He has begun work on a primer. In the first entry, he writes,
Central banks are, for better or worse, responsible for seeing to it that the economies in which they operate have enough money to operate efficiently, but no more. Shortages of money wastes resources by restricting the flow of payments, making it hard or impossible for people and firms to pay their bills, while both shortages and surpluses of money hamper the correct setting of individual prices, causing some goods and services to be overpriced, and others underpriced, relative to others. Scarce resources, labor included, are squandered either way.
I am going to raise an issue with this, but keep in mind that this is an issue I have with conventional monetary theory–it has nothing personal to do with Selgin.
I do not believe that the central bank can set the money supply. Instead, think in terms of Hyman Minsky’s aphorism: anyone can create money; the trick is getting it accepted.
Consider what is accepted as money these days: among consumers and retailers, credit cards and Paypal are accepted. In the “money market” where banks and Wall Street firms trade, government securities are sufficiently liquid to act as money.
With all of these alternatives available, it is difficult for the central bank to create a shortage of money. in response, people can just make a bit more use of the alternative methods.
Creating a surplus of money is possible, if the central bank wants to turn the printing presses loose. But small increases in what the central bank supplies will more probably be met by small decreases in the use of alternative payment systems, leaving no net effect on prices.
Again, mine is not a standard view.
You should probably be reading Jeffrey Snider, then.
yep, color me unconvinced. You simply observe that money creation is *slightly more difficult* in the current environment compared to a more traditional view. Instead of Paypal and credit cards, I think of Amazon gift cards as a more salient example. This is a big chunk of money that is pretty far outside the usual scope of monetary policy — both regulations and direct interventions. But I have little doubt that those who hold nontrivial amounts of wealth in the form of Amazon gift cards will respond rationally to obvious incentives from federal policy regarding these holdings.
+1
I do not think Arnold’s view of money as stated here is consistent with his overall PSST framework.
Let’s say you only drink Indonesian coffee (4th largest producer). But there is a pestilence in Brazil (largest producer). Surely you would expect that the price of your Indonesian coffee would rise as people substitute away from it. And lower if there is a bumper crop in Brazil.
Now, the difference in magnitude between the Fed and gift cards vs coffee from Brazil and Indonesia is vast. ~$4T monetary base vs ~$80B in gift cards = 50X. Brazil ~6B lbs vs Indonesia 900M lbs = 7X. I would also say that gift cards are a worse substitute for dollars than Indonesia coffee is for Brazilian.
Sure, one can imagine a world where there is no Fed that operates perfectly well But I thought one of the points of PSST is path dependence.
All those private dollar substitutes to which you refer, Arnold, are claims to Fed (base) dollars, the employment of which in payments ultimately depends on the availability of means of final payment or settlement. It is a category mistake to assume that, because financial innovation constantly alters the set of such substitutes, the same innovation must also have severed any dependence of their aggregate quantity from that of the underlying stuff for which they constitute mere claims.It simply isn’t true that “anyone can create” dollar-denominated money regardless of the availability of official dollars themselves.
As for the general idea that “anyone can create money; the trick is getting it accepted,” it begs the question: money is defined as a generally accepted medium of exchange or payments! Unless the stuff one creates is generally accepted, in other word’s it just ain’t money!
Yup, in other words, all Minsky has really said is anyone can create paper, the trick is making it money. But phrased that way it becomes entirely empty.
Case in point: Satoshi Nakamoto has created money. Still having some problems getting it accepted.
He’s created something, it ain’t quite money. Not yet, anyway.
If the government stopped making money and made currency illegal we would not all starve. A lot of us would starve. But how many?
Aren’t derivatives $1.2 quadrillion and 10x global gdp?
Anyone who didn’t learn how to trade in, say, cigarettes.
Only those in prison would survive. Sounds like a movie. Probably a comedy.
All of the private money-like assets you list are (mostly short term) securities denominated in dollars, and counterexamples such as bitcoin find the price volatility a serious problem. Why exactly is it that securities whose payoffs are nearly identical to the payoffs of government issued money are the ones with money-like liquidity properties? While private money creation definitely exists, this fact seems to me to imply the government’s role in money markets has some special importance, even if I cannot precisely say what it is.
A related point: If we view banks as the main private creator of money, then in practice private money is effectively a very safe, senior tranche of a pool of mortgages. Shouldn’t a surplus or shortage of government supplied money at least be reflected in the pricing of mortgage credit? For every dollar of bank deposits, you need 1.10 or so in mortgages on a bank’s balance sheet.
“the trick is getting it accepted”
OK, but like, no. If you’re a government, that’s not the trick.
If you’re a nation-state who’s name isn’t Venezuela or Zimbabwe, you can get your money accepted. Getting their money accepted is a problem that none except the most failtacular countries have.
I really wish you’d distinguish between unit-of-account and medium-of-exchange, and explain in more detail what you think central banks can and can’t do to nominal prices.
“I really wish you’d distinguish between unit-of-account and medium-of-exchange, and explain in more detail what you think central banks can and can’t do to nominal prices.”
I don’t think Janet Yellen can hear you. Zing!
But seriously, all I was thinking was about how they might think they are loose when they are really tight because they are staring at the levers instead of the tape. It’s not much different from what Scott Sumner says so far.
But then Scott posits they really could be looser if they REALLY tried. But I think The Fed thinks they are really trying, at least they have said so, and this seems like one time they have no reason to lie.
But I’ll read anything Arnold puts out.
You know what would be awesome:
3 way debate between Scott, Arnold and John Cochrane on what causes the price level.