What are you doing here?
Its Thanksgiving Day!
Shouldn’t you be downstairs with your families?
Man, what kind of a data junkie are you?
I know what you need — you want the good stuff, don’t you?
OK, I got your fix of econo-junk right here.
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Yield Curve Inversion and Real Interest Rates
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Oh, thats the ticket. . . . Hmmmm.
Here’s another hit:
Money Supply Measures:
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How’s that baby? Does that scratch your itch?
Hmmm, good, isn’t?
Enjoy the econohigh . . .
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Source
Monetary Trends
Federal Reserve Bank of St. Louis
DECEMBER 2006
http://research.stlouisfed.org/publications/mt/20061201/mtpub.pdf
Thanks Barry, as a Canadian I was getting the shakes…
Yeah, hit me baby… ah, now I’m ready for some turkey. :-)
Thank you for taking time out from the festivities for the hit.
Okay, you got us!
…but it’s like bein’ called ‘Skinny’ by an anorexic.
http://barbadosfreepress.wordpress.com/files/2006/05/alfred_e_neuman.jpg
Well, at least I’m in good company! What’s a Happy Turkey day w/o food for thought.
Okay, ml… unless you’re too tryp-to-phan-ized to ponder philosophy:
What’s the real core objective of all economic endeavor?
Man, those graphs felt good! That M3 was very stimulating towards the end.
I’ve got to smoke a cig and take a little nap.
I ask again: Is it possible to spend M3 without it becoming M1 or 2?
On the other hand, is it possible to create ~3 years of negative real interest rates–as the FED has done– without distorting the hell out of your economy?
Algernon,
In my personal opinion M3 can never be spent in the conventional sense. But, furthermore, I don’t think M1, M2 or M3 are perfect substitutes for my own personal definition of liquidity.
My definitions of liquidity are for elements of money not measurable by government because they involve the concept of ‘perception.’
However, what I’ll for now agree to define as M3 can be c-o-n-s-u-m-e-d without it having the slighest effect on what people consider to be their own personal ‘perceived liquidity’ that is more perfectly associated with M1 and M2.
The oversight of this is the great failing of m-o-n-e-t-a-r-i-s-m in my opinion.
As to your second question, the domestic U.S. economy came ever so close during the period you suggest to experiencing a ‘liquidity trap,’ and in domestic cap ex it probably more-or-less exists now.
I’ll be back with more on this within a day or so, so stay tuned cause our fearless leader will have the hots for new topics and will ratchet us to the Big Pic hinterlands.
I meant more to say: the ‘overlooking’ rather than oversight.
eclectic,
I wish I understood you
As long as you’re bored, might as well check out the latest chapter on Silicon Valley housing at:
http://www.viewfromsiliconvalley.com/id281.html
Thanks!
I ask again: Is it possible to spend M3 without it becoming M1 or 2?
The simple answer is yes. It may be difficult but it is far from impossible
The chart below shows that M3 is obviously greater than M2 and M1 which means it grows at a faster pace because it is further down the money multiplier leverage chain
long term chart m1, m2, m3
Based on what is counted in M3, clearly when M3 is growing it is the big boys that are getting richer and/or playing games in the money market at the expense of everybody else. That is apparently the same coincident reason the GOP got the boot:
# M2: M1 + most savings accounts, money market accounts, and certificate of deposit accounts (CDs) of under $100,000.
# M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.
maybe this all adds up after all
Algernon,
I have some atypical observations regarding the money supply that come from years of contemplating just what money is; where it goes, what it does and how people react to change it.
What I’ll present are my own personal concepts:
—
M1, M2 and M3 do not measure perceived liquidity (soon to be defined), and though they are usually directly proportional to what the individual considers it to be, they are never exactly the same and at times differ from it by progressively widening margins.
Conventional econometric measures of the money supply are useful and accurate within certain coefficients of confidence, in nominal terms, but the individual components they are aggregated from are mere abstractions in the minds of market participants as they relate to their possessions of money.
Subjective Liquidity Classification:
In economic literature the term “nominal” is almost exclusively used to denote the quantitative measure of an entity (for example: money, prices, interest rates, etc.) which is to be converted to a subsequent real quantity by an examination of the factors acting on the nominal measure over time, or in the real time present via some adjustment process.
It that sense a nominal interest rate of 5% per annum, given an inflation rate of 2% per annum, yields a real interest rate of 3% per annum. Therefore $100 invested for one year would produce a nominal sum of $105 and a real sum of $103 in terms of converted purchasing power (all other factors being ignored).
For my remaining purposes the word “nominal,” particularly with reference to liquidity, will be used largely in one way and without regard to the traditionally recognized factors that convert various nominal economic sums to real sums quantitatively. My use of the word will generally refer to the real time present value of traditionally measured money values that are subsequently acted upon by only the factor of human perception.
Consequently, nominal liquidity is the sum total value of all traditionally observed monetary equivalents of its measure, and perceived liquidity is then the sum total real value of nominal liquidity after being acted upon by perception and also augmented by other factors. These concepts will be developed in greater detail with the following discussion of Subjective Liquidity Classification.
In order to understand Subjective Liquidity Classification, it will be necessary to first accept these principles; that the value of perceived liquidity is not solely a summation of its coexisting nominal measure, but a measure of the value of the goods and services which perceived liquidity, acting as a ‘coercive or compelling force’ [*my definition of ‘money’], modulates the exchange thereof; and that mechanical or intellectual labor is in all cases the core vehicle of perceived liquidity’s execution.
If we are to rupture the conventional understanding of money, then new definitions are in order. Consider the individual; he divides his money into only two components, perceived liquidity and deferred liquidity.
His total stock of money, Mt, is thus defined as:
Mt = Mpl + Md
Perceived Liquidity is the sum total value of the entire capacity an individual has for executing transactions in order to obtain goods and services in real time present value. That entire capacity also includes the value of goods and services he may provide for himself or provide to others in exchange for nominal money, for bartered credits or directly for other goods and services.
Deferred liquidity is the sum total value of everything that would have been classifiable as perceived liquidity, had its value not required some adjustment for subjectively converting it to perceived liquidity. These adjustments are necessary because there is some cost associated with the conversion, or because there is some requirement to mark the value of the deferred liquidity asset to market in real time present value.
