rid of the excess by spending on goods, services, and financial assets. This, of course, is how excess supplies of money translate into rising prices: the excess supply of money is spent because it is more than people wish to hold in their balances at the current price level.

When our actual holdings are less than our desired holdings, we will try to acquire additional money balances. The one sure way we have of doing so is to cut back on our spending. (There are other ways, but they are not completely under our control.) The result is downward pressure on prices, which is how deficient supplies of money lead to falling prices (eventually). "

Thanks for pointing out that Mises and I are in agreement.

Of course if you are implying that Mises didn't believe such excesses or deficiencies were a potential macroeconomic problem, you'll have to explain why he thought inflation (which you seem to imply can be "solved" simply by people consuming more with the excess money balances) was such a problem.

Steve,

I provided just two quotations (there are many more) in which Mises pretty much straightforwardly explains why the notion of an "excessive demand for money" is a nonsense. Altough you usually complain about my failure to carefully read, it seems to me that you actually did not read the quotations at all. Otherwise, you would notice that

You say:
"When our actual holdings are less than our desired holdings, we will try to acquire additional money balances. The one sure way we have of doing so is to cut back on our spending. (There are other ways, but they are not completely under our control.) The result is downward pressure on prices, which is how deficient supplies of money lead to falling prices (eventually). "

and that he says, (among other things):

"there can NEVER BE an excess or a deficiency of money."

Even more commically, you challenge me to prove that Mises did not believe that "such excesses or deficiencies were a potential macroeconomic problem". However, in the second quoted passage Msies says:

"There may appear an excess or a deficiency of money in an individual’s cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment. (Of course, one must not fall prey to the popular confusion between the demand for money for cash holding and the appetite for more wealth.) The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do."

So, it seems that he thinks that "excessive individual cash balances" do not represent any kind of "macroeconomic problem", since any quantity of money is "always sufficient to secure for everybody all that money does and can do". Therefore, you have to address your question to him, not to me. He must have been either very stupid, or extremely inconsistent to not see that there was a "macroeconommic problem" with excessive individual balances. Also, it was not me who “implied” that the “problem” can be solved by spending more, but it was Mises who EXPLCICITLY SAID so in the very passage you quoted as a support for your own views:

“There may appear an excess or a deficiency of money in an individual’s cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment.”

Again, don't ask me to justify anything, but him.

Obviously, Mises agrees with you that an individual can have a deficient of excessive money balances. But, nobody ever denied that. That's trivial and self-evident. The real issue is that you believe that in an economy AS A WHOLE there can be an excessive money demand, and consequently, an insufficient money supply (wasn't that a philosopher's stone of MET?). However, as we have seen, Mises thinks that that's a nonsense and that any quantity of money is always sufficient (Let me repeat: "The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.").

Now, you may be right, and he may be wrong, but please don't pretend the idea of credit inflation as a "remedy" for a "deficiency of money" is a Misesian doctrine, and stop calling anyone who criticizes MET from the Misesian positions a "Rothbardian".

I suggest that if the supply of and the demand for money are to be contrasted, then the demand for money cannot be dimensioned in dollars.

Take a city with a supply of rental cars of 1000 cars. Can the demand for rental cars be usefully enumerated in cars? No. The demand for rental cars must be accounted for in rental-car-days per month, limited to a total of 30,000 rental-car-days per month.

It is the same for money. The demand for money must be in terms of dollar-days per month, not dollars.

Holding 1000 dollars for two days as opposed to one day represents twice as much strain on the supply of money.

The time of possession is even more important in terms of money than it is in the NFL.

This just one more reason that the demand for money is such an unstable variable that trying to use it as an input driver for a monetary policy seems silly and futile.

Regards, Don


"So, it seems that he thinks that "excessive individual cash balances" do not represent any kind of "macroeconomic problem""

This thread is about deficient individual cash balances. Reading comprehension?

Captain Slow,

read my previous comment. It seems that your reading comprehension is problematic.

Lloyd:

Stocks and flows do need to be distinguished.

However, the quantity of money and the demand to hold it makes sense.

The flow that matches that is the flow of monetary services coming from that stock of money (and any real interest yield) must match the demand for that that flow of monetary services (and any real interest yield) provided by the stock.

Your notion that an individual who holds money for two days puts twice as much burden than one who holds it one day is in error. The person puts a burden on it the first day and then not the second day, or else the same burden both days. The stock of money exists both days. Also, I don't think "burden" is the right way to put it.

An excess demand for money can be result from a normal increase in the demand to hold money that is not matched by an increase in the quantity. It can be generated by an unchanged demand to hold money and a reduction in the quantity of money. It can result for an unusual decrease in the demand to hold money that is overmatched by an even larger decrease in the quantity of money. And, finally, it could be caused by some kind of unusual increase in the demand to hold money that is not matched by an increase in the quantity of money.

The notion that an "excess demand" for money would only apply to that last situation, and it means that someone is holding more money than they should is an error.

I don't like talk about hoarding nor do I like dividing the demand to hold money between precautionary and transactions demand (much less speculative demand.) There is just the demand to hold money, a bit like the demand for shoes or cars. I am sure I got this from Mises, though probably filtered through Rothbard.

It is hard to take this confusion that an excess demand for money represents people holding "too much" money as anything but a propaganda club. When Hoppe begain to argue that an excess demand for money is a problematic concept because people should be able to hold however much money they like, there was perhaps an excuse. He isn't an economist. Why do we still hear it?

By the way, I have no problem with writing about a shortage of money. I do it all the time. A shortage of money is when the quantity of money is less than the demand to hold money.

And, of course, everyone understands that this means the price level is too high and the purchasing power of money is too low. Why do we see quotes from Mises about this? Again, I am sure I got it from Mises originally, though probably filtered by Rothbard.

My view is that a perfecly elastic supply of money is best. Sure, that is different from Rothbard and maybe different from Mises. But I surely never say that people are morally wrong for holding too much money or that changes in the purchasing power of money won't correct an excess demand for money. On the contrary, I explain that long term process all the time. Of course, I also mention the painful adjustment process.

Bill W,

No, the second day of holding $1000 means that a second person wanting to hold $1000 starting on the second day effectively faces a smaller money supply than if the first person had released his $1000 after only one day. Money always has exactly ONE owner at a time, at all times.

Regards, Don

What Bill said at 1004. Anyone who thinks the idea of an "excess demand for money" is making any kind of judgment about individuals' demand for money (as in "it's more than it should be" or "too much") is simply ignorant of the economic concept of "excess demand."

Why would there be an "excess" demand for money? There can only be an excess if you believe that for some reason prices aren't allowed to adjust. But wouldn't it be the things you buy with money that aren't adjusting in price since a dollar is a dollar always.

What prices aren't adjusting? My theory is that financial asset valuations have proven to be incorrect, but the holders of those assets aren't willing to relinquish the assets at the price everyone now realizes is the correct price. People understand that house prices have been overvalued for the last 5 years, but the price didn't adjust to reflect that. With the policies that have taken place, all financial assets are overvalued. There is nowhere to invest that isn't overvalued.

In that case, what's the rational thing to do? IMO, hold more cash. Is that an excess demand for cash? Are actual money balances less than desired money balances? I would argue no. People are holding the amount of cash they currently desire. This amount is greater than it has been because financial assets have been deemed too high. The inefficiency isn't with people wanting more cash, it's the current holders of assets balking at selling those assets at the market's current valuation. That's where the stickiness is!

Not getting paid interest is better than losing money buying a house!

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