Sunday, May 20, 2012

I want all of it


From The Role of Monetary Policy (17 page PDF) by Milton Friedman:

Accordingly, the authority increases the rate of monetary growth. This will be expansionary. By making nominal cash balances higher than people desire, it will tend initially to lower interest rates and in this and other ways to stimulate spending.

"cash balances higher than people desire"

Is that the problem, really? We have too much money and we don't like that, so we spend the money just to get rid of it? Really?

I don't see it.

6 comments:

Jazzbumpa said...

You can't have your money and spend it, too. I think the indicated tradeoff is between the desire to hold cash and the desire to get stuff.

But, to your point, it strikes me as false. The desire to hold cash seems highly artificial.

But Friedman blithely throws it out there as if it were gospel.

So much of econ is sheer bull shit.

It's really quite depressing.

JzB

The Arthurian said...

"Higher than people desire". Friedman uses that phrase, or something like it, in his later writing, too. In Free to Choose, or Money Mischief, or both. (I didn't look it up for the post.)

Perhaps he means not "people" in general, but the wealthy few, those whose assets the Fed buys when it puts more money into the economy. The 1%.

I think the Fed's method is part of the problem. If I have "financial assets" I have money I'm not spending. So, savings. If the Fed buys some of those assets, the money I get is really going into savings, not into circulation.

If Friedman is right, and I end up with more money than I desire to hold, I will probably buy some other financial assets with it. As opposed to taking the wife out to dinner, or buying new tires for the car, or getting a pet.

So maybe we get asset inflation from that. But we don't get a lot of real growth.

The Arthurian said...

Note also Friedman's focus on decisions to save or not save in his phrase "making nominal cash balances higher than people desire".

Contrast Keynes, from the end of Chapter Six:

"Clearness of mind on this matter is best reached, perhaps, by thinking in terms of decisions to consume (or to refrain from consuming) rather than of decisions to save. A decision to consume or not to consume truly lies within the power of the individual..."

Jazzbumpa said...

Yes, I like the Keynes quote.

We recently bought new tires - not because cash exceeded our desire to hold it, but because the old ones were worn out.

When I took her to dinner, it wasn't because money was burning a hole in my pocket. It was because we both wanted pizza.

Cheers!
JzB

Ohm (Ώ) said...

"We have too much money and we don't like that, so we spend the money just to get rid of it? Really?

I don't see it."

Well, to an extent, in a roundabout way. For some of the excess money that I have, I increase my consumption, then save the rest. If I buy stocks with this rest, I contribute to the markets rise, which might yield some wealth effect spending (supposed to be 4% of the increased wealth per year) from the rise.
If I put the rest in a bank, it adds to the money banks have and cld contribute to lower interest rates due to extra supply, so someone else might borrow and spend it.

All said, I don't think an economy should build itself on this. Yet America did exactly that, got obligated to keep stepping it up, so the growth continued, with everything tied to the growth rate of consumption. Yet it could not be sustained forever.

The Arthurian said...

2016 follow-up, at Reddit
https://www.reddit.com/r/Economics/comments/58nnph/a_tshirt_model_of_savings_debt_and_private/

and the link

http://www.ateconomics.com/2016/04/28/a-t-shirt-model-of-savings-debt-and-private-spending/