It is possibly useful to observe that perceived liquidity is an ultra-liquid resource and deferred liquidity is illiquid, although the individual does not possess any truly illiquid assets because he does not conceptualize them in this way. Every monetary resource is held merely in the form of perceived liquidity, or as deferred liquidity with some associated level of difficulty required for conversion. Moreover, the individual holds these two components categorized subjectively, and though they may resemble econometric measures of the money stock they are not the same.
Perceived liquidity consists of: the perceived value of nominal cash either on hand or immediately receivable; the perceived value of liquid nominal credit balances on deposit at banks or other financial institutions; bartered credits immediately receivable; commodities (including food, precious metals and gem stones) immediately exchangeable or consumable; finished goods immediately exchangeable or useable; and the immediately exchangeable or consumable value of the intellectual or mechanical labor the individual may produce himself. There are no other components of perceived liquidity, since every monetary transaction ever completed either by primal or modern man has resulted from the exchange of one or more of these forms of perceived liquidity, and all economic exchanges occur in terms of perceived liquidity.
Deferred liquidity consists of: nominal money either employed at interest or invested at equity [*derivative contracts certainly exist here] but with barriers to its withdrawal (including for example: common stock, bonds, saving or time deposits, and the cash value of life insurance or annuities); deferred accounts receivable by purpose, anticipation or circumstance (for example: an inheritance, a retirement account, tax credits, deferred compensation or deferred bartered credits); unfinished goods or workman’s materials which would require mark-to-market value adjustments; and assets employed for intended permanent or semi-permanent use via some type of amortization or depreciation (for example: real property, such as land, buildings, mines, ponds, timber, livestock and other similar assets). There are no other broadly defined components of deferred liquidity.
From these concepts I derived an hypothesis that I’ll present here:
The Perceived Liquidity Substitution Hypothesis:
(I) The sum total of all money in an economy is held in only two forms; (i) perceived liquidity, and (ii) deferred liquidity, and market participants hold these forms subjectively and interchangeably.
(II) Perceived liquidity is always greater than conventionally held nominal liquidity measured at the same time, regardless of economic state.
(III) Perceived liquidity is at the steady state equal to nominal liquidity multiplied times a hypothetical terminal low coefficient of perceived liquidity that is always greater than 1 (one).
(IV) Perceived liquidity is at all times substitutable for nominal liquidity transactional demand at a rate of substitution that is always greater than zero, and the rate of substitution varies in direct proportion to variations in the coefficient of perceived liquidity.
(V) Upon an upset to the steady state the coefficient of perceived liquidity will increase to some higher but not unlimited value, and the increase will be proportional to the severity and speed of the upset.
(VI) An increased coefficient of perceived liquidity can not resume its former steady state value until economic conditions resume the steady state.
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Thus, in regards to your initial question: I contend that, although I obviously don’t accept that M1, M2 or M3 can accurately measure the levels of perceived money in an economy, if we generally relate what you conceive of being M3 to my conception described as ‘Deferred Liquidity,’ then I further contend that changes in deferred liquidity have no necessary direct effect on the level of ‘perceived liquidity’ (were that it could be accurately measured at any given time) experienced by the participants of an economy.
tell that to everyone thats was short the market in spring of 2003, and summer of 2006 during which time “coincidentally” the gov been buying repo s hand over fist.
Algernon,
Depends what you mean by “Spend”. A lot of people attribute the increase in M3 to repurchase agreements (Repos) entered into by Financial Institutions and the Fed – and now the Treasury (who somewhat mysteriously entered the game just as the Fed stopped publishing M3). Repos allow banks to increase their reserves and therefore lend more money.
Now, if the banks are lending to mortgage borrowers, then in my view, the increased activity should show up in M1 or M2 as those borrowers gain access to the liquidity and deposit it in their accounts. If the banks are lending to institutional investors who use the money for various leveraged investments, then the increase activity may not show up in other measures of the money supply.
All very simplified. Hope this makes sense.
Everyone – feel free to comment if you feel this is incorrect.
THNAKNS FOR THE M3 MAN….! THAT WAS SWEEEEET..!
Econolicioua
Thanks for the several detailed answers. Insurance guy, wouldn’t the M3 component lent to institutional investors show up in their bank accounts(ie, M1 or 2) or the bank accounts of those whom the institutinal investors pay as they spend?
Economists claim to find no statistical relationship between M3 & anything in the ‘real economy’.
I’m not saying nothing is going on with M3 growth. My initial thought was that it represented dollar recycling by Asian & petro-state central banks. But it seems to me M2 should capture this liquidity as it is spent.
We are in an interesting situation in that the Fed tightened on the short end for ~2 years & yet we have plenty of liquidity by anecdotal report. The most obvious reason to me is the action of Asians & petro-staters.
FWIW, a Commenter on the WSJ Marketbeat blog offered this observation about M3 growth :
“The M3 numbers are somewhat inflated due to the Fed pause and the corresponding asset shift into institutional money market funds (which are in M3) and out of commercial paper and other direct money market instruments (which aren’t). Money had been in CP and repo (staying short) as the Fed hiked, but has been returning to money funds. That being said, it’s still clear that the money supply is growing robustly. . . . “
http://blogs.wsj.com/marketbeat/2006/11/21/money-thats-what-i-want/#comments
Algernon,
Mish has a very good post on Fed tightening and liquidity today. See attached link:
http://globaleconomicanalysis.blogspot.com/2006/11/open-market-operations-interest-rates.html
As far as whether loans to institutional investors or hedge funds show up in bank accounts somewhere, I’m by no means an expert, but I think that if the loan is in the form of a derivative transaction or in the form of securities lending for example, M2 would miss it.
Banks have large credit exposures through their derivative market making activities. These transactions need to be backed by reserves. When a manufacturer buys an FX derivative to hedge foreign revenues, no money change hands (except for the premium the manufacturer pays to the bank), but the bank now has a credit exposure to the manufacturer. More repos mean more ability to conduct these types of “lending” activities.
That’s my understanding anyway.
Sorry all, just re-reading my post, my example doesn’t work. The manufacturer would have a credit exposure to the bank, not vice versa. Say however, the bank goes and pays a hedge fund to take on the FX risk, no money would change hands except for the premium the bank paid the hedge fund, but a credit exposure would now exist.
Anyway, the point is that “lending” doesn’t have to occur in the traditional sense. Certain credit exposures don’t involve cash changing hands, but the activities still need to be backed by reserves. More reserves means a greater ability to conduct these activities.
