Re: Money supply

["John O'Donnell" <jackodonnell@xxxxxxx>]

John Vertegaal wrote:

<<SNIP>>

> What am I supposed to make of concepts like consistency, taxonomy,
> analysis, etc., that you keep on touting in your valued postings,
> when whenever I point out a potential incongruity in your own
> approach I hit a black wall?

First recognize that you can define any word as anything you
want. The trouble arises when the more conventional meanings
of the word are then allowed to be attributed to the word in
the same argument.

For "money" the term has become so discombobulated by
economists' attempts to attribute the ability to usefully
manipulate economic activity by manipulating the money
supply. In short, it is attempting to manipulate reality by
changing the measuring stick.

To get a rational grasp on the relationship of money to
meaningful economic analysis forget about the
rationalizations of economists. Try explaining to yourself
how it is that bank demand deposits can be called a
component of "money" when they are actually promises to pay
"money" yet all "definitions" put forth by economists
include these deposits and other assets denominated in the
unit of the currency as components of the money supply. To
get around this obvious foolishness some have come to
calling the stuff that banks promise to pay "high powered
money" (HPM) while it is obvious any rational definition of
a term would not have the whole of the stuff of the
definition in turn be only a part of the stuff defined.

The relationship of money to the value it describes can
better be looked at as a generally accepted medium of
exchange that suffers hysteresis because of the many
substitutes that are used in practice. That is, because the
creation or deletion of HPM affects the value of HPM but
that value is also affected by both the demand for HPM and
the general practice of people to use substitutes when those
substitutes are more convenient. The most prevalent
substitute is the transfer of bank promises to pay.

While it is cute to describe an increase in HPM that
accompanies neither an increase in economic activity nor an
increase in prices as "pushing on a string" it is just
another way of describing hysteresis. As in hysteresis, push
on a string that is tied at the other end to something
movable and when the string is pushed far enough the push
becomes a pull.

However, because of the extensive availability of
substitutes, even this simple explanation does not do it
justice. For whatever reason, the public may become
disillusioned about the future value of a currency (it will
usually be for good cause) and increasingly rely on
substitutes. Such transfer of usual transactions from money
to a substitute will increase the relative availability of
existing money to the quantity of exchanges that call upon
its use which will reduce its value which will encourage use
of substitutes, etc. Which is to say that although dQ/dM = 0
that does not mean that, as Friedman assumed in his
erroneous depiction of monetarism, that there will be some
fixed quantity of money relative to economic activity that
will result in maintaining the value of the currency. It
also does not mean that money is "neutral" to an economy
because the quality of the money (that is, it's stability in
value) has a great deal to do with the efficiency the use of
money provides in making exchanges. All dQ/dM = 0 means is
that a change in the quantity of money has no effect on the
quantity of goods and services produced in an economy.

<<SNIP>>
--
			-- jbod

		Tax Privilege, Not People
___________________________________________________
Come visit and see a new economic perspective --
       http://www.geocities.com/CapitolHill/1067
           Comments/arguments welcome.
.