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I think the reason Wicksellian/Keynesian economics works is that some people hold both money and short term bonds, and economize on their money holdings by actively trading bonds. While if I am short on money, I might just reduce my banna purchases, the banana growers who end up short on money sell of some of their bond holdings to replenish they money holdings. They do that over in the apple/loan/iou/bond market.

I grant that going so far as to have a monetary theory without money is irritating. The notion that nothing can be done at the zero bound of the policy rate is wrong. The notion that interest rate targeting is some kind of fundamental law of economics rather than a characteristic of a particular monetary regime is also wrong.

first of all, thanks for writing the post nick!!

now, to be clear, you *do* agree that it's wrong to argue that there's currently an excess demand for 'safe assets' given that these assets are easily bought and sold in financial markets. the price of those assets is very high, but that only means there's a high demand for them, not an *excess* demand. Right?

And if one can't speak of an excess demand for safe assets, then one also can't speak of a mirror excess supply in product markets like delong (based on say) argues. Right?

If I'm not mistaken you had that discussion with delong a while ago right? that an excess demand for money (and not any other asset) had a mirror excess supply in other markets [Link here NR]

Does it make sense to talk about an excess demand for money ** as a store of value ** ? Would that mean an insufficient supply of money ** as a medium of exchange ** ? And thus an insufficiency of exchange?

Thanks. :)

Bill: So instead of the medium of exchange circulating, from the apple market to the banana market to the apple market, much of it goes in and out the bond market in between moving from the apple market to the banana market. Not sure whther or not that changes my basic message here though.

JCE: I agree that it's at the very least *problematic* to argue that there's an excess demand for "safe assets". They might mean there is an "overly high" demand. Yep, this goes back to that old debate I had with Brad. But he's one of the very few that sorta gets the point, as he showed in his response in that old post.

Min: if you read that old post that JCE links above, you can see my answer to a very similar question. Only with cows being used as a medium of exchange.

Hang on, that wasn't the Brad Delong post I was thinking of. There was another one, where Brad responded to my post talking about a world where cows were money, and whether an excess demand for milk could cause a recession.

i think this is the one you mean [link here, yep that's the one thanks NR]


"I agree that it's at the very least *problematic* to argue that there's an excess demand for safe assets".

Not really. The problematic part is finding a definition of a "safe asset" in economics. The "safeness" of an asset can come in the form of lack of backruptcy or solvency risk by the issuer, lack of liquidity risk in the market, lack of price volatility risk, etc. Once you define what a safe asset actually is, then you look at the buyers of the asset and determine if they are buying them because they are safe OR because of:
1. Institutional limitations
2. Market access limitations
3. Other reasons

Gross substitution: everything is a substitute for everything else. This rules out, by assumption, that the representative agent can have an excess desire to substitute money for bananas, but not an excess desire to substitute apples for money for bananas to acquire bananas, even if there are no more bananas left to buy at the (excessively-low) prevailing banana-money price.

Never mind what is going on in the markets, the agent looks at his consumption basket and recognizes that a basket that is of equal cost at the prevailing price vector, with less apples and money, but more bananas, would be a preferable one. There might not be actually anyone who is turned away in the money-apple market, but people desire to swap apples for money for bananas nonetheless. The sequence of how it shakes out is a veil.

It is true that the excess-demand-for-banana disequilibrium happens to wind up at a general price vector that clears the market for apples, by virtue of the inexhaustible generosity of the AGA. But that is a coincidence, nothing more. To see this, suppose that there is a third non-money good, the carrot. Instead of the AGA, posit that there is a ACGA that fixes the nominal price of an apple-carrot bundle that is not consistent with the market-clearing ratio of apples to carrots in consumer baskets, given the fixed prevailing price vector. Then no individual market clears at all, despite the bank's promise. You can get arbitrarily weird results by moving from a money-and-composite-good to a money-and-two-or-more-good model.

Also, there is something a little weird about the AGA at all. Its behaviour is potentially highly sensitive to the assumption of an infinite willingness to guarantee the price of apples, compared to a willingness that is merely very high - you can see this by adding a BGA that guarantees the price of bananas. Voilà, an inexhaustible flow of nega-apples from the BGA to the AGA, or what have you.

I have a gut worry that it is a Kocherlakota-like result where one has a mathematically-implied outcome but no actual plausible equilibration process that gets there. Central banks don't actually have an utterly inexhaustible power to pin bond prices wherever. I'm not sure how to make this worry concrete, though.

Last, apples and bonds aren't really identical. Say the bank's objective is to meet an excess demand for money, but its instrument is announced interest rates. If it keeps lowering interest rates to achieve that, but endlessly fails, the logical result is eventually a bond with -100% interest - one that never has to be repaid. A bond with such an interest rate is exactly identical to an endless supply of helicopter money; it will clear the money market. The intuition is that bonds become more like money as the bank intervenes, hence one argues that someone can always acquire something that, in the limit, is 'money'.

