Monday, August 5, 2013

Bugos Responds to My "What Is Money?" Post

Dear Robert:

 I am responding to your criticism of my money supply metric in the below essay .

You are correct that Rothbard had a very broad definition of the money supply.  I chose to discount the reach of his subjectivism based on an a priori “objective” definition of money (whether it can be used as final pmt for goods, services and legal debts) and based on the double counting problem.

In reviewing all the contemporary Austrian attempts to quantify this statistic I felt that Shostak’s definition was far too narrow.

He discounted savings deposits.  But I felt they met my criteria: they do not succumb to the double counting problem and they can be used as final payment for goods and services rendered (via my debit card) least in the US/Canada.  Hence I sided with Salerno and the consensus more or less.

But I discounted his Rothbardian slant, which you identified in your article, that with regard to MMF’s, “the liquidity and checkability features of  these assets permit their holders to reduce the amount of money they need to keep on hand to meet anticipated payments and to insure future contingencies.”  This is the subjective definition from the demand side that leads to many problems in trying to measure the money supply.

The subjective views of individual users of money do not always meet my two rules.  That is, in this case, MMF’s cannot be used as final payment while their inclusion leads to a double counting error.  These are not my own rules to be clear.  They are parts of the Austrian definition that I have accepted.

I have not accepted the broad subjectivism of Rothbard or even Salerno in that regard.  Admittedly, I have not read Salerno’s piece “Money, Sound and Unsound,” or maybe I just don’t remember it since I am an avid reader of his work.  So I will defer to you on the matter of whether term deposits affect prices or not –though if he means that cashing them in will increase the demand for cash, and pressure prices, ceteris paribus, then heck we can include all sorts of assets into that mix, including the Tbills that I tend to treat as cash in my investment account, but which I know really aren’t cash.

I take pains to exclude “near” money, and I would count term deposits, MMF’s and other things included in MZM as near noney – and, incidentally, MZM historically tracks my Austrian money metric much better than M2 or M3 would.  But my biggest emphasis is on the double counting problem.

The definitions aren’t very helpful if they lead you to keep counting the same quantities over and over again.

I will track down Salerno’s essay in my spare time and see how he reasons that term deposit changes affect prices, but my guess is that he is just going back to Rothbard’s subjectivism in how they are viewed by money holders.

In general, if you have to dip into your term deposits, as far as I know, you have to first liquidate an “asset” in exchange for cash that has already been counted in the money supply.  This is true whether we are talking about MMF's or insurance policies....and I don’t see why it isn’t true with Terms.

Ultimately, I know my measure isn’t going to be perfect, but it rests on the Austrian definitions that I believe to be the most solid and least contradictory –after having studied all of them.

If we want to isolate the effects of the fractional reserve banking system on the money supply, I think we have to keep to deposit liabilities and stay away from other assets, like insurance company policies.  At least that’s how I had reasoned it.

I don’t claim to have the most accurate measure, but I have come to believe that the metric I have put together is the best we have, given all the obvious draw backs.

Best Regards,

Ed Bugos

Senior Analyst
The Dollar Vigilante

Wenzel response:

There is no such thing as "a priori" objective money. Money is subjective in the sense that an owner of money must view it as money (or something immediately convertible into money at a fixed value), as well as being something generally accepted in exchange by almost everyone else.

I certainly view my money market fund account this way. I use it to pay monthly bills via check and I often use the attached debit card. That the money supply may shrink after my use has nothing to do at the moment I am using the funds. That is, your "double counting problem" is late to the game. In fact, it arrives only after the game is over. When I am using the funds, I am bidding for services in the economy. What happens later is a different story. Indeed, even funds in a checking account can shrink the money supply if a person that is given a check that is drawn on a bank checking account cashes the check by going to the bank and asking for currency.

It is what happens before a transaction occurs that should be of immediate concern to the person calculating  money supply, that is, what is available to bid up prices.

Money Sound and Unsound is actually a book form collection of essays by Salerno. The part of the text I quote from is in Chapter 3 The 'True" Money Supply: A Measure of the Supply of the Medium of Exchange in the U.S. Economy (p.125)

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