Re: More money or better distribution?

["John B. O'Donnell" <jackodonnell@xxxxxxxx>]

William B. Ryan wrote:

> 2.  To John O'Donnell:  http://csf.colorado.edu/mail/pkt/aug98/0204.html
>
> You write, "The meaning of dQ/dM = 0 is that they are_NOT_ functionally
> related."
>
> Then please don't express your concept as dQ/dM, which in conventional
> notation signifies that there IS a functional relationship, partial or
> otherwise.  Although you obviously can manipulate calculus, you
> apparently do not have the foggiest notion as to its fundamental
> principles.
>
> In standard notation, dQ/dM = 0 means that Q is a function of M where
> the dependent variable Q does not change throughout the range of the
> independent variable, M, because of changes of M.

No, it means that Q is not a function of M, nothing more, nothing less.

> It does not
> necessarily mean that if M is determined to be a dependent variable of
> Q, it will not change throughout of range of Q because of changes of Q.

Here you are, of course, correct. I did erroneously say they are not
related where there is no indication of such a limitation inherent in
the dQ/dM=0 assertion. [See my response to the multiple choice questions
posted by Bruce McFarling for the correct response.]

<<SNIP>>

> Since it is YOU who claims that the relationship is NOT functional, it
> is incumbent upon you to explain the strong statistical correlation
> between Q and M, as demonstrated by such eminent economists as Friedman
> and Schwartz in their ~A Monetary History~, and Basil Moore, a sometime
> contributor to this list, in ~Horizontalists and Verticalists~.

This is nothing short of the nonsense of many who correctly admit [and
usually admonish those who doubt this] that statistical correlation
provides no evidence to distinguish cause, effect or coincidence. Such
correlation _may_ be indicative of things that are worth examining for
such relationships as may exist, but they do not in themselves provide
that evidence.

As to the demonstrations in _A Monetary History_ it is the false
conclusion drawn from the statistical correlation of measures of money
supply vs. a later measure of GNP that led to the silly proposal by
Friedman to maintain a constant rate of growth in a measure of money
supply. Such a policy would be a valid procedure _IF_ there were an
actual relationship such that d(Q-sub-[t+?])/{d(M-sub-t)}<>0; which
there is not. [That's why it was such a failure when tried, not the
hogwash alluded to by some that it was not applied well.]

As to Basil Moore's _Horizontilists and Verticalists_ conclusion that a
central bank has no choice but to accommodate the demands of banks for
needed reserves such that the only possible control the CB has is to
control the cost of those reserves is just another example of the elite
setting aside their own knowledge of the limitations of statistical
correlation to reach an incorrect conclusion.

Yes, the cost of reserves is one of the effects of restricting the
availability of reserves but the actuality of the supply of reserves is
that there is, and probably always has been, plenty of money [cash]
floating about that can be used as reserves if the banks choose to pay
enough to extract that cash from the pubic in return for interest
payments. For an demonstration of this circumstance check out the
comparison of "adjusted" vs. "required" reserves as presented in
_Monetary Trends_ from the St. Louis FRB. All those adjusted reserves in
excess of the required reserves [typically 40% (+ or - ??%) more
adjusted than required reserves] are convertible to required reserves
without the CB creating a single cent of new reserves.

This is not to say that a CB should not act as lender of last resort. It
only says it is not a mandatory condition IAW Basil Moore's conclusion.
My own opinion is that, if reserves are the control on lending, they
should act _quickly_ as lender of last resort and concurrently demand
that any such borrowing be immediately met with a cessation of lending
by that bank. [I'm not very forgiving of risk taking with funds
entrusted in expectation of fiduciary responsibility.] Also, I would
actually prefer the limitation on lending be instituted IAW capital
ratios as I describe in _Can It Be?_ at:
http://www.geocities.com/CapitolHill/1067/canitbe.html rather than as a
consequence of borrowing from the CB.

> You have admittedly not read the "Austrians," those who follow Mises and
> Hayek, so I will help you by telling you the gist of what they would
> say:
>
> "We define inflation not in terms of the price level, but as any
> increase in the quantity of money.  Q and M are correlated because they
> are historical facts.  When the population increases, the number of
> cancer cases increase.  Inflation, like cancer, is something to be
> exterminated."
>
> That's their explanation.  What is yours?


I define inflation as degradation in the value of money against an
accepted standard of value. [My preference for such a standard is an
index such as the CPI, but I'm open to other choices.] Since I am aware
that there are many contributing variables [both linear and non-linear;
controllable and non - controllable; etc.] that affect the value of
money I say -- When the quantity of money in existence allows the value
to decline it is a signal to reduce the quantity of money and/or credit
and when the value rises it is a signal to decrease the quantity. Any
pretense at estimating addition or deletion of a believed to be
appropriate amount of any particular measure of quantity of money is
just so much folderol that may help in the construction of simplified
models but they do not provide the degree of accuracy needed to predict
the actual needs.

It's just like the way you control the speed of your car while driving.
You don't make calculations of the wind speed and direction nor the
grade of the hill you're climbing or descending to define the correct
position for your gas pedal; you just adjust the pedal to suit the speed
you want to be moving.

			-- jbod

		Tax Privilege, Not People
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