Strikes me the phrase “excess demand for money” refers (if only implicitly) to demand for monetary base, i.e. the phrase is an attempt to say that the private sector wants an increased stock of safe liquid assets.

Thus Nick’s reference to the amount of money supplied in the form of loans by commercial banks is not relevant: money created by commercial banks is not a net asset for the private sector. That is, for every dollar created by commercial banks, there is a corresponding dollar of debt.

Now have I clarified or muddied the issue?


So I am one of those guilty of saying "excess demand for safe assets." The reason I do is because many of these safe assets now effectively function as money--some call them transaction assets--by institutional investors. Just like the liabilities of a commercial bank function as money for retail investors, the liabilities of shadow banks and the government function as money for institutional investors. Typically, though, most observers here talk about a shortage of safe assets rather than an excess demand.

(I think I'll just recycle the comment that I left Robert Waldman on DeLong's original post, because I think it might apply here as well.)

"Excess Supply (or Demand)" has more than one meaning. Those meanings are non-identical, but related.

Waldman and you focus on the micro-economic meaning; in a single market for a homogenous good we can see whether supply for that good is greater than or less than demand when we hold prices fixed. That's a precise definition and probably the most common one.

Macroeconomists have a related and different definition. They're comparing aggregate supply (i.e. potential output) and aggregate demand. Now, in some simple models it is possible that the two meanings correspond; aggregate demand equals aggregate supply if the aggregate price level is right. That equivalence goes away in more complicated macroeconomic models.

I think another way of saying that last sentence is to say that "potential output" is not necessarily the same as the sum of a bunch of price-based supply functions.

"The problematic part is finding a definition of a "safe asset" in economics. The "safeness" of an asset can come in the form of lack of backruptcy or solvency risk by the issuer, lack of liquidity risk in the market, lack of price volatility risk,"
This may explain why ratings agency downgrade or upgrade soveriegn securities issued in the currency of their issuer even though it can't go bankrupt.. The issuer can garantee it will pay back in its own money but can't garantee the purchasing power nor its exchange rate.
Of course there is no such risk now for the U.S $ and the ratings agency act out of their ignorance, incompetence, corruption and mendacity ( as well as that of their clients) but they still have a point.

If I follow, your point is that the demand for money is the sum of demand across all markets, not just the loan market.

What I don't follow is whether other markets have to remain static to make this argument. Why wouldn't the price of Bananas drop to clear the market?


Why wouldn't the mismatch in the supply or demand for money in every other market be a potential arbitrage that would flow back to the loan market as either demand or supply of loans against money?

Presumably the assumption is being made that in a world with just apples money and bananas that included the AGA; when the banana market didn't clear you would see supply or demand for money at the AGA that would then be used to clear the banana market.


"This may explain why ratings agency downgrade or upgrade soveriegn securities issued in the currency of their issuer even though it can't go bankrupt. The issuer can garantee it will pay back in its own money but can't garantee the purchasing power nor its exchange rate."

This delves a little bit into Mundell-Flemings impossible trinity:


The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time:
1. A fixed exchange rate.
2. Free capital movement (absence of capital controls).
3. An independent monetary policy.

This is possible, but only when fiscal policy incorporates both debt and equity financing. In the US, the link between monetary and fiscal policy was established with the creation of the Federal Open Market Committee under the second federal reserve act in the 1930's. Prior to this, the central bank set the overnight interbank lending rate but did not buy and sell government securities.

Excess demand for safe assets = predominate basis of economic decision making is a belief that the future will be worse than the present.

Money depends on a belief in a stable future.

(Money is a store of value, value is the ration of benefit to cost, benefit has irreducible immaterial and irrational components.)

I think that there are some implicit assumptions about inter-market frictions here. One way of thinking about this is that excess demand in one market should bleed over into other markets--the people who could not buy as many apples as they wanted will simply go buy bananas instead. This leads to some unification of the money market across the apple and banana markets.

Alternatively, we could think about this a bit more abstractly. There is nothing inherently different between the three goods you name: apples bananas and money. We could just as easily suppose that there is a money market and a banana market, and customers exchange apples for either. In that context, by your reasoning, the AGA Bank can guarantee equilibrium in the money market but not in the apple market.

Thinking about that way makes it clear that your underlying assumption has to do with the frictions between the apple and banana markets--if there is a way to exchange apples and bananas, either directly as in this latter example, or indirectly through "spillover" of excess demand from the apple to banana markets, then the money demand and supply can be equilibrated by a bank operating in a single market.

Matthew: "Alternatively, we could think about this a bit more abstractly. There is nothing inherently different between the three goods you name: apples bananas and money. We could just as easily suppose that there is a money market and a banana market, and customers exchange apples for either."

