On the topic of "hoarding"

Constant takes on the McArdle argument.

One brief note I'd like to make:

Nobody holds cash with the plan of never spending it. Otherwise, they would burn it, wipe their butts with it, make paper airplanes out of it, or use it for confetti. If someone holds cash, they plan to spend it later.

The argument stimulus proponents have to take on is--

Why is spending now better than spending later?

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Spending money

Nobody holds cash with the plan of never spending it.

True (with trivial exceptions such as coin collectors).

If someone holds cash, they plan to spend it later.

Very close but, at the risk of splitting hairs, not exactly correct. First, notice that there is middle ground between planning not to spend something, and planning to spend it. Maybe this is clarified with an analogy: I hand you a book but you don't know what it is. Do you right now:

a) Intend to not read it?

b) Intend to read it?

There is a third option:

c) Intend to see what it is, and if it is interesting, then read it.

Money is fungible and so you can play with the identity of specific bits of money to come to different conclusions (to be more precise: superficially different but ultimately equivalent statements). You can view your hoard of money as a stack: as you make money you stack it on top of money you already made, building a column or stack of money, and when you need to use some cash, you take money from the top of the stack. You can, alternatively, view your hoard of money as a queue: you line money up into an east-west queue (say), and you add new money at the eastern end and take away money at the western end.

In the picture of money as a queue, then it isn't long before every dollar you make is spent again on something. But in the picture of money as a stack, it can be a very long time before the money at the very bottom of the stack is spent, if ever.

I think that the stack picture most closely matches the role that money plays as storage for a rainy day. You don't intend definitely to spend your bottom dollar ever. What you intend is that your bottom dollar be present as a kind of insurance against the possible eventual rainy day when you have spent every other dollar and you're down to your last dollar. The more dollars you have in your stack, the better you're covered against ever-more-remote uncertainties. You must weigh your preference for this insurance against your preference for spending or investing your money now, thus determining your demand for money.

Constant takes on the McArdle argument.

I just want to mention that I do not purport to refute McArdle's conclusion. I am

a) Claiming "case not proven",

b) Filling in a few of the gaps, and

c) Pointing out one reason why it may not be a good idea for the state to attempt to counteract hoarding in a time of uncertainty.

Yep, I would call that splitting hairs

Point is--

"Hoarding" does not take money "out of the economy". People still spend that money sooner or later. If they don't spend it themselves, they leave to their heirs who do. If they don't have heirs, they leave to charities. If they don't leave a will, somebody somewhere will get that money. It will be spent.

Just to avoid more hair splitting, I admit to the small chance that the bank or other institution in which the money is kept could burn down, be attacked by Al-Qaeda and/or dinosaurs brought back to life via genetic engineering, or disappear into a temporary wormhole.

Friendly fire!

Hey, I'm a friendly. I agree with the point you're making. I wasn't splitting a hair as a means of undermining your point.

Or another name

Splitting hairs, or Rollover Minutes?

Just to avoid more hair

Just to avoid more hair splitting, I admit to the small chance that the bank or other institution in which the money is kept could burn down, be attacked by Al-Qaeda and/or dinosaurs brought back to life via genetic engineering, or disappear into a temporary wormhole.

Wouldn't destruction of that money just make all the remaining money more valuable?

Also, a man with a dome as reflective as yours needn't worry about hairs being split.

"money" is a universal IOU for goods and services

When you accept an IOU in place of immediate goods and services the intent is to collect at some later time. If there is money inflation, don't wait to long. if money deflation, your IOU could be worth more in goods and services in a couple of years.

But you could loan your IOUs to the bank and get a small interest payment which is better than a kick in the pants and even works if there is money deflation.

Money

Money is only needed because of future uncertainty. If you knew precisely what you would purchase and exactly when, you could invest in instruments that mature just prior to your purchase, and not hold any significant money at all for any appreciable time.

The demand for money is always a demand to hold. You do it to prevent randomly getting a flat tire and engaging a tow truck driver who won't accept anything but cash, for example.

Money is a scarce economic good, the Fed notwithstanding. Its scarcity comes from the fact that a given dollar can only be owned by one person at a time. A finite supply places limits on the amount of money that all individuals and entities can hold. OTOH, a purchase never impinges on the scarcity of money since all that happens is that the purchase price is transferred from the buyer to the seller with no change in money supply.

