« Can the buck "break the buck"? | Main | Wealth and Its Distribution: Tomorrow is Yesterday »


Feed You can follow this conversation by subscribing to the comment feed for this post.


An increase in the demand for money is like a decrease in the supply of money. Both cause an excess demand for money (people want to hold more money than they have), and that causes recession and deflation. That was what was happening in my response to your question.

Thanks Nick. I'll have a look at what Mike Sproul has written on the backing theory, and if I have an explanation that is not old hat, I'll put it on my blog.

Nick, it's true it's all the same whether it's an increase in the demand for money or a decrease in the supply of money, they're both inflation. But the result could still mean a decrease in velocity. The resulting high prices could just be that the increasingly few transactions are clearing at the ever increasing price. If the money stock keeps increasing, this supports an increasing price level even though the velocity and the volumes may already be decreasing.

"You could correctly say that the unemployed are trying to "buy" money. But, and this is important, because it is why money is different, that does not mean the unemployed want to *hold* more money. They don't want to *hold* money. They want to buy money, then immediately sell it again, to buy food, clothes, furniture, etc."

Or you could correctly say that the unemployed DO want to hold money but they dont have enough of it to hold it because they need all of what they get just to stay alive.

Gizzard: Yes, but the important question is this: if others did sell their money, by buying the unemployed's labour, would the unemployed hold that money or spend it? OK, it's probably some of each. I think they would mostly spend it, which means they are buying the labour of other unemployed. So the process doesn't stop at the first round, it continues, through a "monetarist multiplier".

Back to the original debate, more commentary from Dr. Wray, going a bit beyond taxes initiating the value of money-

"To go further, let us say government monopolizes the water supply (or energy supply, or access to the gods, etc); it can then name what you need to deliver to obtain water (energy, religious dispensation, etc). In that case, if it says you must obtain a government IOU, then you want government IOUs—currency—to obtain water in order to avoid death by dehydration. In early 19th century England, almost all activities necessary to keep your family alive were illegal by dictate of the crown. You had to pay a fine after you killed game to feed your family. You needed the crown’s currency to pay the fine—hence “fees drove money”. You get the picture."


wh10: thanks for posting that.

But Dr Wray is assuming that the monopolist reduces the supply of water to 9 litres per year when the demand is 10 litres per year. OK, that will make water scarce, and valuable.

But that would mean that the government spends 9 bits of paper per year and taxes 10 bits of paper per year. So it has taxes higher than spending. This creates two issues:

1. If the government can have taxes higher than spending, why does it resort to paper money? It could do the same with gold, or whatever.

2. This means that the stock of paper money is falling over time. That is certainly not what has happened, historically. It has been growing over time. Governments spend 11 bits of paper, and tax 10.

(I may not be responding to comments for a few days).

wh10: if you have the time, I would be grateful if you could suggest this response to Randall Wray. If it does indeed apply to his argument. I tried to read his posts quickly, but I need to go to bed, so can't read it properly. And I may not be on the internet for a few days.

"It's weird. We want the people to fear inflation but we don't want the policymakers to fear inflation."

Most average joes spend every penny of the money they hold, do you really need them to fear inflation?

Perhaps you meant you want the 'people' that hold money to fear inflation? These same 'people' seem seem to have much sway over whether policy makers fear inflation. Maybe call them savers instead of people?

Why force savers to spend if they don't want to? Is there some economic justification, besides making your economic theory work?

MMT allows for people to save and not need to spend by providing unlimited NFA. It seems your biggest fear is that savers might build up large savings and then actually start to spend uncontrollably.

Anyway it might help the national debate if both savers and people acknowledge the fear is hyperinflation, not running out of NFAs or bumping into a debt limit.

"But Dr Wray is assuming that the monopolist reduces the supply of water to 9 litres per year when the demand is 10 litres per year. OK, that will make water scarce, and valuable"

Why only 9? Might someone not want to save an extra liter, so that water still has value ever if 10 were made available? Might another household be created each accounting period requiring another liter to be added to supply?

Will do!


Thanks for the detailed response.

Yes money is wierd. Most people think of it like a commodity but its not. It simply prices commodities and has some value as a useful fiction.

In your story are bond holders people, whom you want to fear inflation or are they govt whom you dont want to fear inflation? If bond holders fear inflation they will, according to all your monetarist models, make things worse by demanding higher interest rates raising "borrowing" costs ( I dont buy the idea that our govt borrows money but Ill use that term just for those of you who do). If they dont fear inflation and keep purchasing low interest debt ad infinitum then......... MMT is correct it seems.

