Will Wilkinson notes the intuition behind the golden warriors.
"Our currency should provide a reliable store of value—it should be guided by the rule of law, not the rule of men," Mr Ryan informed Mr Bernanke. "There is nothing more insidious that a country can do to its citizens than debase its currency". And who would disagree?
I would disagree.
First, that money is a reliable store of value is not a virtue but a regrettable defect of our economic system. It is extremely difficult to create money that is a workable medium-of-exchange without it having some value-storing properties. This is a fundamental problem that industrious minds work to solve whenever faced with it.
The less fundamental value money has the better. An item that is used as a medium-of-exchange cannot be put to productive use otherwise.
More to Ryan’s point, attempts to store value as money have the potential to collapse our entire economic system.
Money does not create anything. Value stored as money is value lost; lost because it represents resources not directed towards capital. Capital, unlike money, does create things. That people sometimes see it as advantageous to stop investing in capital and start holding money is the source of enormous economic instability.
A sudden hoarding of cash means that businesses at once have fewer customers, fewer investors and fewer creditors. They have no choice but to retrench. They have to lay off good workers and shut down good machines.
Unemployment rises. Capacity utilization falls. We have men that – for lack of a machine – do not work; and machines that – for lack of a man – do not run.
It is economic loss of the highest order. Perhaps attempting to take away the government’s primary tool at alleviating this loss is a more insidious act than two or three percent per year increases in prices?
This problem could be eliminated if the entire economy adjusted as instantaneously as the markets for stocks and bonds. If the prices of everyday things soared and collapsed within seconds. In that world both monetary policy and demand driven recessions would be impossible.
Yet, a world like that would be a world where money as a medium-of-exchange was much harder to use.
Bad news about Russian crop harvests would have you dropping everything to run to the grocery store. The price of bread would be rising the moment the news report hit the AP wire. Stock boys would be sent running at the first mention that Florida frost was to be less severe than expected, lest oranges be for one moment overpriced.
God forbid both things happen at once, for coffee shop patrons should have no idea what to expect when they order orange-wheat scones. People in the back of line might find great deals over those at the front, as orange bears sold-short against wheat bulls.
There would never be a market out of equilibrium, but there would never be a moments peace either. We would all be day traders in our daily lives, worried about what the next moment would bring.
For this reason we tolerate money as a store-of-value. We shouldn’t, however, pretend that it is an unmitigated good.
11 comments
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Thursday ~ February 10th, 2011 at 5:36 pm
Dominic Pazzula
I think you missed the point. Saving, or money hording as you call it, used to include sticking money in a jar or putting it under your mattress. We have these things called banks now and an FDIC. Banks use deposits as the base for loans, which fuel growth — at least that is the theory.
What Ryan is complaining about — and not putting it together in a coherent way, I’ll give you — is that a negative savings rate kills savings. Banks have to rely on other means for funding. Savers cannot get ahead, move consumption forward, and take on increasing debt loads. That is only sustaining if you work until the day you die.
We have this thing called retirement. People expect to be able to quit working in their 60s and take 10-20 years to play with their grandkids. Even if they used equities to fund their retirement, they need a source of sure fund flows. Savings accounts and fixed income are the means to do that. A negative savings rate means the time until that money runs out is much shorter.
Thursday ~ February 10th, 2011 at 6:36 pm
studentee
banks do not lend deposits, loans create deposits…
Thursday ~ February 10th, 2011 at 5:45 pm
jsalvatier
There’s an element of truth to this, but I don’t think it’s quite right. You’re ignoring the fact that money is produced from something (normally government bonds). Investing in government bonds isn’t the worlds most productive investment, but it’s also not completely wasteful.
I’ll have a post about this a bit later.
Thursday ~ February 10th, 2011 at 6:34 pm
Larry Thompson
1. The reason why it is a bad thing that countries can debase their currency is because this allows groups with political power to transfer wealth to themselves, either through printing money (in the old fashioned sense), or through large bailouts consisting of loan guarantees which can be created at will (the 21st century equivalent). This is the mechanism which encouraged to TBTF business model which has emerged over the last 20 years, and which we cannot get rid of at this point. I think insidious is a perfect way of describing the way large financial firms and banks have been able by more or less using it to bail themselves out as their risk taking behavior eventually caught up with them.
“It is economic loss of the highest order. Perhaps attempting to take away the government’s primary tool at alleviating this loss is a more insidious act than two or three percent per year increases in prices?”
