- It's the money that's important, Nick says.
- Yeah but nobody notices until the money gets out of order, Mill says.
- I describe "out of order".
Nick Rowe:
The lesson I want you to draw from this post is that thinking of central banks setting a rate of interest and that rate of interest affecting desired investment and desired saving is a very inadequate way of thinking about monetary policy. A better way to think about monetary policy is to think of central banks setting a rate of interest in order to influence money growth... The rate of interest set by the central bank matters because, and only because: it affects money growth; ...(My bolding.) Nick's statement brings to mind Milton Friedman quoting J.S. Mill:
There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money;... it only exerts a distinct and independent influence of its own when it gets out of order.Let me add that when money is "out of order" these days, it generally means there is too much bank money per dollar of government money.
4 comments:
Let me add that when money is "out of order" these days, it generally means there is too much bank money per dollar of government money.
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Does this graph show what you mean?
https://fred.stlouisfed.org/graph/fredgraph.png?g=nE88
Looks like it was highest back in the 1980's and been lower ever since
Well look at that!
Your graph runs high from start-of-data to the early 1990s. That's the 20 years when productivity growth was low.
A downtrend begins after December 1986. By no coincidence, the growth of "All Sectors; Debt Securities and Loans" shows a downtrend beginning in 1986.
On your graph, the ratio runs low from April 1995 to December 2003. That is the time of the so-called "new economy", when productivity growth was high.
From 2004 to 2008 your ratio increased, and our economy got into trouble.
Since 2008 the ratio has been gradually falling. Like the 1986-1995 decline this is a "correction", after which I expect to see improved productivity growth and an improved economy.
You wrote:
From 2004 to 2008 your ratio increased, and our economy got into trouble.
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That's not my ratio. That is a ratio that reflects the combined actions of everyone.
When people take their govt issued cash to their bank and deposit it, the ratio goes up. When they do the opposite and hold on to cash or withdraw it from the bank the ratio goes down. The ratio reflects a collective balance in desire to hold cash or deposits.
What happened in 1986 was the S&L debacle. The decline in the ratio seems to be from a decline in the growth of deposits combined with a continuing growth of cash which had been high since the 70's. The increase in the ratio before 2008 seems to be from a decline in the growth of cash while deposit growth stayed high
I'm not sure why people were moving away from holding money in the form of govt currency before 2008. I wonder how you think this shift in people's preference for cash was related to "our economy got into trouble".
I also wonder why you say there will be "improved productivity growth and an improved economy" at some point when people have converted more of their deposits to cash.
"When people take their govt issued cash to their bank and deposit it, the ratio goes up."
Yeah. Also when banks lend money it adds to deposits and the ratio goes up. Also maybe nonbanks, if nonbank loans are spent and the money is deposited in banks.
"I wonder how you think this shift in people's preference for cash was related to 'our economy got into trouble'" and
"why you say there will be 'improved productivity growth and an improved economy' ..."
Math major. I start with the graph and see lows occurring when the economy is good and highs occurring when it is not.
I know: Not every recurring coincidence is a causal relation. But I also know that almost every transaction is an exchange of goods or services for money. And this means that money is involved in far more transactions than any particular good or service. More than all the goods. More than all the services. More than all the transactions in GDP, as GDP excludes many financial transactions. Therefore, I know money is very important in economics.
So if I look at a ratio of monetary quantities and it runs high when productivity growth is low, and runs low when productivity growth is high, I figure it's probably not a coincidence.
And then, if I can match up the high-to-low transitions of the ratio with key points on a different graph (TCMDO/M1SL) then my confidence increases.
Math major.
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