Hoarding is simply someone holding a cash balance that someone else thinks is too large.

Regards, Don

Money and Certainty

"Money is only needed because of future uncertainty. If you knew precisely what you would purchase and exactly when, you could invest in instruments that mature just prior to your purchase, and not hold any significant money at all for any appreciable time."

This couldn't work in general. Every person would have to be able to find a counter party. Even if ever person knew exactly what they would purchase and when that doesn't guarantee their plans would align. Maybe no one plans to sell an instrument that would mature just prior to your desired purchase date.

In fact, one of the purposes of money is to sent price signals to get people to align their plans.

I agree with the rest of your comment. Cash holdings are necessary to deal with uncertainty but there are other reasons also. 1) Large purchases 2) Future purchases where transaction cost don't justify investing. 3) To bridge differences in transaction sizes and timings. 4) As as store of value. 5) To fund unplanned purchases such as bargains. Etc.

In a non-fiat system, by hoarding cash you are in fact investing in any productivity gains made over the time period you horde. At the same time you are responsible for providing capital goods to fund the very productivity gains you are relying on. It's the ultimate indexed investment. Not only does it track productivity well but their is no counter parties who could fail to pay up.

The only issue is that productivity might fall. People might just consume the goods you provided to get the cash without using them as capital goods. But this is not a problem either. Losses are a part of the free market. If you are holding cash expecting people to use goods wisely on average to increase productivity and they don't then you made a bad investment choice.

... and yes even if you produced a "consumer good" like lemonade to save the cash you are producing a factor of production. After all workers have to eat and drink (and have fun) while making things.

Money

Brian,

"Cash holdings are necessary to deal with uncertainty but there are other reasons also. 1) Large purchases..."

Not at all. You need money for purchases for which cash is needed immediately. In the case of large purchases, it would be rare for either asset conversion to cash or credit not to be adequately timely.

Regards, Don

Don!

Where ya been nigga?!?!

Email me.

Someone has to have the cash

If you are making a large cash purchase then somebody has to be holding the cash. Someone has to accumulated the cash to either buy your asset for "asset conversion to cash" or to provide credit. You are just pushing the problem back one level.

It's also something that you can do for yourself if you don't want to purchase via a loan. Which can make sense for many reasons.

To a poor person a bicycle might be large cash purchase and the rate on a loan probably makes no sense what-so-ever for making such a purchase.

Money

Brian,

If you are making a large cash purchase then somebody has to be holding the cash. Someone has to accumulated the cash to either buy your asset for "asset conversion to cash" or to provide credit. You are just pushing the problem back one level.

If YOU want to make a large cash purpose, yes, you need to accumulate the cash, but you need not hold it for more than a nanosecond or whatever other technical limitation may exist. You can hold millions of dollars in government bonds or money market mutual funds, but this doesn't mean you are holding money. For almost everyone, the value of assets held far exceeds the money held.

Regards, Don

Large Cash Purchases

”If YOU want to make a large cash purchase, yes, you need to accumulate the cash, but you need not hold it for more than a nanosecond or whatever other technical limitation may exist.”

Not true. If the person saves evenly over the time period in question on average then they need to keep half the amount saved as cash. So if the person is saving for a $175 bike over seven weeks by saving $75 a week then they need to hold an ever increasing quantity of cash over the entire seven weeks. The money doesn’t spring into existence magically for one nanosecond. Over the seven weeks on average they are “hoarding” $87.50 in cash.

Sure there are other options. Let’s exclude barter because that’s extremely inefficient and defeats the purpose of money. We don’t want the person trying to save up eggs from his backyard chicken coop for seven weeks, they go bad. Plus then he has to find someone who wants a whole lot of eggs at once.

Barter is problematic in aligning buyer’s and seller’s needs, and timing. You might want to buy a loaf of bread from the baker but only have a cow. The baker doesn’t need whole cow and even if he wants steak it may not be now that he needs it. The units and timing on both sides of the trade are not coordinated.

So what are we left with? Well loans. But loans involve interest rates which are composed of multiple components that you need to pay for. You must pay the lender for 1) Time cost of money 2) Inflation 3) Risk 4) Transaction Costs. Some people don’t want to pay those costs.

