Wealth versus cash

Going through the same quote as Jonathan did 6 days ago.

If we (hypothetically) decide to eliminate takeout from our menu and eat tuna sandwiches instead, we are saving money. But the restaurant loses it. By foregoing spending, we are pulling money out of the economy. This is the insight behind the liquidity trap--if everyone tries to hoard money by selling more goods and services while buying fewer, the total demand for goods and services will drop, and we will make ourselves worse off.

Elementary microeconomic treatment, applied to money.

The above-described thriftiness can be analyzed in terms of supply and demand - specifically, supply of and demand for money. If people start trying to hoard money, they are revealing that their demand for money has increased. Since the quantity of money is fixed (the supply curve is vertical at the quantity), an increase in demand increases the purchasing power of money.

It's possible for everyone simultaneously to save more money than they were saving before, measured in purchasing power. While the average money held remains constant provided a constant population, the average value of money held can go up through an increase in its purchasing power. An attempt by one person to hoard purchasing power for a rainy day causes the purchasing power of everyone else's money to go up slightly. If everyone wants to hoard more purchasing power, they all can.

This continues until the value of money hits the intersection of supply and demand, which is a new equilibrium.

So:

If we (hypothetically) decide to eliminate takeout from our menu and eat tuna sandwiches instead, we are saving money.

Assuming this money is not spent on something else, or invested, but is rather kept in our pocket for a rainy day, then we are demonstrating that our demand for money has increased.

But the restaurant loses it. By foregoing spending, we are pulling money out of the economy.

We are forcing the restaurant to work harder for the money - to sell us more for less money. We are increasing the purchasing power of money.

This is the insight behind the liquidity trap--if everyone tries to hoard money by selling more goods and services while buying fewer, the total demand for goods and services will drop,

An increase in demand for money leads to deflation. This does not go on forever but stops at the new equilibrium defined by the intersection of the new demand curve with the vertical supply curve.

and we will make ourselves worse off.

This has not been demonstrated.

Here is a reason deflation is good: We hold money because of uncertainty about the future. After all, if we knew exactly what we were going to want at all times in the future, we could immediately purchase all those things, spending all our money immediately in exchange for future goods. We are prevented from doing this by uncertainty about the future.

When uncertainty (e.g. uncertainty created by government activity) about the future increases, then it is a good idea to have more money in our pocket for dealing with the increased uncertainty. The quantity of money is fixed, but what we really need is increased purchasing power, and deflation gives us that despite the fixed quantity of money.

This is extremely serious. Running out of purchasing power can be extremely unpleasant, even unhealthy, even deadly. The more uncertainty there is, the more purchasing power we need in order to minimize the chance of running out of it, thus minimizing the chance of an unpleasant, unhealthy, or even deadly event in our lives.

Government programs which have the effect of frustrating our attempts to hoard purchasing power are playing a dangerous and deadly game with our lives.

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Yes. it's also useful to see

Yes.

it's also useful to see cash hoarding as an implicit loan to money holders. Let's say I hoard cash for 5 years. At first, I increase the purchasing power of the consumers, because I am not competing against them to buy goods available on the market. After 5 year, I start competing again which raises the price of goods.

By hoarding money, I allowed money holders to consume more now in exchange for consuming less later. This has the same effect as a loan.

People who claim hoarding is bad and lending is good need to explain how they differ.

balance sheet

The essay is important for reminding us that a balance sheet has two sides and they are always in balance. When we are told that "drunk drivers cost . . . " or "cancer costs . . . " that's only one side of the balance sheet. Cancer and drunk drivers generate good incomes for many people. "It's an ill wind that blows no good."

If you count in money, then

If you count in money, then it's trivially true, but money and wealth are different beasts. Cancer is not neutral, it's a net cost.