Fall of Rome

It's like some kind of sickness

From Wikipedia, the Credit Theory of Money:

Credit theories of money (also called debt theories of money) are monetary economic theories concerning the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and credit/debt are the same thing, seen from different points of view. Proponents assert that the essential nature of money is credit (debt)...

The relationship between credit and money is an important topic, I'll give you that. But understanding is one thing, and blurring together is something else entirely. The Wikipedia article goes for the big blur:

"money and credit/debt are the same thing"

It's not bad enough that "credit" and "debt" are blurred together by a slash, as if the writer couldn't decide which word/term to use because his/her understanding of the pair/the two is so poor that he/she cannot distinguish between them. No: They find it necessary to take a third term -- "money" -- and assert that it also is "the same thing". This leaves us with the new compound term "credit/debt/money", which combines three conceptually different terms without providing so much as a hint of what they mean.

Worse than the failure to provide meanings for these terms is the fact that they are being equated; that's just plain wrong.

Money is not "the same" as debt. One is an asset, dammit, and the other is a liability! One's a plus, and the other, a minus. You might say money and debt are "two sides of the same coin" -- but that's just a metaphor. And anyway, if money and debt are two different sides of the coin, they are different.

Money is money. Credit is money you borrow. And debt is money that you owe.

Spin-off #5

In spin-off #4 I used David Glasner's phrase "liquidity services", thinking it means the things liquidity can do for you. Never gave it a thought. When I read #4 later, the phrase stood out as something undefined. It makes sense to me that it refers to the things liquidity can do for you. But I don't know what Glasner was thinking. So I have to deal with this small matter even though it is a small matter indeed.

(By "liquidity services" I do not mean the company of that name or the services provided by that company. In addition, my intent is to mean not what I mean by the phrase, but what Glasner means, as my purpose is to evaluate his thinking without imposing my meanings upon his words.)

In his Price of Money post, Glasner says every asset has two prices, one to buy it and one to rent it. Then he defines the "rental price" as

the price one pays to derive services from [an] asset for a fixed period of time.

Later, when he applies the concept of rental price to money in particular, he makes a parallel statement:

the price that one has to pay ... to derive the liquidity services provided by that unit of currency.

So I don't think Glasner uses the term "liquidity services" to mean anything other than the useful things you think liquidity can do for you in some situation. He could as easily have said "the price that one has to pay ... to derive the liquidity" provided by the money. So I think my interpretation of "liquidity services" is adequate. And now I can evaluate Glasner's remarks:

You don't have to "derive" liquidity services from money. If you have the money, you have the liquidity. If you have the liquidity, you can do the things that having liquidity allows you to do.

If you have the money, everything else takes care of itself.

David Glasner and clearness of mind

Been lookin at Glasner's "price of money" post from September of last year: Milton Friedman Says that the Rate of Interest Is NOT the Price of Money: Don’t Listen to Him! Actually, my three posts since 15 December are all spin-offs from the response I'm writing to Glasner's post. Count this one as number four.

Glasner says

So although the interest rate is in some sense the price of credit, it is, indeed, also the price that one has to pay (or of which to bear the opportunity cost) in order to derive the liquidity services provided by that unit of currency.

"In order to derive the liquidity services" of money, he says. It's not right. When I receive a dollar, it comes with the liquidity services attached. That's what makes it money: you can spend it. You don't pay extra for liquidity services. They come with the money.

That's why you can "part with liquidity for a specified period." Because when you have the money, you also have the liquidity, and if you lend out the money the liquidity goes with it.

When Glasner says the interest rate is the price you have to pay "in order to derive the liquidity services" of your money, he is talking fluent gibberish.

The rate of interest, Glasner says, "is the cost of holding money". But it's not. The rate of interest is the opportunity cost of not lending money. And it should be the other way around, and it needs two extra words: The opportunity cost of not lending money is equal to the rate of interest. That's as close as I can get to what Glasner said, and still believe I have it right.

"Lending" money is an action. "Holding" money is not an action, not a transaction. "Holding" money is what happens between transactions. If we all "hold" all our money, there can be no transactions, no economy, no GDP, and no income.

It's lending that's the action in this case. It's lending or not lending that's the choice. Clearness of mind on this matter is best reached, perhaps, by thinking in terms of decisions to lend (or to refrain from lending) rather than of decisions to hold money.

Evolution of the standard description of money

I took Econ 101 Macro in the mid-1970s, in the midst of the Great Inflation. At the time, the identifying characteristics of money were still presented as

• medium of exchange
• store of value, and
• standard of value

The first of these identifies money as something we use and accept as payment. The second says the value of money doesn't change, or doesn't change much. So that if you don't spend a dollar today, it will have approximately the same purchasing power tomorrow or next week or next year. The third is how we identify money in words: "the dollar" for example.

Today the definition of money is slightly different. According to Merriam-Webster, money is defined as

something generally accepted as a medium of exchange, a measure of value, or a means of payment

The first of these is unchanged since the 1970s. And the third is rephrased but retains essentially the same meaning. The second, however, is different. No longer a reliable store of value, money is now a "measure" of value.

A "measure" of value rather than a "store" of value, because we now acknowledge that the value of the dollar changes. We now acknowledge inflation.