IMO that is how M3 can increase without corresponding increases in M2/M1.
The difference between M1/M2 and M3 is largely in the mind.
…You can’t write a check for mind.
I don’t doubt the notion that M3 levels may d-i-s-t-o-r-t the perception of a market participant’s evaluation of his own liquidity, but it doesn’t change it… until such time that the market participant needs additional liquidity to meet the transactional demands of living or operating a business.
As I’ve written in earlier posts, but only in terms of my own definitions of perceived liquidity and deferred liquidity, the two forms of money are really not measurable by econometrics and are held subjectively in the minds of market participants.
Market value components of M3 (my: ‘deferred liquidity’) can fluctuate even substantially, even to “zero” without necessarily altering a market participant’s evaluation of his own ‘perceived liquidity.’
Ponder this for a while and I will provide a thought experiment to demonstrate it for you.
As I’ve said here before, the overlooking of this phenomenon is the great failure of monetarism.
Part I of continued comments.
Before continuing to read these comments, please refer to my earlier posting regarding:
“The Perceived Liquidity Substitution Hypothesis”
…and understand these are my personal theoretical ponderings regarding the failure of monetarism to understand the psychological basis for ‘money,’ particularly during difficult economic times. It is unconventional thought and you will have never been exposed to these concepts except here in this blog.
—
Assume an individual market participant in an economic steady state. Suppose he has $25,000 in pocket cash and checking deposits, $50,000 in equity in his house and $50,000 in market value of other investments. According to the hypothesis presented, if we calculate his nominal liquidity to be $25,000, then in the steady state he will consider his perceived liquidity to be $25,000 times some terminal low and stable coefficient of perceived liquidity.
If we arbitrarily assign a value to the coefficient of, say, 1.15, then he considers his perceived liquidity to be $28,750 ($25,000 times 1.15). According to the hypothesis perceived liquidity can never just equal or be less than nominal liquidity measured at the same time. The reason for this is because the individual can always at least work for his own benefit or work for others in exchange for nominal money or bartered credits payable in goods or services, and there are other ways he may also augment perceived liquidity.
Were the steady state to experience an upset, the hypothesis suggests that the coefficient will increase, so that he will reevaluate his perceived liquidity to be greater than $28,750. Moreover, the coefficient will increase within some finite limitation in direct proportion to the magnitude and speed of the upset. Should the coefficient be defined as having increased to 1.25 in this example, then his newly observed perceived liquidity would rise to $31,250.
It should be immediately obvious therefore that perceived liquidity may increase upon an upset to the steady state, by a larger amount than a corresponding decrease of conventionally measured nominal liquidity occurring at the same time. Whatever amount of nominal liquidity remains after the upset (for example: if this individual spent or lost part of his $25,000), newly observed perceived liquidity will still be larger than nominal liquidity measured at the same time, and larger by the same coefficient that results from the upset.
Suppose in this example that nominal liquidity dropped from $25,000 to $23,000 due to expenditure or loss. Then suppose the severity of the upset worsened and that the resulting coefficient of perceived liquidity increased from 1.25 to 1.40, then the newly observed perceived liquidity will be $23,000 times 1.40, or $32,200.
The entire sequence of examples shows that even though nominal liquidity may decline substantially (in this case by 8%) during the progression of severity of an upset, it is yet possible for perceived liquidity to rise above its initial evaluation. At the steady state this had already exceeded nominal liquidity in this case by 15%, or by $3,750. Moreover, perceived liquidity rose from the initial $28,750 to the subsequently observed $32,200, or by $3,450 (12%), even though nominal liquidity declined by $2,000 at the same time, all as a result of the coefficient rising from the initial steady state observation of 1.15, through 1.25 and upward still as the severity worsened, to 1.40.
Suppose we elect to ignore the hypothesis and the concept of perceived liquidity, and then incorporate a most liberal econometric measure for determining the total aggregate nominal money supply, by including the market value of all investment in the total money of an economy. Then ordinarily and by definition a decline in aggregate investment values (assuming no changes in other nominal measures) causes a decline in the aggregate nominal money supply. Such a decline associated with unemployment and a severe recession would further reinforce Monetarist claims that the decline in the money supply is what causes these outcomes, and that failing to inject monetary liquidity in a timely manner would also result in a failed recovery.
But the hypothesis and its prediction of an increase in perceived liquidity can not be ignored. Even if an individual suffers a decline in the nominal market value of his investments, it will not necessarily correspond with a simultaneous reduction in his perceived liquidity, because investments are a component of deferred liquidity instead. The value of composite Md can never decrease Mpl, but can only be additive to it by subjective conversion. The only exception would be if and when the market participant decided to subjectively convert a portion of Mpl back to Md, and that mental transaction is not likely to occur until after a stabilization of the conditions that resulted from the upset.
Consider this illustration. Assume you own an uninsured house in the valley below as you stand on the mountaintop above it among a crowd of bidders for your house. A fire is still miles away from it, but is moving very slowly toward it from the far distant end of the valley. At present the probability of your house being consumed might be relatively low and the bid relatively high. As the threat of the fire consuming your house increases, the bid will drop. At each lower bid you still have the opportunity to accept the bid, whatever it is, and settle in liquid funds, or you may barter settlement and receive it in another form.
In any event, you might convert one or the other of these values to perceived liquidity even without having to conduct an absolute sales transaction. If you do make the conversion, even if it is only a mental marking-to-market of the house’s perceived value at that time, then not until the risk of fire to your house is eliminated will you elect to reverse the process and again place an assumed deferred liquidity value in the house.
This does not mean you will be indifferent to the circumstances of risk to the house, but only that, given you otherwise have sufficient perceived liquidity to transact your current level of demand for goods and services, the decision regarding the house is unrelated to your perceived liquidity.
It is the same with all other investments as well.
Market participants will absorb decreasing investment values without them affecting perceived liquidity, until the decrease is sufficient to no longer allow them to make merely subjective conversions of deferred liquidity in order to augment perceived liquidity. At that point transactional demand will either be at equilibrium with, or be just marginally more than sated by, current levels of perceived liquidity. But any marginal increases in transactional demand from that point will require forced depletion of perceived liquidity because no additional subjective conversions of deferred liquidity are available. When perceived liquidity is finally forced low enough to create shortfalls in goods and services, any remaining deferred liquidity conversions will also be forced.
