EC HH Why Money Matters

Here’s an analogy. When there’s a big apple crop, the new apples are sold at market prices. The wholesalers who buy the apples do so at competitive prices and thus don’t feel any richer. They see no need to go out and spend more. But they do have excess apples, which puts downward pressure on the value of apples.

Inflation is a fall in the value of cash. A big crop of new money puts downward pressure on the value of cash. If the government sells me a briefcase full of $1 million cash in exchange for an equal value of bonds, I’m no richer than before. I won’t go out and buy a new Ferrari. But I will have much cash than I prefer to hold, and I’ll get rid of that extra cash.

And here’s where the fallacy of composition comes in. While I can get rid of the extra cash by purchasing bonds, stocks, commodities, real estate or foreign exchange; society as a whole cannot get rid of the excess cash by purchasing other assets. Doing so is merely “passing the buck”.

But the public’s attempt to get rid of excess cash balances will drive up the price of a wide range of assets, leading to more total spending, more NGDP. Eventually, NGDP will rise high enough so that people are willing to hold the larger cash balances, and a new equilibrium is established.

All of this is ignored by MMTers. They seem to think that swapping cash for bonds is “irrelevant”, even when interest rates are positive.

In fact, an exogenous and permanent increase in the money supply of X% will cause prices and NGDP to rise by X% in the long run. Money is neutral in the long run; just as changing a country’s measuring stick from feet to meters doesn’t change the actual (“real”) length of objects.

1 2
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.
William K. 3 months ago Member's comment

I had a college professor who had nothing good to say about the Keynesian theology. Some of the terms sound good and make sense, but the basic premise seems defective.

Of course the proof of any theory lies in how well it correlates with actual events and happenings.

William K. 3 months ago Member's comment

At least one college professor had nothing good to say about the majority of the Keynesian theology. While some of the terms and expressions sound good and make sense,a fair amount of the basic premise does seem rather defective, to put it politely. So the article carries some good insights. And the common means for evaluating theories is how well they agree with what actually happens.

Gary Anderson 3 months ago Contributor's comment

Great article. Asset rise due to MMT money supply rise won't help mainstream labor much. Asset rise seems to have little to do with wage appreciation.

Bill Johnson 3 months ago Member's comment