Is this change an improvement? I say no, it is not. It is good of course to to be honest with ourselves and admit that inflation changes the value of the dollar. But look at this graph from Robert Sahr:

The graph shows that relative price stability was possible over the long term, at least until the Great Depression. This being the case, it is wise to admit that the dollar is no longer the good store of value that it once was. But it is foolish to change the definition of money.

It would be better to hold to the old definition, and admit there is some problem with the "store of value" characteristic of money. That characteristic has changed, yes. But the problem is not that our definition went bad. The problem is that there is something wrong with the economy. A good solution would be to figure out what went wrong before it's too late. It isn't quite as simple as "printing money causes inflation".

Circulating relative to Sedentary money

Graph #1: Circulating Money as a Percent of Sedentary Money

When the line is going down, circulating money is going down, relative to sedentary money. And sedentary money is going up, relative to circulating.

When the line is going down, money is moving into savings.

People like it when they can save money. So it seems like a good economy when the line is going down. But only as long as it can keep going down. And there's the problem.

The line fell rapidly to the late 1960s, then went flat, and then we had a recession.
The line fell rapidly in the early 1970s, then went flat, and then we had a recession.
The line fell rapidly in the mid 1970s, then went flat, and then we had two recessions.
You could say those recessions were caused by the Fed, fighting the inflation. And I'd say: Sure. But it shows up anyway in the ratio of circulating-to-sedentary. Just like it shows up in yield curve inversion.

So the long-term trend was down, meaning less money was buying things and more was in savings, until the mid 80s. Then it went up a little in the mid-80s, and then the economy was good in the latter 80s.

And it went up a lot in the early 1990s, and then the economy was good in the latter 1990s.

But the line was low again by the year 2000, and then it went even lower, and then we had a "great" recession.

Aint that great?

And yes, the line has been coming up ever since. And when it gets high enough, it'll start to fall, and the economy will be good again for a while.

Opportunity Lost

You can't be in two places at once. That's a fact. But it's not a cost.


"Opportunity cost", from Wikipedia via Google:

In microeconomic theory, the opportunity cost, also known as alternative cost, is the value of a choice, relative to an alternative. When an option is chosen from two mutually exclusive alternatives, the opportunity cost is the "cost" incurred by not enjoying the benefit associated with the alternative choice.

See how they put the word cost in quotes? That's because opportunity cost is not really a cost.


I Googled the word cost. Not as a verb or action word, but as a noun, it means:

an amount that has to be paid or spent to buy or obtain something.

Straightforward, simple, and obviously correct.

In homage to relevance, I Googled define cost in economics. Wikipedia again:

Economic cost is the combination of and losses of any goods that have a value attached to them by any one individual. Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another.

Prudence. Dear prudence. Because every act is a "rational" act in economics. And every man is rational, everyone is prudent. But have you looked at the world lately? The world of politics for example, your world: No one is rational in that world. No one. It's easy to see it on the other side, not so easy to see it on your side. But both sides suffer this impairment of vision and this evidence of irrational behavior.

Under "People also ask" on that same page, from BusinessDictionary.com:

What is the definition of cost in economics?
An amount that has to be paid or given up in order to get something. In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service.

and from EconomicsDiscussion.net:

What is the concept of cost?
In general terms, cost refers to an amount to be paid or given up for acquiring any resource or service. In economics, cost can be defined as a monetary valuation of efforts, material, resources, time and utilities consumed, risks incurred, and opportunity forgone in the production of a good or service.

See it? The word "forgone". The phrase "opportunity forgone". That's not the same as a cost.

I looked up "forgo". Seems to me there should be an "e" in that word, but Google tells me otherwise. Anyway: To "forgo" something means to do without it, like I have to do without the "e". You can see it as a cost if you want to, or maybe somebody can bullshit you into thinking it means "cost". It doesn't.

Go back to the definition of opportunity cost I quoted up top:

In microeconomic theory, the opportunity cost, also known as alternative cost, is the value of a choice, relative to an alternative.

And in particular, the sentence that comes next:

When an option is chosen from two mutually exclusive alternatives, the opportunity cost is the "cost" incurred by not enjoying the benefit associated with the alternative choice.

The phrase "mutually exclusive" means you cannot pick two things; you have to pick one or the other. However, the one you give up is not a cost. The simple fact is that you can only pick one of the two.

So you pick the one you want, knowing full well that you must forgo the other. But it's not a cost. So it's not an opportunity cost.

It's just an opportunity lost.


Cost is not hypothetical. Not imaginary. Cost is actual monetary cost: I'll give you a dollar to scratch my back. Or, cost can be actual and non-monetary, as with barter: You scratch my back and I'll scratch yours.

But if I'm lying on my back by the pool, checkin out the babes, I can't have my back scratched because I'm lying on my back.

That's not a cost. Not by any definition. Cost is what you have to give up to get the thing you want.

Cost is the value, usually the monetary value, of one side of a trade or exchange. In order to get my back scratched, I have to scratch yours. There is an exchange.

Or, I have to give you a dollar. There is an exchange.

I may have to give up lying on my back to get my back scratched, but this is not an exchange. It's just the way physical reality works. Besides, giving up lying on my back does not mean I will get it scratched. It only means that I can get it scratched because it's accessible. Physical reality. Nothing to do with exchange or trade. Nothing to do with cost.

I'm not giving up lying on my back in exchange for some scratching. Giving that up is not the exchange. It's not a cost. So it's not an opportunity cost.