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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.

The Data

Gallup ask small businesses about their hiring practices.


Nearly as many reported hiring fewer than needed as reported hiring as many as needed.

Note the question asked was as needed.  From an economists perspective this is as if the firm is saying that if deliberately did not continue hiring until marginal revenue produce equaled the wage rate. There were workers, there was work, profit could have been made. They decided not to make it.

The question is of course why?

Gallup asks that as well


The top two answers are consistent with standard Aggregate Demand stories.

The first is a New Keynesian story that employers can’t sell all the product that they want at existing prices.

The second is a more monetarist flavored story that real cash balances are two low.

The third is a structural reason. Not the right employee mix. Note that this is a Mismatch story. Not recalculation.

The fourth is harder to interpret. It could be regulatory uncertainty: Is the new health care law going to cost me too much.

It could be a sticky-wages story: I can’t just take away my employee’s health care at the drop of hat. If health care costs are rising that is forcing real wage increases on me.

It could be a Austrian story. The relative demand for health care is rising implying that I should reduce resource use in my area to free up resources for the health sector but the price signals are screwed up health care, making this unclear to business owners.


Lastly Gallup asks a question that reveals why Aggregate Demand might cause the natural churn of the economy to bubble up into recession.



41% of those hiring say they did so to replace an employee who left. Employees quitting is part of the natural economic churn. No problem there The problem is that the employers didn’t all hire up to the point that they needed. Meaning that our natural churn spilled over into excess unemployment.

We really want to to see the crosstabs here but with 41% hiring to replace a lost employee and 42% saying they hired less than they needed, it seems reasonable that many employers did not replace all lost employees even if they needed them.

The Story

The story that makes sense to me is that employees left for some reason – could be fired, dead, quit, laid off when recession hit, whatever. Employers could profitably replace those employees if they were sure they could sell all their merchandise at existing prices.

They are not sure, and so they have hired only a few employees.

Now this could be an entirely real story. It could be that small businesses completely misinterpreted the real economy and so now are readjusting. They have to wait to see if demand is really there or not before committing resources.

The question is why did this happen to so many employers at once.

This is where I think Bob Murphy and his Sushi story have an advantage. He says the Fed confused everyone and that is why so many businessmen are confused at once.

The problem with that story is that it depends on some workers have very low or zero marginal product during the transition. It seems to me that this is akin to saying these workers are needed.

However, the survey here suggests that there were workers who were needed but not hired.

To me this points to an Aggregate Demand story where a sudden drop of in sales leads many owners at once having more inventory than they can sell at current prices and reluctant to hire unless that inventory starts moving again.

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