The purchase of a bike by a poor person involves very large risk and transaction cost payments. These costs can be avoided by hoarding cash directly. Of course, people avoid doing this because the government has forced us to use a fiat currency, or if they do they are penalized by inflation. Inflation is a cost in both ways of doing the transaction, and if it’s high enough it tends to make the transaction and risk costs look smaller.

Loans also involve, like barter, the coordination of timing issues. These maturity issues cannot be ignored or you get all sorts of problems. In fact, our current economic crisis was caused by doing just that.

That’s where the transaction costs come in. You have to have some system to coordinate these loans, which you don’t need with cash. Barter has higher transaction costs, and so does a loan system. So how does the person in my example find a lender who wants to lend money over the same time period, for the same quantity of money? One certainly can’t do so without someone holding cash on hand. Otherwise you are back to barter. That other somebody has to be holding some good they can sell to raise the cash to lend you.

To them your loan looks like it’s due to “uncertainty” and they need cash holdings on their part to your needs. Thus your need to “hoard” cash for large purchases translates via the lending process into their need to “hoard” cash for the uncertainty of lending.

You seem to be arguing that one can move to some kind of instantaneous transaction model where cash is not truly required, one where the medium of exchange is backed by assets instead of money. This is a horrible and unstable means to run a medium of exchange. A price is a ratio of the medium of exchange to the underlying good. When you try to back money with the very goods that are being priced against those goods you get asset bubble and then collapse.

On top of those issues you have maturity issues. You act like long term note and short term ones are fungible against one another. They are not, and that is the major mistake of this economic crisis, and is the major cause of the “business” cycle.

In my example it would be a impossible to buy a $25 thirty year maturity note for each week then cash them in to purchase the bike. Even if the 30 year notes were available in such low denominations or your savings much larger it would still be a mistake to buy them. Why? Because you might not be able to unload them when you wish to make your purchase.

Not the funny thing is that this is exactly what the banks do for you when you make $25 deposits every week into a savings account. You might think this is a good way to fund short term purchases but it isn’t. The bank faces the same problems you would when you withdraw seven weeks later. Plus they don’t know your intentions. This is why we get bank runs (or FDIC bailouts).

You have to remember to apply the “What if everyone tries it” rule. Certainly if you are advocating this as a way to precede then many people will do it and will suffer the consequences when their plans become discoordinated.

It’s a mistake to hold a long term bond in order to fund a short term purchase, and vice versa. Your idea of “asset conversion” fails for long term bonds because it has a maturity mismatch problem.

Also, in the case of your example, an imagined state of perfect certainty where money [cash holdings] is not needed, it would be impossible to determine prices. The situation would essentially be the same where bank reserves were zero. The money supply expands at the inverse of the reserve rates, a 50% reserve doubles the money supply, a 4% reserve multiplies the money supply by 25 times. If everyone tried to hold zero cash by lending it all out we would be in a situation with zero reserves. The inverse of zero is 1/0 which is infinite, or approaches infinity as we approach zero. Prices would skyrocket to infinity with a fiat currency.

Cash “hoarding” is actually what allows us to even calculate prices, despite being denigrated by some. Everyone “hoards” money and that’s what cash holdings are. Any attempts to eliminate hording will cause systemic instability.

Attempts by the government to prevent this type of action actually drive prices up, and cause discoordination of people’s long term plans. It hurts the poor disproportionately because they have higher transaction costs, and higher risk payments. Often they take out loans during a boom to compensate for inflation, only to be hit hard during the fractional reserve deflationary bust.

You can hold millions of dollars in government bonds or money market mutual funds, but this doesn't mean you are holding money.

Of course not, and I think you are making an improper point, since you are supporting the argument that we only need cash holdings only for future uncertainty. Which is false, and a point you haven’t conceded, so I assume you are still on the same argument.

For almost everyone, the value of assets held far exceeds the money held.

I know that. Not sure what your point is. I see points but they are in frameworks that are mistaken.

On the contrary, this fact argues against using assets to back our medium of exchange. Even if we could prevent prices from rising on the assets we were using to back the currency it would still inflate the money supply by a relatively extreme amount and cause prices on other goods to shoot up.