If there were one market in which apples exchange for "money", and a second market in which apples exchange for bananas, and no market in which "money" exchanges for bananas, then "apples are money, and "money", despite the name, is not money.

And if there were 3 markets, so that all 3 pairs of the 3 goods could be traded against each other, then we would be in a barter economy. Which is very different again.

Yes, there are some implicit frictions here. That's why we live in a monetary exchange economy. And Walras' Law does not work in a monetary exchange economy. It only works if there is one market in which all goods can be traded against all goods simultaneously.

Good to see you commenting here.

david: I'm not sure whether you are right on the gross substitutes thing. Suppose apples and bananas are substitutes. Start in equilibrium. Then raise the price of bananas, and lower the price of apples. Couldn't we have an excess demand for apples and an excess supply of bananas, even if some of the unsatisfied demand for apples spilled over into increased demand for bananas?

"Also, there is something a little weird about the AGA at all."

Not really. Remember that AGA might adjust the price of apples frequently, if it fears it is either buying or selling too many apples. In the limit, it adjusts the price of apples every second until the quantity it buys or sells approaches zero. Which is equivalent to assuming the price of apples is perfectly flexible, and AGA does not exist.

Jacques and Frank,
I recently attempted to show that the impossible trinity was no longer impossible in a post on The Impossible Trinity or the Permanent Floor. Countries with sovereign fiat currencies that wish to protect against appreciation of their currency can accomplish all three fears, if the CB is willing to accept unlimited foreign exchange.

Separately, I agree with Ralph on "money" typically referring to the monetary base. In that case an excess demand for money makes sense. Similarly, I agree with David's version of an excess demand for safe assets. I think both of these aspects are critical to understanding the past several years and maybe longer.



Foreign currency intervention (under US law) is a fiscal policy action.

The FOMC can buy foreign government debt:

b. Purchase and Sale of Obligations of United States, States, Counties, etc., and of Foreign Governments
To buy and sell, at home or abroad....obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof...

And so the FOMC can buy foreign bonds with US currency, swap them with the US Treasury for US debt, and sell the US debt for foreign currency - which works well enough when the interest rate spreads between US and foreign debt are stable.

Remember monetary policy is never helicopter drop money. By law the FOMC must buy some asset with the money that it creates.

Joshua : as long as someone is willing to accept your domestic currency. It may last a long time for the U.S. $ and somewhat less for the British L.
The trilemna is not eliminated, just postponed, hoefully long enough.

Self-congratulory note:" Fleming-Mundel IS-LM-BP is a staple of Ph D programs". We saw it in my 2nd undergraduate year. Which reminds me of that aQuebec B.A. is worth a lot and that 40 years ago, Pierre Fortin was already an awesome teacher...

An excess demand for apples can indeed be avoided in this model if someone agrees to buy/sell any quantity of apples at a given price as long as they adjust the price so they never run out of apples . This will not necessarily prevent an excess demand for money because if prices are inflexible in the banana market then that market may not clear.

However if it sets the price of apples and observes what happens on the banana market it may learn that it can always adjust the price of apples to a level that also clears the banana market so that there is no excess demand/supply for money either. It might notice that it can make things easy for itself by rather than constantly checking if the banana market is is clearing it can just make sure that total spending on bananas stays constant. If spending on banana's is too high it reduces its target price for apples and vice-versa.

In this way it can prevent an excess demand for either good or money by intervening in only the apple market in order to stabilize velocity on the other.

How do you distinguish between a demand for a particular form of money (say dollars) and a demand for assignable credit in the same unit of account (say a dollar mortgage, where I, as the buyer, never receive either cash or deposits). If people can't get mortgages, does that mean money is tight, and does this mean there is an excess demand for money? Or is it an excess demand for credit?

The point where credit money is converted to "higher powered" (?) Money is at least partly discretionary. As the seller, I can either cash the payment check, or I can endorse it to someone else. It's usually good for 1 year before it becomes stale.

During historical times of tight money, it wasn't/isn't that unusual to see dozens of endorsements on checks and also IOUs. Multiply endorsed Social Security checks are common today.

Ron: I think we are on the same page.

"If I see that it is hard for people who want to buy apples to find someone who wants to sell, and easy for people who want to sell apples to find someone who wants to buy, I would say there is an excess demand for apples.

"And I know what it means to say there is an excess supply of bananas, and I know where to look. I go to the banana market, where people buy and sell bananas for money. If I see that it is easy for buyers of bananas to find sellers, and hard for sellers of bananas to find buyers, I would say there is an excess supply of bananas."

One cannot OBSERVE someone's mental thought processes. You can only observe people's actions.

You can't see someone having "difficulty" selling or buying apples. The only connection here to the concept of "excess" demand is until the relevant events are already past and settled and people tell you about their historical experience relative to their planned intentions. You can't see such difficulty while it is taking place, without inserting an arbitrary standard of how many apples you believe people "should" be selling at that time.