If perceived liquidity had already otherwise declined too low to support your transactional demand for goods and services (for example; if you and your family are at risk of starvation) without converting the house’s value to perceived liquidity, then you would already have converted it, fire or no fire.
If perceived liquidity happened to drop to that point now while you are observing the bids, you will accept a bid and convert the value to perceived liquidity, fire or no fire.
If perceived liquidity could not independently drop low enough as you observe the bids, you might or might not accept a bid, but not because of perceived liquidity. You would make the decision for other reasons.
Nothing stated so far indicates that there must be a point reached where deferred liquidity will have necessarily dropped to zero. Arriving at the point where subjective conversion has ceased does not require a total nominal loss of investments, but a decline in value to a point at which, for whatever reason known only to the market participant, he will no longer use deferred liquidity to subjectively conduct the augmentation of perceived liquidity. His investments in deferred liquidity might drop to zero long before his perceived liquidity drops low enough to force the conversion of any remaining deferred liquidity, should there indeed be any left to convert. Conversely, the market participant may choose to operate on a level of perceived liquidity far below his typical economic station in life, even at a level approaching poverty, and still not augment perceived liquidity with deferred liquidity conversions.
Deferred liquidity might first reach zero and therefore mandate the cessation of subjective conversion, but reaching zero is not an absolute requirement. In the prior example of the house in the valley, fire may literally be casting hot embers onto the roof, and yet the owner may still prefer to resist accepting any bid, even an illogically high bid, and might continue to hold the asset value of the house classified as deferred liquidity. He owes nobody an explanation of why. He himself may not even know why.
Part II of continued comments
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These observations are very critical to the understanding of why expansive monetary policy will fail to recover depressed economies after an upset. It is because not until perceived liquidity is forced low enough, to some hypothetical terminal low, so that market participants will no longer substitute it for what would be the normally observed nominal liquidity requirements for that exact level of demand, market participants will incorporate additional inputs of nominal liquidity extracted from monetary expansion and simply reevaluate them as augmenting elements of perceived liquidity. They will not use the nominal liquidity inputs to pursue economic enterprise. This of course has very real consequences for the economy because the intended effect of monetary expansion will be subverted.
The rate of substitution of nominal liquidity by perceived liquidity may have a practical zero, but it can never reach absolute zero except in a purely philosophical and theoretical realm. However, should the reader be interested in once more pondering that realm with me; a rate of substitution of absolute zero would be reached when human productivity reached infinity, but only because nominal liquidity would cease to have value at that point and its substitution by perceived liquidity would have become permanent. Perceived liquidity would exist then in infinity as the vested totals of abstracted wealth. There are only two permanent components of abstracted wealth; pure intellect and the sum total of all inherent commodities.
When aggregate demand stabilizes after an upset and begins to increase once more, it will subsequently rise to a level at which perceived liquidity will no longer provide transactional capacity for satisfying the increasing demand. At this point nominal liquidity will resume its modulation of nominal GDP, and the hypothesized coefficient of my illustration will decline and begin to approach its former terminal low steady state value.
Consider this example of how perceived liquidity is used. Assume you are a market participant and want to increase your consumption of tomatoes. If you alone both purchase the same quantity of tomatoes as before and also grow your own tomatoes to meet your increased demand, you will have used a component of perceived liquidity as a substitution for the use of the nominal liquidity needed to purchase the additional tomatoes desired.
Conversely, you may recognize a reduction in the available supply of tomatoes first and then, electing to maintain your consumption level without purchasing more tomatoes at higher prices, you may decide to grow tomatoes. This can partially or completely offset the effect on you personally that the market shortage of tomatoes has caused.
As one extrapolates the tomato illustration into a realization of the complexity of goods and services that are both supplied and demanded in an economy, it should become clear that market participants have many opportunities to substitute perceived liquidity for nominal liquidity transactions. For example, market participants may; purchase more tomatoes, but produce more clothing for themselves; produce more lawn services for themselves, but purchase more lodging and entertainment; paint their own houses, but purchase more milk. The possibilities for these substitutions are almost endless.
Two functions; (i) the substitution of perceived liquidity for nominal liquidity transactional demand, and (ii) the substitution of one’s own self-produced goods and services for augmenting supply, are collectively very important, because they are the elements that modify nominal liquidity. Sometimes this creates a sudden and substantial excess of perceived liquidity for substitution, severely limiting the capacity for new inputs of nominal liquidity (monetary expansion) to bring about a return to steady state equilibrium.
At these times either perceived liquidity must decline or demand must increase (on some relative basis) until the excess transactional capacity of perceived liquidity is reduced to a point that begins to cause a shortfall in nominal liquidity. At this point the economy will again become responsive to monetary policy.
The string will have been transformed into a rod.
The reason for these described phenomena is because in a crisis individuals focus inwardly. They become more resourceful; they will call in bartered credits, consume less, economize, develop and hone skills, and they will labor for themselves rather than hiring labor and paying wages. The many ways this happens all cause a magnifying effect on the perceived value of nominal liquidity. Too, perceived liquidity is also augmented by the addition of elements that, as I have already described, are not measurable by government.
Consider the following illustration. Assume an individual contemplates $20 in nominal fiat currency over two consecutive days. Given both that the time value of money is ignored and that the price and availability of goods and services are identical from one day to the next, then, if asked how he perceived the value of the $20 over the two days in question, how do you suppose he would answer? I suggest he must, by any reasonable application of logic, perceive the values on both days to be exactly the same.
But, let us add another assumption without altering the prior assumptions. Assume that after the first day’s evaluation he learns that he has lost his job or that there has been some other economic tumult in his life or in his consciousness. Now, do you suppose he will still consider the perceived value to be the same over the two days? In my opinion it would be simply an absurdity to think he would. No, he will modify the nominal value of the $20 to some higher perceived value after learning the news. That increased modulation is one of the ways he arrives at an increased coefficient of perceived liquidity.
The other way is that, on both days, he subconsciously perceives that he may substitute intellectual or physical labor in order to augment the transactional nominal liquidity demand of the $20. On both days this causes his perception of the value to be greater than $20, but on the second day he perceives it to be even higher than on the first. Because of that higher perception (due to an economic upset to his personal steady state), his level of perceived liquidity is raised progressively higher in amount than the unchanged nominal sum of $20 could ever indicate.
