Sunday, January 24, 2010

More on The Shostak/Salerno/Rothbard Money Supply

In the comments section following my original post, True Money Supply versus M2: Why Murray Rothbard Was Wrong , Peter writes:
The Shostak/Salerno/Rothbard argument against including MM funds in the money supply is that when a person writes a check to a MM fund that amount of cash is withdrawn from their checking account, loaned to the MM fund, then loaned (by purchasing, for example, commercial paper) to a corporation, who deposits in their checking account. Therefore the same dollar can't simultaneously be "money" to both the person who invested in the MM fund and the corporation who deposited the dollars in their checking account. Shostak has a couple of daily articles on mises.org that explain the origins of TMS and give the above argument.

The quick answer to Peters comment, especially, when he writes:
Therefore the same dollar can't simultaneously be "money" to both the person who invested in the MM fund and the corporation who deposited the dollars in their checking account
Why not? Money is subjective. If in general economic actors view something as money, it is such. If a dry cleaner accepts a money market fund check just as easily as he does a check drawn on a bank demand deposit account, then they are both money bidding on prices in the economy.

I have yet to see any situation where a retailer or a landlord has asked, "Is that a check from a money market fund, or a bank?" Checks are either accepted or they are not.(Note: I say retailers and landlords here because I believe there is some kind of government regulation prohibiting stockbrokers from accepting money market checks under certain circumstances.)

As for the argument that the money put into an MM is then paid out when, say, commercial paper is bought by the MM, I remind Peter that this same thing happens when, under the current fractional reserve system, cash is put into a bank demand deposit account. The money doesn't sit there, it is loaned out, or perhaps just like the MM, the money is used to buy commercial paper. Yet, the original depositor acts as though his money is there as cash.

1 comment:

  1. I think you are not quite understanding Peters arguments, which is, "Measuring TMS".

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