As if there was really such a real thing as “natural” rate and it wasn’t just a mental construct (like equilibrium).
Notice: Nothing works any longer “until prices adjust” (Esuric’s own words). The market, once again, is considered only functional in some equilibrium (monetary equilibrium IS equilibrium), but is in some apparent disarray when voluntary actors are disturbing it.
Equilibrium is considered a benchmark according to this analysis. Equilibrium is not a benchmark. It’s a mental construct that shows us the direction in which market forces act upon and would be brought about if no further changes in market data were to take place.
This analysis, and I am happy you took the time to write it, contains the same fallacies that the mathematical economist commits. You just didn’t model the above in mathematical form.
Don’t confuse the demand for money with the demand for wealth. They are entirely different and the latter is insatiable while the former exists in order to facilitate exchange (and is elevated during times of extreme uncertainty). The demand for money is the demand for liquidity. If you had an infinite demand for money then you would sell off all of your assets and never spend a single dollar. You would just hoard cash at all times and die of starvation.
This is what economic analysis (pure theory) is. You compare the real world with a hypothetical and perfect world in order to identify and analyze the relationships between certain variables, while realizing that such a state is completely illusory and unattainable. The monetary equilibrium theorist’s don’t claim that any deviation from Pareto efficiency is a market failure which requires government intervention, as the mathematical economists do; they merely reveal and explain the effects of a certain type of disequilibrium, which, whether you acknowledge it or not, exists and has profound implications, the same way that other Austrians focus on the effects of inter-temporal equilibrium and disequilibrium.
I mean, should we just abandon Austrian business cycle theory because inter-temporal equilibrium can never be attained in perpetuity within the real world? I would say no. Furthermore, the level of monetary disequilibrium that exists and has existed is not the result of natural market processes; it is the direct result of certain government interventions and institutions. Why should economists ignore it?
Don’t conflate demand in the colloquial sense (desire) with demand in the economic sense (which takes the cost of acquiring the good into account). We might not demand more money (or, as Esuric points out, wealth) than we currently have if that comes at the cost of giving up leisure time.
Doesn’t wealth also exist to facilitate exchange? Can’t money be exchanged for wealth and vice versa? Money is not wealth? What’s the difference?
So who’s stopping you from selling whatever assets you want and receive whatever money the market will give you for them? Just curious. Could your demand for money exceed the market value of all your assets?
What’s the difference?
Of course, no one is stopping you from using (consuming, exchanging, etc.) your property (assets, money, labor) toward satiating whatever demand you have. What if money didn’t cost anything, as in Bernanke throwing it out of helicopters? Or as in a “free” banker pressing the “0” key on his computer a few times? What would your estimate for the “demand for money” be then?
This is starting to feel like a Twilight Zone episode.
Demand for money is probably best thought of as the inverse of the demand for goods. If you increase your consumption you increase your demand for goods and decrease your demand for money. If you increase your saving you decrease your demand for goods and increase your demand for money.
Do you wish to hold more of your wealth in goods or in money? Your demand for money determines the answer to this question.
Do you wish to hold more of your wealth in bonds or stocks? Apples or oranges? Skis or snowboards? A or B? You can’t have everything. You must make a choice – a preference. You must trade. This is scarcity. This is economics. Demand for money is no different from demand for anything else that is freely traded in the market*.*
Then, Mr. Zeitgeist, until further notice, I’ll have three Ferrari 458 Italia and an 80ft sailboat in the Caribbean with an all-blonde-female crew. Supply away.
Here I am giving you basically a home run and you blew it with such a comment.
What you meant to say - I take it to be, but I could be wrong - is something like this: the MIT people emphasize that ‘the demand for money’ (as liquidity) makes sense. But it doesn’t follow that we have to supply it in the absence of them giving up stuff. If you want more money as liquidity: save less or earn more. There is no real need to adjust the monetary quantity in the absence of these sacrifices. And this makes sense.
So, what the MIT people ought to proof is: why would we want to increase the supply of a good in the absence of people having to make sacrifices for it? (If you want more boats, you have to give up some cars. If you want more money as liquidity: save less or earn more.)
As far as I take it: the MIT people would argue that the increase in the supply of money is actually good, because people just want more liquidity as such, so there is no need to adjust the capital structure as such. (Again: this is my interpretation. Could be wrong.) But why would that be? People’s preferences actually say: given the circumstances, we would rater have more liquidity thatn the stuff generally on the market/investment projects going on. Why should we ‘protect’ entrepreneurs from making these adjustments to the consumer preferences?
This is the part that doesn’t make sense to me. You say ‘the natural rate of interest remains unaltered’, but how can this be true?
People have 3 ways to spend their income: spend it, keep it for liquidity or save it. If one of these raises, one (or both) of the others have to go down. If people save less because their demand for liquidity raises, how can you possibly say that ‘the natural rate of interest will remain unaltered’? Doesn’t their demonstrated preference imply that it has to change?
On the other hand: the MET crowd also argues that the supply of money in the long run is always ‘oke’. But their emphasis is on the short run. Also: they don’t argue just for monetary expansion (monetary contraction also makes sense). The quantity of money is something that should adopt to consumer preferences.
The more Rothbardian idea is that the supply of money doesn’t have to change - period. Any quantity of money, both short and long term, is sufficient.
If we take into account that monetary expansion can happen - the debate on fractional reserve banking, based on a gold standard is connected to this - but we also remember that monetary contraction can happen, than the ‘demand’ of Z can be satisfied: because people have a higher demand for money, the banking industry can, in fact, provide it for them - but there is, in fact, a cost: it has to be paid back to the bank.