Problem is that the new money created by fractional reserve banking is used in trade first against the very assets that are supposed to back the extra currency. This drives these backing asset prices up first and the most. Thus it is a self reinforcing process. Inflated housing prices allow people to borrow even more money which drives prices up even higher. The higher prices allow more expansion in bank lending against the assets. This can continue so long as one can continue to reduce reserves (and other factors pointed out by the Austrians haven't played out yet).

Furthermore, backing assets can be produced and the increased price signal causes extra units of the backing goods to be produced. More than consumers can actually fund. Precious metals are in part freely chosen as the medium of exchange specifically because it is hard to produce more from scratch or convert other goods into precious metals. We can convert forests into houses easily enough, so backing short term banknotes (and deposits) with liens against houses is not a good strategy for a stable currency.

If you look at the history of Fiat Monetary Inflation in France they tried to back currency with land stolen from the church, supposedly a limited asset. Problem was that current prices were set by the ratio of gold (with some fractional reserve inflation) and the additional backing allowed base monetary inflation. The idea was that the money wasn’t truly fiat because it was backed by a limited good. Problem was that it still caused asset price rises in other goods that were loaned against, a stock market bubble, etc. Plus when the rise in prices slowed down (like today) there was enormous pressure to keep the party going (like today). In response the French kept on adding new backing assets, so in fact there really wasn’t any limitation.

I highly recommend to anyone that they read this short 66 page book and see the parallels with today. Our current situation is a little different in that our monetary bubble from Clinton to today was mostly built on fractional reserve type leverage of various sorts. That leverage is unwinding. The danger is that our currency is truly fiat and our government may decide to switch to fiat inflation to keep the party going. In fact, I’m afraid their hand is politically forced.

money

Brian,

Backing for money is a total fallacy. It serves one purpose, and one purpose only, and that is to reduce and control the possibility and the profitability of adding to the supply of money.

If you had the need for money for a large cash purchase and you had only liquid government securities, it might take a little effort the first time, but after that it seems unlikely that you would need to be in possession of the cash for more than a few minutes. And your seller will likely have re-invested the cash in a few minutes more, if that long.

Ultimately goods and services are exchanged for goods and services, with the process very much lubricated by money. But the demand for money is a demand to hold as insurance for when a payment means that is both universally accepted and immediate is necessary.

Regards, Don

Demand for Money Includes Cash Holdings for Large Purchases

Backing for money is a total fallacy. It serves one purpose, and one purpose only, and that is to reduce and control the possibility and the profitability of adding to the supply of money.

Yes, I agree and haven't said otherwise. That doesn't mean people don't try to operate on that principle. Fiat money being one example. Fractional reserve banking another.

If you had the need for money for a large cash purchase and you had only liquid government securities, it might take a little effort the first time, but after that it seems unlikely that you would need to be in possession of the cash for more than a few minutes. And your seller will likely have re-invested the cash in a few minutes more, if that long.

Doesn't prove a thing. Cash is accumulated for large purchases. Especially in a commodity money system. It serves that purpose even though one can do things otherwise. It serves that purpose without the transaction costs of opening a trading account, trading securities, exposing oneself to the risk of government default, etc.

Cash holdings serves the purpose just fine, and is necessary if my only intent is to make a large purchase and not expose myself to investment risks, and transaction costs.


"Ultimately goods and services are exchanged for goods and services, with the process very much lubricated by money."

Let's just treat services as consumption goods, and refer to "goods and services" as goods.

I disagree vehemently with this position in this sentence. That describes a web site used for arranging barter trades, not money. Moneys use of a medium of exchange cannot be separated from its use as a store of value. To the extent that money is not a store of value it becomes less useful as a medium of exchange.

In the extreme a money that does not hold value, like the Zimbabwe currency, is NOT a medium of exchange. Lacking a true medium of exchange the economy collapses.

Money is not merely about exchanging goods for goods. Money acts as a time mediator (store of value). You trade goods for money, hold the money until the next separate transaction, then you trade some of that money (or all, or plus some more money) for other goods, or you die and leave it to your heirs. The center portion of the transaction is why it is important that money hold its value over time.