"But money is not like land, or bonds. Money is really weird. At least at times like now, when there's lots of output and labour that firms and unemployed workers want to sell but can't, because they can't find buyers."

Agreed, but I would add they cant find buyers in the private sector. They COULD find it in the public sector if we didnt have this unwarranted aversion to govt employment as a bridge to private sector employment.

Treating money like its a zero sum game is a large part of our problem I think.

Sorry I'm late to the party Nick:

How about plan c: government gives the money to the banks. The banks loan out the money, 10 bits of green paper, and demand back 11 bits of green paper. Not only will this create an excess of demand, but it will allow government to spend more than it issues, as long as the excess of demand is maintained. And the banks are the ones that come beat up the ones short of their green bits of paper. As you point out, there always will be some peple short of the green bits of paper.

Check out: http://anamecon.blogspot.com/2010/11/banks-are-forcing-debt-on-rest-of-us.html

Gizzard. In any Keynesian model, for example, an increase in expected inflation *may* (depending on the central bank response) increase *nominal* interest rates, but will lower *real* interest rates (unless the economy is at full employment). An increase in expected inflation will increase AD, output and employment. Same in monetarist models, if we are in a short run recession. Hard to explain this fully, without diagrams, etc. But you really MUST distinguish real vs nominal interest rates. MMTers need to be clear on this. "Bond holders" are people.

Greg: but that's not a tax, which is involuntary. Suppose I said: "here are 10 bits of paper. If you take them, and don't give me back 11 next year, I will beat you up. If you don't take them, I will not beat you up, even if you don't give me back any." Nobody will take my offer. Unless of course the bits of paper already have value.


When you use the term real interest rate you are referring to a natural rate of interest no? I understand that its not universally accepted that there IS a natural rate of interest.

If you are talking about the nominal rate minus the inflation rate, the inflation rate is in essence a nominal variable itself that is quite divergent in how it can be determined.. is it not. I understand that there is some agreement to the measurement of inflation but even inflation is a nominal variable is it not? In fact, inflation must be nominal because inflation is only measured in the same units as money.

I don't believe in "and the a miracle occurs" science. Inflation is like price controls, it systematically misleads people about price relation -- it does so because the growth of money MUST take place a particular places in the economy, but no one can know everything about this, or all or the effects on relative prices and quantities (particularly productionand use of time consuming production goods).

To ubderstand causation, stop thinking in terms of magic.

Nick writes,

"Greg: In a steady, fully-anticipated, inflation."

There is No Such Thing. Inflation by definition is Not fully anticipated, or perfectly steady in it effects.

It begs the question to assert "a steady state" my counter-example assumes isn't possible or actual.

Assume magic and "a miracle occurs" only reveals the scientific poverty of the "case" against my point and causal example.

Make that:

"I don't believe in "and then a miracle occurs" science.


While I not entirely convinced by Mike Sproul's defence of the real bills doctrine on his website, it does highlight the need to explain the "hot potato" effect of money rigorously. Do you (or any other reader) know if this has been done please?

Nick said:

"Greg: but that's not a tax, which is involuntary. Suppose I said: "here are 10 bits of paper. If you take them, and don't give me back 11 next year, I will beat you up. If you don't take them, I will not beat you up, even if you don't give me back any." Nobody will take my offer. Unless of course the bits of paper already have value."

The bank can say: "I will give them value. I will make sure you will be able to buy- a used car from my friend the used car dealer, who will be able to take the bits of paper and buy from my friend the farmer, who will pay you for your labor in these bits of paper which you will work for because to you they now have value... Im not sure how token economies started, way back when, but I doubt the first medium of exchange was gold. How did cowrie shells take on value? It wasn't because of taxes.

"a steady, fully anticipated inflation" ... isn't inflaftion and isn't a phenomena of the real world.

If your "model" stipulates "a steady, fully anticipated inflation" you model isn't allowing us to even think of inflation much less understand it or model its causal effects.

In a gold money system, the growth of the gold supply out of mines in the new world changes all relative price relations and changes the time structure of production at particular places in the economy, and also changes consumption and production decisions by different people.

In different sorts of banking / money regimes similar effects take place, depending on were new money enters the economy, where it didn't before, and depending on how it interconnects with credit and leverage elements.

The comments to this entry are closed.

Search this site

  • Google

Blog powered by Typepad