Sunday, November 11, 2012

Loose Ends, Grand Irony

Re-reading, trying to wrap up this series of posts labeled "Medium of Account".

7 November: Medium of Exchange, Standard of Value

I went out of my way to include two things when I took excerpts from Raymond P. Kent's 1953 book. One was his example of a homeowner valuing his house at $8000. Reading that, my first reaction was Maybe this is a typo?

Nah. That was written in 1953. Prices have gone up, brother. And then there was the housing bubble.

(Also, for Mr. Kent in 1953, "home owner" was two words. How things change!)

The second thing I made sure to include was what I called his paragraph on the word "or". He has it right, certainly. But you never see people go into so much detail on such a simple thing. Even I don't do that!

Well, sometimes, maybe.

8 November: The Medium of Account

I quoted Marcus Nunes from Two kinds of money:

The good kind is “whole money”. That is, it is both the MoE and MoA. Bad money loses its MoA property, but keeps its MoE property.

I didn't exactly agree with that, but I did call it fascinating and I didn't disagree. I have to fix that.

Marcus's "Bad money loses its MoA property, but keeps its MoE property" is a conclusion. Not an observation. I'm still in the observation stage on this, so I cannot just agree with him. Because I don't know yet. But it doesn't sit right with me.

Ah. In a reply to my comment on his post, Marcus wrote, "the MoA function is what gives money (usually viewed as the MoE) it´s 'wholeness'." This is a reference back to his statement "the good kind is 'whole money'," quoted above. I didn't get that till now.

Anyway, Marcus seems to like MoA more than MoE. He likes the wholeness. Well sure, everybody likes wholesome goodness. But again, I'm still in the observation stage.

The words "good" and "bad" imply preference. They imply more than just "this thing works" and "that thing doesn't". Maybe Marcus doesn't mean it that way, I don't know. I can't help but read it that way.

Anyway, again, Marcus seems to like MoA and MoE together because that is good or because it is whole or because it works. He seems not to like them apart because it is bad, or incomplete, or because it doesn't work. But I think, by the time we come to realize that MoE and MoA have separated, we are already in the results stage of economic events.

"After the crisis" thinking. One sees it every day on the internet. But the crisis was a pimple caught in the act of popping. The pimple was there before, and if you want to understand it you have to look at how things were before the pimple popped.

Not a lot of that on the internet.

I think Marcus may be engaging in after-the-crisis thinking on this. He has "good" and "bad" things defined for us. He writes:

Bad money reflects a “sickness” in the economic fabric. Usually this sickness is manifested in very high, rising AND uncertain inflation. In those situations people search for “something” to play the role of MoA. That “something” could be gold, but in modern times the dollar is the usual stand in for the MoA.

He is thinking of what happened in Brazil, something he was "living witness" to. That's okay. That's a big piece of the puzzle, and maybe Marcus should turn his observations on Brazil into a book. This is a problem that needs to be examined from many angles.

Going by Marcus's observations, there is a bout of inflation that awakens people to the need to protect their wealth. So they might want to "separate" their wealth from the everyday price level and from the inflating medium of exchange.

I would suggest that the greater the level of financial wealth, the easier it is to achieve this separation. Wealth is power.

So the inflation leads to a separation of MoA from MoE, and the result is seen as the "sickness" of which Marcus writes.

In Brazil, in the story Marcus lays out, we see a few years of inflation in the early 1990s. Then on 1 March 1994 a new policy is instituted and by 1 July the inflation problem is solved. Four months. "There was no recession," Marcus says, "and no unemployment."

In the United States, the big inflation occurred in the 1960s and '70s, drawing down in the 1980s. But the big change came in the 1990s -- see yesterday's graph -- a decade or more after the inflation problem had been solved. Two decades or more after inflation was rampant.

Yes, the U.S. currency is the world's reserve currency, and that makes the story different. But Marcus's Brazil story is very different from what happened in the U.S. I'm not sure his story is relevant to the present situation.