Consequently, he will view marginal additions of nominal liquidity quite differently than if he had not experienced the phenomenon of an increase in perceived liquidity. The aggregated effect of this phenomenon is what disturbs the capacity of nominal monetary expansion to affect a return to equilibrium. In the enigma of macroeconomics this may be analogous to the singularity observed in theoretical physics.
Any critical reader may at this point assert that the coefficient in question is simply an alternative expression of velocity. My reply is that since, according to classical theory, MV = PQ, and therefore V = PQ/M, that no change in velocity could be demonstrated until an observance of sequential nominal money transactions is recorded, since a change in that ratio expresses a change in the velocity. And so a change in velocity would have to precede the upset to the steady state, if it were to have the same effect on the participant, rather than if the upset preceded the change in velocity, which, given there is a change in velocity after an upset, is the more likely course of cause and effect.
Saying this in one other way; even if velocity is assumed to have modulated a steady state, it could only have done so after an upset had already caused a modulation in perceived liquidity. Frankly, velocity might in this circumstance initially increase in nominally measurable terms after an upset, for a period, although it is likely to eventually decline.
The change in perceived liquidity will obviate central bank actions to expand the money supply, because aggregate perceived liquidity, relative to aggregate nominal liquidity measured at the same time, will have already risen and begun to absorb the nominal money expansion by being substituted for its transactional demand. Its transactional demand thus reduced by substitution, nominal money expansion will produce no corresponding linear modulation of economic output. This is much more critical when the nominal money supply has declined as a consequence of the upset, because that is when the central bank will recognize it and have the greatest intentions for expanding it.
The academic and policy implications of this should be staggeringly obvious. It would be relatively as though I have suggested that the sun rises in the west to suggest this phenomenon; that the element of conventional monetary policy thought to be most needed in a crisis is instead: sterile.
I was simply astounded at this realization, after having searched all of my life for an understanding of money. It answers questions that grew out of the sharing of abstractions with my father regarding the substance of money; what form money takes, and how it was used during the Great Depression era he grew up in.
Money has three conceptualizations for market participants. Whether they consciously understand them all or not is of little consequence because they are nevertheless bound to obey the principles of each. Macroeconomics has attempted to deal with two of these; money’s tangible and semi-abstract representational concepts, but it has not dealt with the third; its fully-abstract psychological concept.
Eclectic:
What I’ve understood from all this is that:
1) The “real M3” cannot be truly accounted
2) Wealth is defined by he who deems it of value
3) Money can be translated as anything of value (which goes along with your argument that gold is just as strong a currency as the faith in the American dollar)
Correct me if I’m wrong. Also what exactly is an “upset” and a “coefficient”?
Enlighten me as usual, and Great Post!
my1,
Thanks for the kind word. It seems you’ve paid attention to a number of my thoughts expressed on this blog.
I’ll try to answer your questions and repeat some other information, but first some background on why I’ve developed these theories and the hypothesis I presented.
When I was 5 (I’m soon 56) my father, who’d been in the Army Air Corp during WWII, had a small metal box he kept with memorabilia in it from his military travels. He’d show me these items and tell me stories about where they came from.
His favorite items were the various types of ‘money’ he’d collected from almost everywhere he’d been stationed. It wasn’t the materialistic nature of money that made him so interested in the types he’d collected; it was the philosophical concept of “what money is” that was so fascinating to him. There were examples of paper and coin currencies from possibly a half-dozen countries, but the thing he was most fascinated with was a collection of a few marine shells that were used as money by natives on a South Pacific island near a base he’d been on.
One of the types of marine shell was one about the size of a penny and had a peculiar brown eye-like formation that was slightly off-center. “It was used for money on that island,” he’d tell me. I was particularly puzzed by this when I made the connection that money was used for value exchanges, and if you could just pick up free eye-like shells on the beach, how could the shells have value equal to items you wanted to ‘purchase?’
Well, I know now that the particular eye-like shells were somewhat distinct from the much more common shells without that formation, and, too, all that type shell were much harder to find than to just stoop and shovel them into your pockets on the beach.
His fascination seemed to be about how the natives could derive value from the shells, but not so much as how our cultures could derive value from the western “currencies,” which he had no philosophical problem understanding. To him a U.S. dollar was big enough to use as a blanket at night.
However, I was 5 and all of it fascinated me. I couldn’t make the connection between feeding a nickel into a coke machine and enjoying the frosty coke that dropped out of the bottom (well, really you turned a crank and pulled it out back then!), and later I was fascinated by the thought that I could hand my 1st grade teacher a few coins for lunch money, but on some island far away, another student was possibly handing just eye-like marine shells to his.
What I’m saying is that I developed a profound philosophical questioning of money, all money — in every form whatsoever, western or otherwise — at a very early age and I strove all this time to reach an understanding of just what it is.
—
On your comments regarding what you assume I mean:
1) The “real M3” cannot be truly accounted
….Yes, I think that is correct, but remember that, officially, M3 is a composite that includes both M1 and M2. What I’m saying is that the part that makes it distinctly ‘M3’ is really something of an equivalent to my defined: ‘deferred liquidity,’ and, yes, total deferred liquidity, ‘Md,’ in an economy can not be measured by government.
2) Wealth is defined by he who deems it of value
….That sounds a lot like “Beauty is in the eye of the beholder,” which is not what I mean exactly. My definition of wealth is:
Wealth is a qualitative infinite; it is the status of continuously having sufficient coercive or compelling force to cause the execution of marginal labor to satisfy marginal demand.
So, what I mean is that ‘wealth’ is to a greater extent an ability to satisfy ‘demand’ than it is an ability to possess wealth in the conventional sense, or riches in the concept of most people. Warren Buffet just spent one hour with Liz Claman on CNBC giving you an example of what I just described as being ‘wealth’ under my definition.
3) Money can be translated as anything of value (which goes along with your argument that gold is just as strong a currency as the faith in the American dollar)
…You’ve put some words in my mouth that aren’t mine. Yes, anything of value that can be exchanged between participants can be considered as money, but it wouldn’t necessarily be a good national currency.
All I’ve said about gold is that it’s no longer useful as a national currency. It was, during most of mankind’s history, but there are many reasons now why a gold standard would be a disaster. Otherwise, gold may be a very good investment or a poor one over time. I have no opinion about that to share with you.
What exactly is an “upset” and a “coefficient”?
