mercoledì 31 marzo 2010

Is money a present or future good?

This morning I read "credit creation or financial intermediation?" by Cochran, Call and Glahe (QJAE).

The paper precisely hits one point of disagreement in the monetary disequilibrium vs injection effects debate, which divides the orthodox Austrian camp (Mises, Hayek, Rothbard,...) and a new brand of Austrian-monetarist synthesis whose most important proponent is Horwitz (Microfoundations for microeconomics), and is at the root of the works of Warburton, Yeager, Selgin, White, and Sechrest.

The two theories appear to differ on many aspects, some of them of purely ideological and noneconomical nature, and some of theoretical interest: is free banking feasible?, is money a present or future good? are injection effects or price rigidities responsible for monetary non-neutrality? is the law of reflux a feasible way to enable a proper use of voluntary saving?

Today I want to talk about the issue of presentness, because I consider both camps to be wrong (which means that the only right explanation is to be found in this blog, and this adds to the unlikeliness of its reliability):
  • Cochran says that there is no cost in money holding, in terms of foregone consumption, because money can be used without any delay: money is a present good.
  • Horwitz says that money holding is saving, because it is not consumption.
  • I say that money holding is neither of the two.
When a bank receives 1$ of deposit and decides to lend a fraction 0 < X < 1 of it, it is immobilizing X$ worth of real resources (assuming constant prices) for an investment project. The moneyholder, however, doesn't lose the availability of his spending power, so that it has not yet decided whether he will consume or not. The bank is right in lending the deposit if the consumer won't exercise his option of using his money to buy consumers' goods before the investment is liquidated. The bank is wrong if the option is exercised before final liquidation, because it will have to ask for credit to pay for something that was not intended as credit. If all the banks at once immobilize more money than money holders are willing to consider as real saving, the banks will run out of liquidity and a crisis will ensue. This is not a liquidity crisis: it is a real crisis, because it is the command over real resources that is not available, not liquidity per se, at least if money doesn't depreciate (i.e., if a firm and a consumer want the same commodity, this is real scarcity, it is not a monetary problem). Of course, the banks can reduce the real value of their monetary liabilities in order to avoid running out of liquidity by printing more money. This is exactly what happens under central banking. However, without a public safety net I don't believe that this behaviour would be feasible, other than in the shortest run: there are limitations to monetary devaluation in that outside money cannot be printed, as it is commodity money.

This is not an analysis of the business cycle, becasue, to say the least:
  • a distinction between real and nominal movements should be done: if prices were perfectly flexible, market coordination were instantaneous, and monetary movements had no distributive effects... money would only be a nominal issue, of no interest for economics (this is unlikely, of course),
  • not all banking crises result in inflation, so that an analysis of deflationary crises is necessary (there is no mystery here: credit and monetary aggregates are countercyclical, so not all crises result in devaluation, a stop in the credit creation process suffices to create a crisis when the underlying market structure is unsustainable, and its reversal adds to it).
I believe that some of the deposits are to be considered as saving, and that fractional reserve banking is stable to the extent that it can distinguish, at a systemic level, between money intended as saving and money intended as consumption.

The error in the monetary equilibrium analysis is to confuse a tautology (money holding is saving now, as there is no consumption) with the real economic issue (in order to avoid problems, money holding will have to be saving from now to the end of the underlying investment).

At this point, a question must be raised about how banks can distinguish between real saving (in the economically relevant sense, i.e., over an horizong linked to the time structure of production, which in monetary equilibrium analysis is never considered) and merely instantaneously foregone consumption. I know of no reliable answer to this question, maybe because, in the literature I know, both "presentists" and "futurists" don't see the problem in these terms.

2 commenti:

  1. ... isn't money a present goods whose value depends on the value of goods it will be exchanged for? A Medium could be even considered as a goods of order zero, whose value depends on the value of all higher order goods which "derive" there-from; as "production" needs time, these higher order values are future values, and this involves a shade of "future" in the characteristic of the goods "money".

    ... banks need not distinguish deposits stemming from real savings or inflationism, they even cannot, because every deposit is held in form of currency, and currency "aggregates" all fiat and real components of savings within and undistiguished "summa" of means of payment.
    It is the same mechanism with implies the "drain" of wealth from real savers to the first fiat money beneficiary: a banknote is a banknote, and its claim on real production is the same.


  2. Money is a present good because you can spend it now, but it is not consumption, so it is also saving, i.e., it is a future good.

    A lot of words have been expended to prove that fractional reserves were wrong because they were instantaneously usable and created duplicated property rights (I don't believe it), and a lot of words have been expended to prove that fractional reserves were just a limit case of a continuum of legitimate credit transaction like time deposits, with time going to the zero limit.

    The problem is how to distinguish the limit between now and the future, and I think that the proper limit is the length of the underlying investment plans: money should not be consumed when it is used for investment, otherwise a dearth of savings ensues and investments need be liquidated.

    It's the same argument set out by Bagus on the Libertarian Papers, although I think he didn't draw the full conclusions.

    If banks cannot distinguish deposits which will be saved long enough and deposits which will be consumed, and, even more important, they cannot distinguish credit originated by the original depositors' choices and credit multiplied by the banking system as a whole, then there is no possibility that banks will ever succeed in avoiding business cycles by immobilizing more resources than their depositors are willing to save... this was Hayek's argument in "MOnetary theory and the trade cycle".

    If you say "banks need not distinguish deposits stemming from real savings or inflationism, they even cannot", you are basically claiming that banks cannot avoid creating economnics instability.