tag:blogger.com,1999:blog-5713178645208582139.post1138636884622894907..comments2024-03-22T02:37:15.030-05:00Comments on Macro Musings Blog: Martin Wolf, the Paradox of Thrift, and the Excess Demand for MoneyDavid Beckworthhttp://www.blogger.com/profile/04577612979801459194noreply@blogger.comBlogger20125tag:blogger.com,1999:blog-5713178645208582139.post-83483794053110921492010-10-02T06:57:12.798-05:002010-10-02T06:57:12.798-05:00Thinking about a unit of account that is different...Thinking about a unit of account that is different from the medium of exchange soon becomes very complicated. Still, I am sure that 2 year T-bills are not serving as the unit of account or the medium of exchange in the U.S. today.<br /><br />Anyway, if there is an excess demand for anything that serves as unit of account, it does require a deflation of the prices of everything else, and if Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-37212920983037028522010-10-02T06:49:12.359-05:002010-10-02T06:49:12.359-05:00Great post David.
Nick's explanations in the ...Great post David.<br /><br />Nick's explanations in the comments were great.<br /><br />One point I would add is that David's response about the money supply process looked to base money. If loans are paid down and checkable deposits contract, the banks that issue the checkable deposits are accumulating base money--reserves. The demand for base money has risen.<br /><br />Nick's Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-53533081600828328962010-10-01T10:28:10.898-05:002010-10-01T10:28:10.898-05:00"Paradox of thrift" is a misnomer. It is..."Paradox of thrift" is a misnomer. It is possible for an excess demand for money to occur while total savings are actually declining. Consider a case where, all else being equal, spending income on stocks, bonds, etc. decreases while income spent on money balances increases. Should this be called the "paradox of spendthift"? Of course not, because it has to do with money not Lee Kellyhttp://www.criticalrationalism.netnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-74770157917178036012010-10-01T09:33:22.958-05:002010-10-01T09:33:22.958-05:00Thanks Nick. I also provided a link to your new po...Thanks Nick. I also provided a link to your new post on my latest one.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-90145176280435856722010-10-01T08:25:40.686-05:002010-10-01T08:25:40.686-05:00My response, mostly to Paul Krugman, because there...My response, mostly to Paul Krugman, because there's actually less difference, theoretically between me and Brad DeLong on this.<br />http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/10/the-paradox-of-thrift-vs-the-paradox-of-hoarding.htmlNick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-8668482308797206152010-09-30T17:50:08.464-05:002010-09-30T17:50:08.464-05:00Right, David.
Rarely have I read something that i...Right, David.<br /><br />Rarely have I read something that is so obviously right.<br /><br />And now I have a new anchor for trying to understand what excess demand for money actually means (which I desperately need).JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-4632421300894579662010-09-30T17:16:41.836-05:002010-09-30T17:16:41.836-05:00JKH,
Luckily for both us we have Nick Rowe!JKH,<br /><br />Luckily for both us we have Nick Rowe!David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-87614542522398388062010-09-30T17:07:40.033-05:002010-09-30T17:07:40.033-05:00thanks, Nickthanks, NickJKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-84181475439439263982010-09-30T17:02:36.347-05:002010-09-30T17:02:36.347-05:00JKH: If a bank loan is paid down, and so loans and...JKH: If a bank loan is paid down, and so loans and deposits both fall (and stay down, let's assume), and if those deposits were (say) chequable demand deposits, and so a medium of exchange, then the supply of money falls. If the demand for money stays the same, we now have an excess demand for money.<br /><br />Andy: <br /><br />You lost me on the first paragraph. <br /><br />You may well be Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-34340948840469873422010-09-30T16:45:26.289-05:002010-09-30T16:45:26.289-05:00ecb,