…An upset would be some event that triggers the increase I’ve described to be an increase in the positive coefficient that market participants apply to their nominal liquidity in order to step it up to ‘perceived liquidity.’ In other words; it’s the event that causes someone to view $10 in nominal currency today as being more valuable than the very same nominal $10 was perceived to be yesterday.
…If 1.X times nominal liquidity = perceived liquidity at a base economic ‘steady state’ level, then ‘X’ is my coefficient. I have to say that I don’t know what it is, but it is positive and can never be equal to zero or less than zero (can’t be negative) ; it fluctuates; it’s not unlimited; and it could only be discovered in a vast experimental study, and then only as an estimate.
Let me ask you: If you really applied yourself, how could you modify $100 in nominal currency value today, to have more than $100 of value to you tomorrow? If you said you couldn’t do it, you’d be fooling yourself. Anybody could, from Bill Gates right on down to a pauper. Their incentives may differ, but their capacity to do it is the same. That’s where the ‘X’ I’ve described comes from.
What would your own ‘X’ be in a steady state personal economy?…
What would it be if you lost your job?
Wouldn’t you view your money and reliance on yourself differently tomorrow if you had a personal ‘upset’ to your steady state today? Wouldn’t your ‘X’ increase?
Now, you’re getTinG tHe biG pICtuRe!… right?
my1,
There is no such thing as ‘faith’ being applied to any fiat currency, dollars or otherwise. I’ve coined the term: “Monetary Obedience” which I think better describes what you term as being faith.
Also, I meant earlier to say that Wealth was: a ‘qualitative abstraction’ rather than having said it was a qualitative infinite. It’s not that the two are really that different conceptually; it’s just that I’d defined it with different wording than I’ve used before and I want to be consistent.
I’m repeating a whole section on: money, productivity, inherent and non-inherent commodities, power, wealth, riches, labor… and other concepts of mine since this seems to be a good place to repeat them.
—
-Money is the coercive or compelling force that ordinarily facilitates cooperative exchanges of labor, goods or services in any combination. Power, in the sense of being a controlling influence, is a greatly dissimilar and more efficient force that is yet a further abstraction of money and drives money’s uncooperative exchanges.
-The conventional nominal money used in modern societies is for the most part fiat money, and it exists in its static condition entirely as a derived element of power. Fiat money therefore derives its value from its representation of power, not from some other representational value marked-to-market against other commodities that have real value independent of power. Gold, silver, corn and many other commodities used as money do not require power to have value, either real or monetary. Fiat money must be supported with power in order to have any monetary value. It can have no real intrinsic value beyond the mere pittance of its compositional material cost.
-All cooperative exchanges of labor, goods or services directly for other labor, goods or services, in which the totals of all values exchanged are netted to market participants without a physical distribution of conventional nominal money being made to any party, are bartered exchanges. Even though bartered exchanges are usually conducted conceptually in nominal money equivalents, they are conducted without using conventional nominal money as a physical representative intermediary of value.
To be sure, bartered exchanges are very likely the only exchanges in which one or more participants might be correctly led to conceptualize that labor, and not nominal money (merely labor’s surrogate), is the core basis of all economic exchange. Yet much as a multilingual person fluent in several languages might still prefer to think and dream in his parent tongue, it is possible that even direct bartering might occur without any participant to the exchange ever constructing this view of labor. The influence of nominal money, whether it is fiat money or real commodity money, may simply be too great a distraction. However, no complete understanding of money can ever occur without accepting the concept that all money exists as an abstraction of mechanical or intellectual labor.
Only cooperative bartered exchanges can be made exclusive of the element of power, but all uncooperative exchanges, bartered or not, necessarily must involve power. All economic exchanges that utilize fiat money impart to the value of the exchanges some proportional quantity of power that necessarily must be greater than zero. It is commonly assumed that every exchange of fiat money must involve some element of trust. This is an erroneous assumption. Placing trust in real commodity money (even if the commodity is an eye-like marine shell), though it fluctuates in marked-to-market value against other commodities, is rational; placing trust in fiat money is irrational, if only understood subconsciously. Trust is not the power element of fiat money.
-Instead, the power element is monetary obedience. This obedience exists as the point of equilibrium established between two needs; the very rational need to conduct all economic exchanges that only fiat monetary obedience can facilitate, versus the ordinary human philosophical need to nullify an irrational concept.
When the associated power of the issuing authority of fiat money is high, then monetary obedience tends to be high. If associated power declines slowly, monetary obedience will still tend to remain relatively high. But, if associated power drops low enough, then the need to nullify an irrational concept will increase until it rises from the subconscious to the conscious and begins to cause significant changes in the equilibrium of monetary obedience. The equilibrium can ultimately change sufficiently so that fiat money marginally ceases to exist and all cooperative and uncooperative exchanges shift marginally to barter.
-All the power elements of economic exchanges that are not derived from fiat monetary obedience are instead related to the mismatching of price and cost. This is true even when price and cost are politically represented as being matched, and still so if the mismatches are totally innocent and result from the ignorance of any, or every, participant involved. The reason for this is that every element of power involved in economic exchanges causes the imperfect allocation of economic resources, at least in some proportion that, even if expressed infinitesimally, still must necessarily be greater than zero. Every misallocation of economic resources hampers the natural progression of human productivity marginally toward philosophical infinity (to be explained later).
-Money and power are component expressions of the same philosophical entity. In this sense the relationship of money to power is analogous to the relationship of matter to energy. The force of money may be stored in any form of what we commonly accept as money currency, whether the currency is intrinsically valuable, such as with gold, silver and other commodities that are used as money, or whether the currency has near zero intrinsic value, as with fiat money.
Money may be stored in bartered credits (with or without notation) established by market participants as they conduct the active evaluations of the relative values of these credits. Bartered credits may result from the exchange of anything of value between market participants; often labor and certainly food and other commodities, although all other commodity values derive ultimately from the value of just one commodity, food.
-Labor is in all cases the ultimate currency of exchange since the coercive or compelling force of money is executed via labor. Productivity is a natural byproduct of the improving efficiency of labor that is derived from intellectual learning. Therefore labor may exist in either mechanical or intellectual form, but both forms are philosophical expressions of intellect. Requiring the use of intellect is not consumptive and can never reduce pure intellect. Pure intellect is a qualitative infinite; intellectual labor is simply the flowing of intellectual force that can be begun and stopped at will. Intellectual labor is to mechanical labor, in magnitude of relative effect, as power is to money.