"But the demand for money is a demand to hold as insurance for when a payment means that is both universally accepted and immediate is necessary."

You just got done claiming that one doesn't need to hold cash for payment. According to you we can all just keep our money as assets and convert for a nanosecond over to cash before settling our bills. You made no claims about having to pre-plan the selling of the liquid government securities. Happens in a minute according to you.

I say that the demand for cash includes the demands made by those who wish to accumulate cash for large payments while avoiding transaction costs and the risks associated with contracts, investment instruments, and other problems with non-money assets. That demand can fluctuate, can be effected by law, etc.

money

Brian,

I don't think our disagreements are fundamental, but are a matter of interpretation. Any money that I hold falls into one of two categories.

First, to the extent that I don't want to not have sufficient money when I need it for unpredictable expenses and bargains, for which only actual money may be accepted on the spot, I must hold a cash balance, routinely replenishing it when income becomes available, or when required at other times. The size of the cash balance is a matter of trial and error. Too small a cash balance and my convenience store purchases deplete it before my next income event. Too large a cash balance and I am sacrificing either consumption or investment, or both. BTW, this process automatically adjusts for purchasing power changes. You don't need to predict the future rate of price inflation, you just increase your cash balance if you find it doesn't stretch between paydays or equivalents.

Secondly, I hold cash targeted at specific future purchases if the available short term investments are not worth the bother or have high transaction costs. For example, I may hold my rent in cash between an income event and the due date. It might be 1 day or it might be 30 days. If it weren't for the averaging of large numbers, a swing one way or the other would affect the unit exchange value of money because of the effect on the demand to hold money. The same thing is true for changes in wage payment intervals, with longer intervals tending to increase the demand for money to hold.

Regards, Don

Money scarce?

Every time I use my credit card I spend money into existence. Before the transaction the money wasn't on the books. After the transaction, there it was. Amex recently raised my credit limit. I didn't ask for it.

Spending Money Into Existence

Actually AmEx has the money. They are just letting you borrow it. If they didn't have the money then they couldn't pay the store on your behalf.

Uncertainty

Doesn't prove a thing. Cash is accumulated for large purchases. Especially in a commodity money system. It serves that purpose even though one can do things otherwise. It serves that purpose without the transaction costs of opening a trading account, trading securities, exposing oneself to the risk of government default, etc.

Cash holdings serves the purpose just fine, and is necessary if my only intent is to make a large purchase and not expose myself to investment risks, and transaction costs.

But in this case cash is being used to deal with uncertainty. You even mention it explicitly - you accumulate cash to avoid investment risks.

This was Don's claim:

Money is only needed because of future uncertainty.

While I'm not certain Don's claim is right, I don't think the above is a genuine counterexample.

To expand on how saving for a large purchase deals with uncertainty: if you're accumulating cash for a large purchase, why not simply pay a little bit at a time (as in layaway)? You might even get a slight discount that way (because you're paying earlier). Think about it and immediately uncertainty appears as a major factor. If do layaway, then you don't have the cash in hand in case you change your mind or have an emergency need for the money. And you are also forced to trust the seller a great deal - that he will honor his obligation weeks or months after you started paying. These are problems of uncertainty.

Risk not included in the definition of uncertainty provided

"But in this case cash is being used to deal with uncertainty. You even mention it explicitly - you accumulate cash to avoid investment risks."

Investment risk wasn't part Don's definition of uncertainty. He made it clear that his uncertainty was totally eliminated "If you knew precisely what you would purchase and exactly when". Investment risk cannot be eliminate in this way. So I was under the impression that he was talking about future purchases including unexpected expenses like tow truck drivers.

He did not state that this uncertainty would be eliminated by being able to spot good investments, trustworthy stock brokers, trustworthy governments, and the like.

When I was talking about large purchases I meant ones that were greater than could be handled by a single paycheck. I wasn't even thinking of buying a house.

My list of "other reasons" was not meant to be self exclusive and there is overlap. I listed transaction costs in 2), but it is part of 1) and 3) also.

I'll grant that number 5) probably was already covered by his example but listed it because his sentence, "If you knew precisely what you would purchase and exactly when ..." contained the personal "you" and bargains are less predictable from a personal standpoint. If he meant to include that case I'll concede 5).