Tuesday, January 11, 2011

Could a Spike in the Demand for Honey Buns Cause a Recession?

The answer is no for most of us.  If, on the other hand, you live inside a Florida prison then the answer is yes.  For the economies inside Florida prisons now use honey buns as a medium of exchange.  And as Nick Rowe has tirelessly explained, recessions can only occur when there is an excess demand for the medium of exchange. I am not sure, though, what a prison economy recession would look like...
(HT Tyler Cowen)

5 comments:

  1. David,

    I know cashing out into currency and NOT spending it and just holding it is money hoarding, and thus the Fed must immediately increase the money supply by the same percent.

    But what if you put your money into your checking or savings account in a psychological attempt to hoard it and never spend it. Is this hoarding? On the one hand you are increasing your demand for money since thats the money supply, on the other hand its not hoarding because the money goes over to someone else (the bank).

    For example. In the 21st century I imagine no one "hoards" money by physically increasing their demand for cash. These days they hoard money, or in other words "increase their demand for money" by putting it into and holding it in their checking or savings account. So, in the summer of 2008 people were not increasing their desire for currency, but trying to hold more money than they used to in the bank accounts. But how on earth is that hoarding?!

    That is very confusing.

    Joe

    ReplyDelete
  2. Joe,

    An increase in money demand means not spending your money, no matter where it is. As you note, today it would most likely take a non-cash form such as checking, saving, or money market account. Now just because these are deposited in banks does not mean they are lending them out. Banks too may increase their demand for money by holding more reserves.

    ReplyDelete
  3. What is interesting is that a spike in demand for honey buns, in this circumstances, might reduce the propensity for them to be used as a medium of exchange, i.e. honey buns would become less money-like because of the excess demand. Another good might step in and help fulfill the demand for a medium of exchange. The money supply, measured as both goods, would increase. However, their combined moneyness might only be a little bit less.

    Of course, one of the problems for the U.S. economy is that no other good can step in to satisfy peoples' demand for a medium of exchange, because the government operates an effective monopoly control over the money supply. Consequently, when there is monetary disequilibrium, U.S. dollars lose some of their moneyness, there is no alternative to help alleviate the lack of good money, and people probably resort to barter more often.

    ReplyDelete
  4. Lee,
    Interesting point. If some other goods does become the medium of exchange in the prison then this would make for a great 'natural' experiment in competitive currencies.

    ReplyDelete
  5. David,

    Better yet, I bet the medium of account, such as there is one, remains U.S. dollars. Perhaps there is a natural experiment for a Yeagerian separation of the medium of account and medium of exchange. Shouldn't this mitigate the problems associated with a monetary shortage?

    I may be misunderstanding matters. I haven't read much Yeager, but I got his "The Fluttering Veil" for Christmas, and hopefully will be up to speed soon.

    ReplyDelete