-Wealth is a qualitative abstraction. It is the status of continuously possessing sufficient coercive or compelling force to cause the execution of marginal labor to satisfy marginal demand. Being rich is the status of possessing great relative quantities of assets denominated in nominal money value. It is necessarily a connotation of wealth, but only in real time present value. Having wealth is, however, not necessarily a connotation of being rich, because the status of having wealth may require very little, if any, nominal money value assets.
An island chieftain several hundred years ago may have been relatively as wealthy as the King of England was at the same time, and yet the chieftain’s wealth may have resided in the command of the labor and services of his subjects and little more, without his possessing riches equal to that of an ordinary London merchant.
Too, average individuals in modern society, without possessing great riches, are yet wealthier in real time present value than ancient kings were in their capacities to cause the execution of marginal labor to satisfy marginal demand, when those capacities are viewed in the present day.
If the reader doubts this, I invite the submission of an example of an ancient king who, though he may have commanded armies and possessed kingdoms and chambers piled high with gold, silver and precious jewels, could have realized the benefit of a heart bypass operation, or could have experienced the convenience of flight or the almost priceless utility of the Internet.
While it is true that each of these services would have had philosophically infinite costs for such a king, because they were obviously unavailable to him, that fact alone does not obviate the present day average individual’s possession of a greater capacity to afford them than the king had in his day. It is because human productivity is not a philosophical arbiter of the availability of goods and services in any specific time, but merely a real arbiter of cost… in real time present value.
-Here we discover the reason that misallocation of resources hampers the achievement of philosophical infinity in human productivity. It is because the real objective of all human economic endeavors is the reduction of costs marginally toward zero, even if this objective is only understood subconsciously. Mankind misconceptualizes this objective to be the marginal attainment of philosophically infinite riches via profiting from economic exchanges. However, profit is an erroneous philosophical conceptualization because it is necessarily the definition of mismatched value and can not occur without causing misallocation of resources.
-Every economic transaction therefore that produces profit must also produce a greater quantity of anti-profit, if only infinitesimally greater. Thus, profit can have no philosophical aggregate net basis for existence.
If the reader doubts this, then pause to consider this illustration. What if you were the sole participant in an economic universe? Perhaps a good way to think of this is as a lone individual living in a wilderness environment, dependent entirely on himself for every want and need without human contact. Philosophically he would have the capacity to experience all the aspects of economic exchange available in modern culture, except one. He would have no capacity to conceptualize money and its erroneous philosophical expression, profit, because he would have no opportunity to conduct economic exchange with other individuals.
It is not true that this would make him unable to conduct economic exchanges, because these would indeed be accomplished internally. However, he could only express them as the rational allocations of his time, his mechanical and intellectual labor and the commodity resources available to him. All these he would apply to satisfying internal needs. It is very true that he might realize something analogous to profit, but it would be in the form of a gaining of excess resources extracted from his endeavors and from productivity or even from random effortless good fortune. He only has one way to express these gains; they augment the natural progression toward reducing the costs of goods and services marginally toward zero.
-Market participants logically pursue profits because they consciously conceptualize that a gaining of riches would assist their personal attainment of an objective, one that is merely equivalent to what is their real subconsciously expressed objective; they seek to benefit from costs that marginally approach zero.
-Infinity in human productivity can not be achieved until all the power elements of economic exchange are removed, and profit is always a power element. Power can never be completely removed until there are no remaining misallocations of resources that prevent the progressive approach toward infinity in human productivity.
By these discussions I do not mean to imply that profit, in its commonly understood tangible expression, is evil. It is the necessary inducement that capitalism provides for the subconscious attainment of zero cost for goods and services. In an imperfect world, capitalism might be flawed by the observance of its occasional unique failures to allocate resources, yet its failures are lessened by the equitable dynamics of the economic system that drives it. Communism or Socialism fail to a greater extent to allocate resources, because those socioeconomic systems depend largely on benevolent altruism, and not on the profit motivations of capitalism, for the subconscious attainment of zero cost for goods and services. It might be said that capitalism occasionally fails because of its lack of heart, but that Communism must necessarily fail because of its ultimate lack of altruism.
-All animal, mineral and plant material, whether found on earth or in its seas, whether naturally occurring or requiring collection, cultivation, mining, breeding, husbandry or other operations for gaining the control and possession thereof, are commodities. Commodities are natural storehouses of money and power, although labor and thus intellect are required for obtaining them.
-Some commodities exist only as Inherent Commodities and can not be possessed in the form of a titled asset. Some general examples of these would include: solar energy and the machinations of weather, tides, magnetism, gravity, and many other naturally occurring compounds, powers, functions and forces. All these things have the capacity to facilitate the unassisted production of various commodities that can be owned, titled, stored and exchanged as money. However, having the capacity to produce titled assets does not, in and of itself, constitute a titled asset. For example, solar energy can not be titled, but it can produce corn, timber, electricity and a geographical presence of enjoyment, and all these can be titled.
-Inherent commodities therefore in one sense have infinite value; in another sense they have zero money exchange value. This is because they are preexistent elements of attained infinite productivity in terms of human perception and are therefore both priceless and universally owned. In a similar fashion human productivity, when taken philosophically to infinity, ceases the existence of all money exchange value, because the agent of money’s exchange execution, labor, is therefore obviated. At the point of infinity all non-inherent commodities become inherent commodities. Inherent commodities and pure intellect are the only permanent investments of abstracted wealth.
-In this sense, wealth at the point of infinity in human productivity may be thought of as being analogous to electronic capacitance; the coercive or compelling force of money is similar to voltage; labor therefore functions as amperage; and productivity is the element of charge. If a capacitor is charged to peak and has no means of discharge, then amperage will drop to zero.Voltage is then an orphan force (or potential) with neither the means of, nor the need for, execution.
I submit that, though it may be difficult to conceptualize philosophically, very nearly 100% of all aggregate wealth is already vested in pure intellect and inherent commodities. The marginal fractions of wealth that are not yet vested this way represent the entire spectrum of aggregate economic endeavors undertaken by mankind. It is only within this tiny spectrum that the abstraction of money in every sense and form can exist.
Yes, and Sorry about the “faith” bit. That was someone else’s comment. My mistake. In that thread you advocated more the Labor and Power of the financial medium of exchange.
I understood the following points:
1) nominal money = fiat power of bartering influence in the marketplace
2) All money exists as an abstraction of mechanical or intellectual labor.