The concept of an excess demand for money is as equally arbitrary.

MF: Maybe. But if I see a lot of people in a long line at the stall where they sell apples, and if they tell me they are lining up in the hot sun waiting for hours, just to buy some apples, why should I disbelieve them? Cuban supermarkets did look very different from Canadian supermarkets, in that sort of way. The hypothesis "those Cubans want to buy more food at the state-controlled prices, and are finding it hard to do so" looked plausible to me. I don't think it was some sort of religious ceremony, or a sort of Potemkin village in reverse.

Major Freedom,

I agree 110%. I like to put it this way: if I want to get rid of money, in order to hold goods, then there must be an equal and opposite increase of someone else wanting to get rid of goods, in order to hold money. Every desire for me to get rid of money, that you and everyone else can observe, requires someone else to want to hold money, that you and everyone else can observe.

Everything else is mere guessing what other people are thinking.

In the aggregate then, isn’t there always zero excess demand for money and zero excess supply of money? What does it mean for there to be an observable excess demand or supply of money anyway? What is being observed that one concludes this?

It is inevitable that one must insert an arbitrary standard for what one believes others SHOULD be doing, which of course requires introducing some arbitrary standard of measurement. Be it NGDP or prices or whatever, it is arbitrary because it isn’t based on finding out what others actually want for themselves, but assuming what they want by looking at particular statistics and imposing that on them “for their own good.”

There is no escaping this if one really believes one can observe excess or insufficient demands and supplies of anything, let alone money.

Try it yourself. Just consider me without knowing my thoughts, and you can only observe my actions. Suppose I am holding $1000 right now in cash. Can you tell just by looking at that, whether I myself think this is too much money and too little goods, or too little money and too many goods? It’s ridiculous to even consider anyone other than me being able to know such a thing.

Well, the same is true for millions of others in a division of labor. Nobody knows what the correct supply of money should be. Nobody knows what the correct spending and holding of money should be. The only people who know this are the individual for themselves, and taken in the aggregate, the aggregate statistics that result from these desires are what the “correct” supply of money and volume of spending should be.

W. Peden,

Excess demand is like safe assets, an idea that appears frequently, but is a shared intuition without a clear shared definition.

Obviously if markets clear, then they clear at a price where supply equals demand. The most obvious definition would imply that some markets don't clear at a price where supply equals demand. Perhaps, for instance, the seller is afraid of acquiring a reputation for price gouging, or perhaps the goods are part of a promotion, or the marketing psychology requires selling out.

If only part of a sports team's revenue comes from gate receipts and all opponents don't generate the same demand, then what you see is a team sacrificing gate for increased TV and concession earnings and the many advantages of having regular season ticket holders.

This means that thee will be excess demand for popular games, since the team could have sold tickets at higher prices and still sold out. Homo economicus is definitely not a sports fan, and expectations may not be entirely rational.

Another related meaning is that although the market cleared and the seller got the maximum ordinary return, there would have been additional buyers at a "fair price". A "fair price" can mean all sorts of things some reasonable (the advertised price, the price set by price controls, the customary price where changes without notice impose inconvenience costs on buyers...) and some not.

Finally for locally delivered services, demand from outside the service area will often be unsatisfied, even at a higher price. Cable and telephone companies behave this way. There's a lot of unmet demand for high speed internet connections.

I don't think any of this applies to money in the sense of currency and demand deposits, but most people, when the talk about money make little distinction between money and credit. There are certainly a number of senses in which a demand for credit might be unmet. When people complain about tight money, it's about inability to get loans, not the bank running out currency.

As for safe assets, think about safety in terms of them having the same yield in utility at the planned and of term as the money used to buy them had at the beginning. How close can an investor get to this, what are the possible loss mechanisms, and how can they be insured against? Of course, with long tailed risk, such insurance is impossible, but that won't stop many people from trying.

W. Peden: "I like to put it this way: if I want to get rid of money, in order to hold goods, then there must be an equal and opposite increase of someone else wanting to get rid of goods, in order to hold money."

What do you mean by holding money? Suppose that when I get the money I use it to pay off my credit card. If the money is currency, then it persists, but if it is marks on a ledger, it is gone. The money created by my credit card loan or loans disappears. You can't hold money if it does not persist.

I think I'm stuck at "excess demand for apples." What formal model do you use to think about that? You can't see it in a supply and demand curve model, where the equilibrium price and/or qty adjust to changes in the demand curve.

Alternatively, in the total demand to hold model, we would say that the current apple holders have higher reservation prices than any of the buyer bids.

[Nick mentions people standing in line. Is that because the posted price was too low and the store ran out? Or because the cashier at the register is really slow? Or what?]

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