Income ≠ Money ≠ Value ≠ Wealth

Steve Roth of 24 May:

The key (and I think hugely simplifying and clarifying) distinction:

money [is to] financial assets [as] energy [is to] barrels of oil.

In the vernacular we speak of oil as “energy,” but we know that they’re conceptually distinct. The energy is embodied in the oil. Just as it’s embodied in a rock at the top of a hill.

So... we speak of financial assets as "money," but we know they're conceptually distinct? We know they're different? Yeah, I agree with that. Most financial assets are NOT money. But that's not what Roth wanted to say:

Pieces of currency are just financial assets (legal claims, or credits) that have particular characteristics, properties. As do barrels of oil and rocks on top of hills. We’ve always called those particular types of financial assets “money,” and therein is rooted much of the confusion and miscommunication we suffer under, IMNSHO.

I friggin hate metaphors. Pieces of currency are just financial assets with the particular characteristic that we use them for money. If you like: All money is financial assets, but not all financial assets are money. That's fine, I guess. But this is not fine:

Add up the value of all financial assets, and that’s the money stock.

That is just plain wrong.


Roth of 21 May:

“money” should be technically defined, as a term of art, as “the exchange value embodied in financial assets.”

I replied:

To me, money is the medium of exchange, not the exchange value.

You can see I was focusing on the word "exchange". That could have been a mistake. Let me re-arrange Steve's definition of money just a little:

Money should be defined as the value embodied in financial assets, value that can be used for exchange.

That's a little less objectionable, maybe. But the thing about money that makes it special is that it is used for exchange. Money is the particular "embodiment" of value that is useful for exchange. And it's not that money "is" value, but that money "has" value.

"Value" is in the eye of the beholder. Things have value because we value them. Money has value because we value it, and especially because most of us value it similarly (so that it is widely useful for exchange). But value is one thing, and money another.


There's value in money, and there's value in other financial assets. Money is the particular financial assets that is generally used for exchange.

The trouble with thinking of all financial assets as money is that most financial assets are not generally accepted in exchange. You have to convert your financial assets into an exchangeable form before you can spend them: You have to convert them into money. Steve Roth says the same:

People can exchange various financial assets for currency-like financial assets when they need to buy real stuff, but that’s largely mechanical; its macroeconomic effects are trivial.

He says you have to convert your asset into money before you can spend it. Then he tries to minimize the significance of this with sweeping generalities that happen to be wrong. Remember the deleveraging a few years back? Everybody wanted to convert their financial assets into cash. The demand for financial assets fell sharply. And what happened? Asset values crashed. There was nothing "trivial" about that.

Yes of course, it was a unique situation. It was a situation that showed most clearly that not all financial assets are money.


Roth of the 24th:

I hear this kind of thing all the time. e.g. “Health-care spending is taking all that money out of the economy.” As you would say, “Nonsense!” ;-)

I remember that same complaint used against the space program, years back. The catch phrase was that they were throwing money into space. That was obviously incorrect; the money stayed on planet Earth. But the money was most certainly being thrown into circulation by the space program. It was not allowed to sit idle in anybody's "bathtub".

You can’t “take a dollar out” of the bathtub (except by paying off loans to the financial sector, paying taxes to the federal government, or reducing the equity allocation in your portfolio hence driving down stock prices).

If the bathtub is planet Earth? No, we don't take money off-planet. There's nobody out there to sell you things or accept payment. Not yet, anyway. But if the bathtub is the economy? Then yes, we can take dollars out of the "bathtub".

The economy is transaction. Failing to spend takes money out of the economy, just the same when you fail to spend as when the Federal Reserve fails to spend. Money-not-spent is money removed from the spending stream. Hoarding will do it, and if loans create deposits -- and if nothing happens with the money in savings, as some people say -- then saving is just the same as hoarding.

You can, however, reduce or increase the turnover of your stock of money in a given period. You can “hoard” or spend your money. Not-spending is indeed taking a dollar “out of the flow” (relative to the counterfactual of spending it) — reducing velocity.

Not sure about "reducing velocity". A dollar removed from the spending stream affects both GDP and the quantity of money in motion. Affects both the numerator and denominator of the velocity ratio. So I can't say what happens to velocity so easily.

Roth insists on keeping money all in one lump -- one "stock of money" -- which has a single turnover rate that you can change by spending more or spending less. But economists define several types of money: "monetary base, M1, M2, divisias, and all that" as Roth observes. He wants to sweep "all that" confusion away, and come up with something new. That's the wrong way to do economics.

Yet we seem to agree. Roth says: Not-spending is indeed taking a dollar “out of the flow”. Then he tramples the obvious:

But in aggregate, not-spending doesn’t “tuck it away” any more than spending it does. If you spend it, it just ends up tucked away in somebody else’s account.

That's not right. If I spend it, it ends up as somebody else's income. Income is money in circulation. You know, cash flow. Then, having received the income, they get to decide whether they'll be spending that money or saving it. If they decide not to spend it, they are tucking it away for later. But the economy is not just "having money". The economy is spending. If the money doesn't move, there is no economy.

Spending vs. not-spending doesn’t change the amount of money in the bathtub.

"Spending" is clean water, flowing into your bathtub. "Saving" is the soapy, wet, gray pool of filth you relax in.