The Fed’s ability to unilaterally bail out (ie transfer wealth) to whomever they see fit, combined with the change in behavior among market participants who are cognizant that the Fed considers them too big to fail, is the truly insidious aspect of this system, not necessarily the erosion of savings.
2. “Money does not create anything. Value stored as money is value lost; lost because it represents resources not directed towards capital.”
According to this logic, people and firms who choose to save their cash rather than spend or invest it are actively destroying value every day they decline to spend it. On the flip side, it also implies that as a rule, savings can always be turned into productive investment, no matter what.
“Capital, unlike money, does create things. That people sometimes see it as advantageous to stop investing in capital and start holding money is the source of enormous economic instability.”
Why do you rule out the possibility that there are no productive investments available to the people who have chosen to hold money? Is the optimal monetary regime really one in that people always feel the need to spend or invest all their money all the time, because otherwise it represents lost value?
Friday ~ February 11th, 2011 at 9:47 am
IVV
“Is the optimal monetary regime really one in that people always feel the need to spend or invest all their money all the time, because otherwise it represents lost value?”
Yes.
In a recession, people hold money partly because other people hold money. They don’t invest it, and they don’t utilize the assets/capital they have, causing there to be fewer goods and services (less stuff) available.
Ultimately, it matters less whether there is more or less money available. What truly matters is how much stuff there is. If we grow enough food but some people are too poor to buy it, we can redistribute and lower starvation. There are coordination problems involved and some people will resist the eroding of their purchasing power, but it can be done. However, if we don’t grow enough food, it doesn’t matter how our money is distributed. People will starve.
Indeed, we’ve developed a financial system that (ideally) allows us to maximize investment. We’ve worked hard to make sure that money doesn’t just sit around–we want that money in the bank, loaned back out to others who buy capital, and then for those previous owners of the capital to put that money back into the bank to be loaned out again for more capital, etc. Whether that dollar is backed with (empty) government promises or (useless) gold, that dollar can be used for much more investment–creating more stuff and ultimately raising real wealth in the society.
And regarding your claim about the existence of productive investment: as long as someone somewhere needs something, there is a productive investment available. Do you know someone who needs a job? Needs some debt relief? Needs a chance to just relax a moment? We don’t need to go back to the hoodwinked credit-fueled overconsumptive culture, but we do need to align our productive resources to our needs.
Sitting on all the money in the world doesn’t help if there isn’t stuff to buy with it.
Thursday ~ February 10th, 2011 at 7:31 pm
Chui Tey
Well said and it is a recognized concept in economics. This is why definitions of M1, M2 and M3 are required.
The main problem with money is that you can’t inherently store the value of money. For instance, energy is scarce resource. Much of what we term capacity depends on the availability of increasingly expensive energy. In this sense, wishing for currency to remain as a reliable store of value is simply fancy thinking, and not a reflection of reality.
Friday ~ February 11th, 2011 at 1:19 pm
Johnnie Linn
Storing of money is no more an economic loss of the highest order than converting kinetic energy into potential energy. Money is a potential energy equivalent in economics. Our economy is a coupled oscillator, like a Wilberforce pendulum (for Wilberforce pendulum in action, see
http://en.wikipedia.org/wiki/Wilberforce_pendulum).
Some parts of our perfectly good economy may show no motion at a particular time just as a perfectly good Wilberforce pendulum may not show particular kinds of movement at a particular time.
Thursday ~ February 10th, 2011 at 10:54 pm
Zenobia
I think people are missing the point that money ought to be nothing more than a medium of exchange. Imagining value in it only confuses the matter and confuses people’s decisions about said exchanges. The means is supposed to have no intrinsic value, and indeed, aside from the cotton it printed on and the ink it’s printed with, it has none. All that stuff about where the government gets the “backing” for the money is basically fantasy, whether you’re talking about gold or bonds or whatever.
Friday ~ February 11th, 2011 at 12:09 pm
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Saturday ~ February 12th, 2011 at 12:04 am
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[...] Smith, an economist who blogs frequently at Modeled Behavior, has written a short post criticizing Will Wilkinson’s idea that money should serve as a [...]
Sunday ~ February 13th, 2011 at 2:52 pm
Anton
You are absolutely right! If “money” is used as a medium of exchange and if we experience economic growth (thus more money is needed as more things need to be exchanged), then by default money cannot be a good store of value. The problem is that in the last 20 years, the supply of money has substantially decreased, while growth has continued to steam ahead. Instead we have had an increase of credit, as a substitute for money, and therein lies our current problems.