3) Money is to power as Matter is to energy
4) infinite value vs. money exchange value
A few points however I remain unclear on. You mentioned:
“Trust is not the power element of fiat money. Instead, the power element is monetary obedience.”
You began by saying however
“I’ve coined the term: “Monetary Obedience” which I think better describes what you term as being faith”
So what is “Monetary Obedience”?
Too, average individuals in modern society, without possessing great riches, are yet wealthier in real time present value than ancient kings were in their capacities to cause the execution of marginal labor to satisfy marginal demand, when those capacities are viewed in the present day.
Amazing point! I heard this expressed by Warren actually explaining how teenagers today live better than did John D. Rockefeller.
In addition, regarding your previous post that mentioned Liz Claman’s interview with Warren Buffett, although I didn’t have the chance to see it, I would like to. If you know of its location do mention it.
Monetary Obedience exists as an equilibrium:
This obedience exists as the point of equilibrium established between two needs; the very rational need to conduct all economic exchanges that only fiat monetary obedience can facilitate, versus the ordinary human philosophical need to nullify an irrational concept.
In other words; people play a game even though they know it’s a game, because they have no choice about playing it. If they want the goods and services, they must play the game.
Even if only subconsciously, the market participant knows his fiat money is worthless, but he’s made to be ‘obedient’ for the sake of obtaining the goods and services he must have.
Consequently, he is forced to both work for fiat as payment, and to use fiat to pay others.
If you suddenly suspended all obedience, a few pounds of beans would be worth more than a stack of $100 bills.
The Clayman thing on Buffet will probably run many times on CNBC, so just watch their listings.
my1,
You said these points you understood:
1) nominal money = fiat power of bartering influence in the marketplace
…Yes, that’s generally correct in modern western culture, but remember that nominal money doesn’t have to always be fiat. It can have real intrinsic value, as does gold, silver, corn, lumber, precious stones and, yes, even my eye-like marine shells given to me by my father. It’s just that those items don’t serve as currency as well as fiat does, regardless of whatever capacity they have to ‘preserve’ value.
2) All money exists as an abstraction of mechanical or intellectual labor.
…Yes, this is the absolute essence of understanding the philosophical concept of money.
3) Money is to power as Matter is to energy
…As an analogy, yes, and, too, intellectual labor is to mechanical labor, in magnitude of relative effect, as power is to money.
4) infinite value vs. money exchange value
…I don’t understand what you mean??
“If you suddenly suspended all obedience, a few pounds of beans would be worth more than a stack of $100 bills.”
This would in other words mean, that as soon as this “Faith/Monetary Obedience” ceases to exist, or is substituted by other means (US Dollar to lets say the Yen or Euro) there is no other option other than the collapse of its currency. (Similar to what happened to Rome once the empire realized what type of debt it was in – even from the individual’s perspective). This by definition is why no single nation’s fiat currency – eye-like marine shells or dollars alike – has ever lasted.
“infinite value vs. money exchange value” – I guess I was just rewording your example of Perceived Liquidity and Deferred Liquidity.
Well you may be right, but at present the U.S. dollar is still ‘the’ currency of the world.
It’s where all the chickens come home to roost in difficult times. As I’ve said before, never before in history has a fiat currency been supported by a greater amount of power.
It is ‘the’ currency of China, regardless of this silly talk about the value of the yuan. China has two currencies; one it uses to suck the life out of its peasants — that’s the yuan — and another that’s pegged to the dollar, and the reason is easy to understand; it ‘is’ the dollar and if China allowed it to float against the yuan, contrary to popular belief, the yuan would eventually turn belly up and crash.
We’ll never know until the “game” we’re all playing is over. Looking at Bloomberg headlines though…
* Dollar Drops to 20-Month Low Against Euro on Speculation Growth Is Slowing
* U.S. Housing Market Kept Weakening in October, Economic Reports May Show
* Fed’s Poole Says Eurodollar Futures Fail to Predict Interest Rate Changes
* Gold May Rise on Expectation Dollar’s Slide Will Continue, Boosting Demand
* Hong Kong Dollar Peg to U.S. Shows Strains as Interest-Rate Gap Widens
I guess we can just label this story as “Developing”.
You say how the Yuan would belly up is they allowed it to float. Yet they realize how critical it would be to the US currency as well as all Forex markets if they would begin to sell their US currency reserves in favor of another. If so then why is the Yuan subject only to Dollars? They can’t switch to another currency but they can indeed withhold from buying more, which they have claimed recently to enact.
*with a bit more sense: “Yet they [Chinese] realize how critical it would be to the US currency, as well as all Forex markets, if they [China] would begin to sell their US currency reserves in favor of another.”
UR preachin’ to the choir.
I haven’t claimed any stability of the dollar vrs other currencies… only that it is still ‘the’ currency of choice, and that it will remain so. In regards to China, certainly it will remain so as long as they want to sell us Santa Claus.
They will keep the yuan:
“Eight -to -the -Bar…
…..in Boo-gy Rythym”
…regardless of what the dollar does against non-US forex, and for good reason… because the dollar is THEIR currency for export trade as much as it is ours.
Also, in my writing if you remember I have said that in reality ‘THE’ world currency (all money) is actually LABOR, and what happens is that labor gets denominated in any currency to reflect its relative price (wage) across countries.
That’s true whether you use pounds, yen, dollars or eye-like shells. They’re all going to be priced in the wage where ‘money’ is created… and that’s where intellectual and physical labor is d-e-m-a-n-d-e-d.
Meant to say:
…regardless of what the [yuan were to subsequently do] against non-US forex.
In other words; they will ride the dollar to the ground if they have to, like a buckin’ bronc, rather than give up the dollar/yuan peg.
Paulson is goin’ to China to pick up right in the tracks left by Snow… and he’ll be singin’ the same song, which is “please let your yuan float,” and the Chinese will put a snow job on him just like the Snow job they put on Snow.
Paulson will come back claimin’ he’s gained something and the Chinese will be happy to let him think so… but nothin’ will change about the boogy rythym.
Because, they’ve been told that if they quit playin’ freeze tag with the yuan/dollar, that they’ll get their debt ratings cut. They also have vastly more unemployed or underemployed than we have in the West, and they don’t sell nearly so much underwear to the Eurozone as they do to the U.S., so damaging their U.S. market would not be healthy for China.
Then I won’t mention Russia and the Euro Banks! ;)