Saturday, October 9, 2010

M1 and Shostak and Mish, oh my!

Dear Mish,

Back in July '08, you took a look at various measures of the money supply in relation to changing prices. You wrote:

The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange.

That's what we want, a measure of spending money. Spending-money is the money that affects prices. Spending-money facilitates transactions. The level of, and the changes in, money that facilitates transactions -- this is what affects prices.

Anyway, Mish, you then quoted Shostak, and you said:

Shostak rightfully excluded savings deposits because they are credit transactions (savings deposits are immediately lent out and are not really available on demand).

That's my focus here. Shostak excludes savings from spending-money, and Mish says Shostak has it right.

If you will allow me to reduce an economist's complicated discussion of TMS and MZM and M3 and M-prime and who-knows-what-all, to a simple, old-fashioned discussion of M1 and M2 money --

M1 is spending-money. M2 is M1 plus money in savings.

-- then we can say Shostak and Mish and I agree we should count M1 but not the money in savings. That's good. It is a mistake to think of M2 as the cause of inflation, because money in savings isn't spending-money and is not facilitating transactions. However, economists often do think of M2 money as a cause of inflation. (Maybe they got that from Milton Friedman and his MRTO graphs.)

By the same token, if we're considering the money that facilitates transactions, we probably ought to be considering the use of credit.

Anyway, I'm glad I'm not the only one who doesn't want to count the money in savings when we worry about inflation. There are at least three of us. Thanks, Mish.

But, Mish...

Shostak rightfully excluded savings deposits because they are credit transactions

I always thought of saving as not-a-transaction. I never thought of it as a credit transaction. But I think you're right, Mish. If my clan recently graduated from hunter-gatherers to an agricultural society, and I lend a neighbor some wheat, I expect him to pay me back (and then some) after the growing season. That's a credit transaction, even if it takes the whole growing season. Or maybe because it takes the whole season.

And if I save a dollar today, I expect to get it back with interest at some point down the road. It is a long-term transaction. A credit transaction. Mish, you're right about that.

(savings deposits are immediately lent out and are not really available on demand)

But I don't accept your claim that "savings deposits are immediately lent out." They are probably lent out -- in a growing economy, anyway, and the more so when the reliance on credit is excessive -- lent out more quickly than I imagine. But not immediately. It's just not realistic to say that.

And as for my savings being "not really available on demand," that's nonsense. As long as we don't all go down to the bank at once to get our savings, the money really is available on demand.

So Mish, (even though I do agree with you and Shostak, that savings ought not be counted in with the money that contributes to inflation) I do not buy at all your reason that savings should be excluded. I think you are trying too hard to find an explanation.

The thing is, Mish, people save money in order not to spend it. We don't want to count savings in with our spending-money, because we want to save our savings.

Doesn't that just make more sense, Mish? Yours,


No comments: