ARNOLD KLING
August 14, 2011
The Top Political Contributors
August 11, 2011
Gender and the New Commanding Heights
August 11, 2011
Jamie Galbraith Makes an Assumption
August 11, 2011
Macroeconometrics: The Science of Hubris
August 10, 2011
Real and Nominal Bond Yields
BRYAN CAPLAN
August 14, 2011
The Effect of Thumb Sucking on Income
August 12, 2011
The Voice of Cold, Hard Truth to All Would-Be Educators
August 12, 2011
Ability, Morality, and Prosperity: A Paper and a Report
August 11, 2011
The Theory of Time and Frittering
August 10, 2011
Male Variance and the Remnants of the Gender Gap
DAVID HENDERSON
August 9, 2011
Hayek in "Unbroken", Part Two
August 8, 2011
Hayek in "Unbroken"
August 5, 2011
James Bovard on the Peace Corps
August 4, 2011
Summers Way Off on FDR and 1941
August 3, 2011
The "Amazon" Tax
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Money is not the same as cash. You might not change the amount of money that you hold in your wallet based on interest rates, but they might affect your decision to take out student loans, or to refinance your home, and those decisions will influence how much money is in your checking account, which is also part of the M1 money supply.
My willingness to buy a large asset in which to hold money (e.g. my house) increases and falls with the interest rate. Similarly, my willingness to hold money in a bond or a money market increases and falls with the interest rate. Certainly I don't move my money with every single interest rate change. But when the interest rates pass a threshold, I make changes to my holdings.
This seems (to me) like a very common mentality. Why aren't the above examples of what Bryan says rarely happens?
Most actual cash, to my understanding, is held by banks, which certainly respond to interest rate changes. As for M2 sorts of things, plenty of non-economists are more willing to borrow money when interest rates go down, and try to pay off debt when it goes up; I don't know that spending of balances by individuals responds in quite the same way, but I think by businesses it does something similar. I don't see that what the macroeconomics textbooks propose is so micro-counterintuitive as you claim.
dWj wrote:
I agree with almost everything you wrote, but I'm not so sure about this one claim. Most actual cash is very much in circulation, documentably outside of banks. Who the other large cash-holders are has been an interesting question since the 1970s. Cash is certainly not typically used in large quantities for the daily transactions of the blog-contributing component of the population!
Large chunks of U.S. cash are held abroad, where they are sometimes used in large quantities for black market transactions and as stores of value in countries whose own currencies are inflationary or inconvertible. (As an extreme recent example, consider the enormous cash hordes found in Iraqi safeholds after the toppling of Saddam Hussein.) Large chunks are used for illicit transactions right here in the United States.
To get a handle on how large these other uses are, divide the quantity of cash dollars (or whatever measure of U.S. money you are looking at, perhaps after subtracting the measured cash reserves held by banks) by the U.S. population. The size of the average cash balances held individually will knock your socks off. Your next question will be: since you and no one you know is holding cash balances like that, who is?!
Measuring the interest sensitivity of some of these other large money holders is tricky because the holders are intentionally hiding their cash balances, transactions, and bank accounts; and they are often overseas. I'd have to guess, though, that the large cash holders are fairly savvy and move the money around in international markets and black markets quite a bit. International interest rates are certainly responsive to each other. Do black market interest rates affect legitimate interest rates? I'd bet they do (and vice versa).
Anyone got a link? Economists used to consider the characteristics of who the large cash-holders might be routinely in the 1970s and 1980s, when U.S. double-digit inflation was on our minds. ("Who is holding cash 'at the margin'?" is the way economists ask the question, in tech terms.)
The marginal cash-holder is not the banking system. Banks lose money when they hold cash instead of lending it out at interest--as you point out. Banks try to keep their cash holdings as small as possible as a consequence. They keep minimal cash holdings to satisfy the requirements based on their expectations of their bank depositors' daily requests for cash, and for legal requirements to hold cash reserves.
The marginal cash-holder is also not Grandma--maybe hoarding cash under her mattress. And, it's probably not ordinary folks like you or me going to the bank every few weeks for a little cash in their daily transactions.
The international integration of cash holdings and credit markets is fundamental to economics, but is often forgotten by U.S. writers when discussing the dollars they use in their daily lives.