I think you're right. I don't mean t...ecb,<br /><br />I think you're right. I don't mean to be contentious for the sake of being contentious.<br /><br />Still, one way I visualize an increased demand for money is an increase in the duration of M1 balances - i.e. duration of the average holding period between velocity blips.<br /><br />As demand for M1 balances increases, velocity goes to zero, and duration goes to infinity.<JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-1379762513914070912010-09-30T16:33:06.885-05:002010-09-30T16:33:06.885-05:00I don't think DB and JKH will be able to agree...I don't think DB and JKH will be able to agree on money demand because they have different views on money supply.<br /> DB argues in the quantity theory tradition, and believes the money multiplier model to be a valid one. I think JKH has a very different take on the monetary system. <br />This is an old debate. Back in the 1970s the British post-Keynesians such as Kaldor mercilessly ecbnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-18055941826951815092010-09-30T15:21:50.363-05:002010-09-30T15:21:50.363-05:00David,
"In general, someone or some entity m...David,<br /><br />"In general, someone or some entity must hoard the money after getting it."<br /><br />Absolutely not.<br /><br />The banking system contracts. Loans decline. Deposits decline.<br /><br />There is no hoarding of money, because the money's gone.JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-63162345038127983922010-09-30T14:27:25.104-05:002010-09-30T14:27:25.104-05:00JKH:
There is no excess demand at the point of the...JKH:<br />There is no excess demand at the point of the bank loan being paid down. The question is what the bank or any creditor does with the money used to pay down the loan. As alluded to by Nick, if the creditor fails to use the money then it creates an excess demand for money. In general, someone or some entity must hoard the money after getting it.<br /><br />Andy:<br />If I understand youDavid Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-10789495665050696102010-09-30T12:34:34.187-05:002010-09-30T12:34:34.187-05:00I disagree with Nick (and with the original post) ...I disagree with Nick (and with the original post) about this. It is not a paradox of hoarding the medium of exchange; it is a paradox of hoarding any bubble asset in units of whose value sticky prices are quoted – which is to say, it’s a paradox of thrift, provided that such an asset (or assets) exists, because the only way to engage in collective thrift is to purchase such an asset. But the Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-20045795032406658522010-09-30T11:04:59.448-05:002010-09-30T11:04:59.448-05:00David,
When a bank loan is paid down, there is a ...David,<br /><br />When a bank loan is paid down, there is a contraction in both bank loans and bank deposits. <br /><br />How should one construe this as an excess demand for money?JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-24306305053545562102010-09-30T09:36:36.257-05:002010-09-30T09:36:36.257-05:00Question for you: since the paradox of thrift refe...Question for you: since the paradox of thrift refers to a flow rather than a stock, i.e., an ongoing reduction in expenditure, does this require the Fed to increase the flow of money?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-64614001246502243362010-09-30T09:35:21.328-05:002010-09-30T09:35:21.328-05:00Question for you: since the paradox of thrift refe...Question for you: since the paradox of thrift refers to a flow rather than a stock, i.e., an ongoing reduction in expenditure, does this require the Fed to increase the flow of money?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-23169024671399550572010-09-29T20:22:37.672-05:002010-09-29T20:22:37.672-05:00Nick,
Even though I read Yeager in grad school, i...Nick,<br /><br />Even though I read Yeager in grad school, it was reading your blog and Bill Woolsey's that got my thinking straightened out on this issue. Consequently, I was remiss not to mention you in the original post. I remedied that with an update that links to some of your posts on the topic.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-52464554510583377912010-09-29T18:30:09.979-05:002010-09-29T18:30:09.979-05:00And, the way to reduce debt, without creating a re...And, the way to reduce debt, without creating a recession, is for debtors to spend less and creditors to spend more. So debtors save, and creditors dissave, while leaving aggregate desired saving the same. For every $1 borrowed, there must be $1 lent.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-59947836405251365432010-09-29T18:27:00.120-05:002010-09-29T18:27:00.120-05:00Yes! There is no paradox of thrift. There is a par...Yes! There is no paradox of thrift. There is a paradox of hoarding the medium of exchange. That's because there are two ways to buy more money: sell more other things; buy less other things. One of those two options is always open to the individual, but not to everyone.<br /><br />The *only* case where Say's Law is wrong is when there is an excess demand (or supply) of money, the medium Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com