Re: Money supply

[pdavidso <pdavidso@xxxxxxx>]

>===== Original Message From "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx> =====
>Money supply is a complex issue and at this moment in history it is a term of
considerable
>chaotic meaning.  The official definition by the Fed: M1, 2 & 3, is quite
clear, but its
>usefulness even to the Fed is as limited as it is clear.

Unfortunately M1, M2, and M3 are not definitions-- they are exemplifications.
For example, if astronomers used this economist way of defining things how
would they distinguish between planets and comets, and asteroids, and moons.

All successful classification schemes require the taxonomist to define each
category in terms of those necessary and sufficient common PROPERTIES
possessed, and/or common functions provided by any item for it to be a member
of a specific class.
	For example, even though a whale looks like a fish, swims like a fish, and
will die (like a fish) if it is out of water for too long, a whale is not a
fish. The taxonomy of biologists classifies all whales as mammals despite
their obvious similarities to fish. Biologists have agreed that the necessary
and sufficient characteristics for a species to be labelled a mammal is that
the species bears its young alive and suckles the young. A creature's physical
appearance, its habitat, or its swimming propensity are neither necessary nor
sufficient for the botany classification. No matter that the uninstructed
layperson perceives a whale to be more similar to a fish than to his/her own
mammalian self. Nor does it make any difference to the lifestyle of the whale
who, oblivious to the biologists's taxonomy, continues to look, swim, breathe
and die like a fish.
	In the physical sciences, taxonomists often invent words to define specific
categories. Thus certain things that share common properties are "quarks,"
even though the average layperson has not the slightest idea what a quark is
or what it feels, smells, tastes, looks, or sounds like. The word "quark" does
not appear in everyday conversation. Physicists are free to define a "quark"
anyway they see fit.
	Unfortunately, economists do not have the linguistic freedom of physicists.
To communicate with policy makers and intelligent laypeople regarding economic
matters, economists tend to use words adopted from nonstandardized, everyday
speech to designate rigorous economic categories. All too often the result is
that defenders of some economic position are using economic terms to mean one
thing, while their antagonists use the same word to connotate something
different. This ambiguity in economic language often perpetuates semantic
confusions rather than shedding light on economic problems.

NOWHERE IS THIS MORE OBVIOUS THAN IN HAVING DIFFERENT EXAMPLES OF MONEY as M1,
M2, AND M3.

before you can control something you must understand its essential properties
and functions.

When many years ago I asked David Laidler how would he distinguish between M1,
M2, M3, or even higher M's for the purpose of the quantity theory-- since they
all did not grow at the same rate; Laidler's response was that M value that
correlated best (in any period) with income was the money of the period!!

How's that for hard-headed science?

 Alan Greenspan, at the 15th
>Anniversary Conference of the Center for Economic Policy Research at Stanford
University,
>Stanford, California  September 5, 1997 admiited, with Milton Freidman in the
audience, in
>defense of the accusation that Fed policy failed to anticipate the emerging
inflation of the
>1970s, and by fostering excessive monetary creation, contributed to the
inflationary upsurge,
>and the claim that some monetary policy rule, (such as the taylor rule on
which I posted on
>this list sometime ago), however imperfect, would have delivered far superior
performance,
>admitted that our knowledge of the full workings of the system is quite
limited, so that
>attempts to improve on the results of policy rules will, on average, only
make matters worse.
>Greenspan observed that the monetary policy of the Federal Reserve has
involved varying
>degrees of rule- and discretionary-based modes of operation over time. very
often historical
>regularities have been disrupted by unanticipated change, especially in
technologies. The
>evolving patterns mean that
> the performance of the economy under any rule, were it to be rigorously
followed, would
>deviate from expectations.Such changes mean that we can never construct a
completely general
>model of the economy, invariant through time, on which to base our policy,
Greenspan asserted.
>

Is he saying the economic system is nonergodic??? SDo that previous
(historical) identified regularities may not rule in the future??????



>Greenspan admitted that in the late 1970s, the Federal Reserve's actions to
deal with
>developing inflationary instabilities were shaped in part by the reality
portrayed by Milton
>Friedman's analysis that ever-rising inflation rate peaks, as well as
ever-rising inflation
>rate troughs, followed on the heels of similar patterns of average money
growth.


Which money growth???  M1, M2, M3, etc --  there has as many as M5 concepts.



 The Federal
>Reserve, in response to such evaluations, acted aggressively under newly
installed Chairman
>Paul Volcker. A considerable tightening of the average stance of
policy--based on intermediate
>M1 targets tied to reserve operating objectives--eventually reversed the
surge in inflation.



So who needs M2, and M3????
>
>The fifteen years before 1997 had been a period of consolidating the gains of
the early 1980s
>and extending them to their logical end--the achievement of price stability.
>
>Although the ultimate goals of policy have remained the same over these past
fifteen years,
>the techniques used in formulating and implementing policy have changed
considerably as a
>consequence of vast changes in technology and regulation. Focussing on M1,
and following
>operating procedures that imparted a considerable degree of automaticity to
short-term
>interest rate movements, was extraordinarily useful in the early Volcker
years. But after
>nationwide NOW accounts were introduced, the demand for M1 in the judgment of
the Federal
> Open Market Committee became too interest sensitive for that aggregate to be
useful in
>implementing policy. Because the velocity of such an aggregate varies
substantially in
>response to small changes in interest rates, target ranges for M1 growth in
its judgment no
>longer were reliable guides for outcomes in nominal spending and inflation.
In response to an
>unanticipated movement in spending and hence the quantity of money demanded,
a small variation
>in interest rates would  be sufficient to bring money back to path but not to
correct the
>deviation in  spending.
>
> As a consequence, by late 1982, M1 was de-emphasized and policy decisions
per force became
>more discretionary. However, in recognition of the longer-run relationship of
prices and M2,
>especially its stable long-term velocity, this broader aggregate was accorded
more weight,
>along with a variety of other indicators, in
> setting our policy stance.

Thank you David Laidler ---).  Suppose that the time series of the number of
garbage can in Secaucus, New Jersey provided a better correlation?  Should we
control the garbage can growth there??



>
> As an indicator, M2 served us well for a number of years. But by the early
1990s, its
>usefulness was undercut by the increased attractiveness and availability of
alternative
>outlets for saving, such as bond and stock mutual funds, and by mounting
financial
>difficulties for depositories and depositors that led to a restructuring of
business and
>household balance sheets. The apparent result was a significant rise in the
velocity of M2,
>which was especially unusual given continuing declines in short-term market
interest rates. By
>1993, this extraordinary velocity behavior had become so pronounced that the
Federal Reserve
>was forced to begin disregarding the signals M2 was sending.

Saint Alan should factor in the growth of garbage cans--).

>
> Greensapn recognizes that, in fixing the short-term rate, the Fed loses much
of the
>information on the balance of money supply and demand that changing market
rates afford, but
>for the moment the Fed sees no alternative. In the current state of our
knowledge, money
>demand has become too difficult to predict.

Matbe to difficult to provie unique examples -- unless we define it in terms
of its essential properties and functions -- as Keynes does in ch. 17 of the
GT and I do in ch 6 of my POST KEYNESIAN MACROECONOMIC THEORY.




>In the United States, evaluating the effects on the economy of shifts in
balance  sheets



After Arthur Andersen and Enron -- who can say what balance shhets mean????

Paul

Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 523
Knoxville, Tennessee 37996-0550
phone # (865)974-4221; fax #(561)737-8262;
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/davidsonextra/Davidson.html