Money as a store of wealth

Nick Rowe has a post that decries the idea of money as a store of value. He asks:

How much would I have been willing to pay for my house if the seller had imposed a condition that I could use it as long as I wanted but could never sell it again, or rent it out to someone else? Less than I paid for it, but still a positive amount. It yields a flow of services even if I can't sell that right.

How much would I have been willing to pay for the S20 note in my pocket if the seller had imposed a condition that I could use it as long as I wanted but could never sell it again, or rent it out to someone else? Nothing.

My response:

That's the same question a value investor asks before buying a stock.

The answer usually comes to something like, if I can pay $50 for a stock that is worth $100, then even though I can't resell it in the market I'll still buy it. Because the stock can't be resold, that $50 in value has to be realized through dividends. But if the stock is prohibited from ever paying a dividend, this value can still be realized by the firm repurchasing and canceling shares at higher prices.

I'd say roughly the same applies to central bank notes. If I can buy a note for far less than it's worth and hold it till the central bank begins to mop up the supply notes and cancel them, then I'll go ahead with the transaction. Since central banks are less opportunistic than firms and therefore less likely to announce buy backs, I'd only buy at a huge discount. A huge discount to what? The value of its bonds, bills, gold, buildings, and forex. In sum, the price I'd be willing to pay for non-transferable bank notes is not "nothing" but some number >0.

The store of value vs. medium of exchange argument is one of the oldest arguments in monetary economics. I don't think the answer is is binary, as in either/or. Rather, there is some sort of way to properly configure the two concepts into a logical whole. The answer would be a lot easier if the twin concepts medium of exchange and store of value were to be defined first in a microeconomic sense. In a sense, this sort of integration of monetary economics with microeconomics goes against the grain, since this would be making microeconomics more like monetary economics, and not vice versa, which has been the general approach taken by the whole microfoundations of money enterprise.

Comments

Shadow banks want in from the cold

Remember when shadow banks regularly outcompeted stodgy banks because they could evade onerous regulatory requirements? Not any more. In negative rate land, regulatory requirements are a blessing for banks. Shadow banks want in, not out. In the old days, central banks imposed a tax on banks by requiring them to maintain reserves that paid zero percent interest. This tax was particularly burdensome during the inflationary 1970s when short term rates rose into the teens. The result was that banks had troubles passing on higher rates to savers, helping to drive the growth of the nascent U.S. money market mutual fund industry. Unlike banks, MMMFs didn't face reserve requirements and could therefore offer higher deposit rates to their customers. To help level the playing field between regulated banks and so-called shadow banks, a number of central banks (including the Bank of Canada) removed the tax by no longer setting a reserve requirement. While the Federal Reserve didn't go as f...

The bond-stock conundrum

Here's a conundrum. Many commentators have been trying to puzzle out why stocks have been continually hitting new highs at the same time that bond yields have been hitting new lows. See here , here , here , and here . On the surface, equity markets and bond markets seem to be saying two different things about the future. Stronger equities indicate a bright future while rising bond prices (and falling yields) portend a bleak one. Since these two predictions can't both be right, either the bond market or the stock market is terribly wrong. It's the I'm with stupid theory of the bond and equity bull markets. I hope to show in this post that investor stupidity isn't the only way to explain today's concurrent bull market pattern. Improvements in financial market liquidity and declining expectations surrounding the pace of consumer price inflation can both account for why stocks and equities are moving higher together. More on these two factors later. 1. I'm with...

Does QE actually reduce inflation?

There's a counterintuitive meme floating around in the blogosphere that quantitative easing doesn't do what we commonly suppose. Somehow QE reduces inflation or causes deflation, rather than increasing inflation. Among others, here are Nick Rowe , Bob Murphy , David Glasner , Stephen Williamson , David Andolfatto , Frances Coppola , and Bill Woolsey discussing the subject. Over the holidays I've been trying to wrap my head around this idea. Here are my rough thoughts, many of which may have been cribbed from the above sources, though I've lost track from which ones. Let's be clear at the outset. Inflation is a rise in the general price level, deflation is a fall in prices. QE is when a central bank purchases assets at market prices with newly issued reserves. In equilibrium, the expected returns on all goods and assets must be equal. If they aren't equal then people will rebalance towards superior yielding assets until the prices of these assets have risen high...

Typography

Search This Blog