Saturday, November 10, 2012

The Assets We Hold, and the Money We Spend

TFAABSHNO is "Total Financial Assets - Assets - Balance Sheet of Households and Nonprofit Organizations" at FRED. I'll use that as a proxy for our "medium of account" (MoA). Stuff we value as dollars, even though we don't want to spend it.

M1NS is a measure of the money we ordinarily spend -- our "medium of exchange" (MoE).

This graph shows the ratio of MoA to MoE:

Graph #1... Click for FRED page

Starts out at $10 of financial assets for every circulating dollar. Shows a gradual increase until about 1993. After that, there's no comparison. If the gentle trend before 1993 was natural, the rowdy trend after 1993 is not. A result of tax code changes of the early '90s, perhaps?

Neither trend is natural. Both are results of policy.

PS: The graph shows why people now see MoA as more important than MoE: Because there is so much more MoA now, that's why.


Greg said...

This to me seems like the illusory "money multiplier" so many think they see in banking!

Instead of reserves becoming loans and deposits. Deposits are becoming TFAABSHNO.

In turn TFAABSHNO becomes how rich we feel we are.
It then drives our decisions about further borrowing (Yeah I can borrow to buy that house Ive got $500,000 in GE stock)

The problem should be obvious. Those loans must be serviced eventually and to service them many will have to sell some TFAABSHNO...... which will drive the price of TFAABSHNO down...... we will be less rich and our balance sheets more out of balance....
uh oh.... where have I seen this movie before??

Greg said...

I agree about the word natural by the way.

Used waaaaay too much by neoclassical economists. They really dont understand nature.

The Arthurian said...

Two comments. You are really into this topic... So am I :)

"TFAABSHNO becomes how rich we feel we are. It then drives our decisions about further borrowing"

One thing neither of us said: For the 99%, TFAABSHNO may affect how rich we feel. For the 1% it affects how rich they actually are. Concentration of wealth plays an important role in this.

RE the ratio shown in the graph:
I'm thinking this ratio affects your analysis. The lower the ratio, the less perishable value there is, so the less there is that can suddenly fall in value when everybody wants to sell at once.

By the same ratio, there is more spending-money which can be used to buy those assets.

Granted, if *everyone* wants to sell at once, there is a problem. But I think that preventing the ratio from reaching extreme values can prevent or help prevent the situation where everyone suddenly wants to sell.

Clonal said...

You see the effect of two asset bubbles - the "dot com" asset bubble, and the real estate asset bubble. There is policy there, as well as individual (group - bandwagon) effects.

Luke Smith said...

Building on Gresham's Law, as the US government deficits contracted in the mid-1990s, it drove money from bonds to stocks. It was bad money; remember Cisco's $480 billion market cap?

Good money then left the overinflated stock markets and went into hard assets: mostly real-estate. When the stock market deflated in the early-2000s, the bad money went into real-estate under the disguise of easy (bad) credit.

Mortgage refinance activity peaked in summer 2003. That's when, in 2004-2005, we saw an absolute violation of lending standards: large volumes of loans like the interest-only negative amortizing adjustable-rate mortgage from hell.

Good money (credit) was then priced out of real-estate by easy credit, and went into savings. If all the good money didn't leave by 2006 it sure did in 2008 when excess reserves shot up through the roof. I think the good money has been sitting in savings, or some of it in emerging markets. That's the story I see from these charts.

Greg said...

One thing that might skew this graph, the more I think about it is that much of the elements within TFAABSHNO are also within the M1NS. They are being double counted.

Balance sheet of households includes M1NS, so does Total Financial Assets (a dollar IS a financial asset). Im not sure how to reckon this with your graph but I think it might be important.

Greg said...

Oh...... and yes I really do like this topic. I suspect this might lie at the nexus of world views of monetarism and MMT/MR.

Clonal said...

That does not make sense since the ratio of the two ranges from 10 to 40

However, try (TFAABSHNO - M1NS)/M1NS

The results can be seen at

It does not change the picture much at all

The Arthurian said...

It's not double-counting, Greg, because we're not ADDING the M1NS to the TFA... The graph just COMPARES one to the other so we can see if M1NS grew in proportion to the total.

The graph shows that the total grew much faster than M1NS grew.

The Arthurian said...

I did not remember Cisco's $480 billion market cap, so I looked it up. I think you are referring to the high value Cisco achieved during the dot-com bubble. Much of this value was soon lost, which is why you say it was bad money.

But Gresham's law -- bad money drives good money out of circulation -- does not refer to "bad money" in the same sense we use it today, as in "throwing good money after bad". As we use it today, "bad" money is money wasted or lost, as in the loss to Cisco shareholders when Cisco's market capitalization fell.

Gresham's law refers to something completely different. Greshams law tells me that full-bodied silver quarters will not long circulate side-by-side with cheaper "sandwich" quarters. People collect the silver quarters, or hoard them, or save them for the kids, and they come out of circulation. "Good" money (like full bodied silver quarters) come out of circulation when "bad" money (like the sandwich quarters) become available.

So I have apparently misunderstood your remarks on this.

Re-reading your remarks, then... by "good money" I think you mean what I would call "the best investments". And by "bad money" I think you mean "the crappy investments". On this interpretation, your remarks do help me to understand the MoE::MoA thing.

For Gresham (as I understand it) "good" and "bad" were embodied in the coin itself, physically: more gold in one coin, less gold in another, due to clipping or wear.
For you Luke, "good" and "bad" are embodied in the place the money is put, and the timing of the placement.
Gresham's is an observation about MoE. Yours is an observation about MoA.
Makes more sense to me now.