I have to go back to what I said above: The greater the level of financial wealth, the easier it is to separate MoA from MoE. MoA *IS* financial wealth.

MoE is poor people's income.

9 November: Ch-Ch-Ch-Changes

From the start -- from my first read of Marcus's Two kinds of money -- I was absolutely fascinated by the topic. But also, from the start, I was confused by the phrase "medium of account". Marcus and (to my mind) also Nick Rowe equate the phrase with "standard of value". Nick explains that "Money ... is the medium of account" by saying "all prices are quoted in terms of money".

But prices are quoted in terms of the standard of value, just as distances are stated in terms of the standard of measurement, be it inches, feet, centimeters, parsecs or light years. Be it dollars, yen, or ounces of gold.

In our case, the dollar is the standard of value or, to use Nick's phrase, the "unit of account". But Nick's phrase "unit of account" lacks the word "medium". In fact, he goes out of his way to take the word "medium" out of that phrase:

[Update: just to clarify terminology: in my model, gold is the medium of account; and (say) an ounce of gold is the unit of account.]

The medium is gold, or fiat money. The unit is the ounce or the dollar.

The medium of exchange is the money we use for spending. The medium of account is the money we use for purposes other than spending. The word "medium" implies "money" in both cases -- but stocks or flows of money, as opposed to an individual, conceptual dollar or ounce defined as a standard.

// Well, that was like a paragraph on the word "or", wasn't it.

In mine of the 9th I counted four properties of money:

So now there are four concepts rather than three: Medium of exchange, store of value, standard of value (or unit of account), and medium of account.

I also said

Our concept of money as a store of value changed, because in inflationary times, money is not a good store of value.

Our concept of money as a standard of value changed for much the same reason.

These properties of money changed because of inflation, I said. And Marcus in his post said that high, rising, uncertain inflation causes people to "search for 'something' to play the role of MoA."

The cause of all these changes in money? Inflation, inflation, and inflation.

And now, the Grand Irony:

People say printing money causes inflation. But it wasn't printing, really. It was the lending and the borrowing and the excessive use of credit that caused most of the inflation since the early 1960s.

All of that credit-use created debt. Debt is a financial asset. Financial assets make up most of the medium of account.

The same credit-use that caused the inflation is the same credit-use that created those financial assets and created the medium-of-account money that now wants to separate itself from the medium-of-exchange like some kind of snob money.

All these changes cause people like Sumner and Michael Sankowski and Greg and me to start thinking of money as the medium of account, and no longer as the medium of exchange. And I think, once we get to this point we had better fix the problem soon or it will be too late.

We had better stop thinking of "more credit use" as the solution to every economic problem. We'd better start thinking that "excessive credit use" has been creating our problems since the end of the Golden Age. We'd better, or soon it will be too late.


The Arthurian said...

I don't think I captured the irony. Let me give it another shot:

-> Using credit as our MoE caused the inflation.
-> The credit use created debt, financial assets, and the MoA.
-> The MoA now separates itself from the MoE because of inflation.

Maybe it's irony. Maybe it only shows that excessive reliance on credit was a really, really bad policy. Maybe both.

Greg said...

Dont make this your last post on this subject Art. Keep it up

Couple more thoughts this morning.

When a bank makes a loan to you they are expecting the MOE in return, In fact they are expecting a certain number of units of the MOE, not a certain value obtainable with the MOE. If banks adjusted the number of MOE units as the value of the MOE units changed, it might not be necessary to increase the number of MOE units as quickly as we do.

Our MOE also has an MOA component too because each unit of MOE can be given a value. A physical dollar can be measured to have a value of less than a dollar.......... this is an interesting quandary we can place ourself in. Additionally, we dont have control over our dollar value. Our trading partners can affect it for us making our bank loans more or less expensive.

Im not exactly sure these are Eureka moments for anyone else but me but these factoids do not make me feel better about the state of our current financial system. I feel much much worse in fact

And yes excess reliance on credit IS really really bad policy.