Re: Rolling bubbles

From: William F Hummel (wfhummel_at_comcast.net)
Date: 06/30/04 

Date: Wed, 30 Jun 2004 00:37:32 GMT

On 29 Jun 2004 13:52:25 -0700, mikevilkin@mail.com (Michael Vilkin)
wrote:

>William F Hummel <wfhummel@comcast.net> wrote in message news:<pme0e0htn6fvjhv42r57btf2a5vb96gqov@4ax.com>...
>
>> On 27 Jun 2004 21:29:44 -0700, mikevilkin@mail.com (Michael Vilkin)
>> wrote:
>
>> >I've visited you Web site, and I do like it, and I do agree with you.
>> >I think we have very little differences so far... unless you hate
>> >quantity theory of money.
>
>> Well, "hate" is certainly not the right term. I don't embrace the
>> quantity theory of money because it is misleading, and does not
>> provide a sound basis for understanding macroeconomics. It treats
>> money as an exogenous stock variable rather than an endogenous flow
>> variable, which is its real nature. Those who think of money as
>> exogenous are comfortable with simple analogies that only appear to
>> explain how prices are determined.
>
>>I believe that all theories in economics are right... and wrong.
>It's _when_ that particular theory is at work and why it works at that
>particular time.

Economic theories are proposed by the bushel basket, and none are
forever. But surely each can't all be right and wrong at different
times, considering that often they are mutually incompatible.
>
>One theory can not be right all the time. Only a fundamental theory,
>the one
>that serves as a foundation for other theories, might be either
>correct or not correct.

Yes, conditions change and make some useful theories obsolete with
time. The quantity theory of money is a case in point.
>
>> The quantity theory never gets around to defining precisely how to
>> measure "money", which is surprising when you think about it.
>
>Let's discuss what is the main function of modern fiat money.
>I believe that a dollar is a share of wealth of the United States.

Money is a claim on real wealth, the so-called store of value. But I
prefer to start with the definition that money is a token that is
widely accepted as a medium of exchange. Obviously it would be
accepted only if it were a store of value. Basically, money is what
we use to intermediate exchanges of real wealth.

The amount of money, if there were a way to measure it, is in no way
proportional to real wealth. In a modern economy, it varies daily as
a function of the demand for bank credit.

Perhaps some day you will understand why modern money is endogenous
and behaves like a flow variable, and not an exogenous stock variable
which is how you now see it. But I won't hold my breath.

>Here is why.
>There is a total amount of wealth of the U.S.
>At any given time a part of that wealth is for sale.
>Let's name it current supply, S.
>At any given time a certain amount of money is chasing wealth.
>Let's name it current demand, D.
>There are bid prices, and there are ask prices.
>People agree to exchange wealth for money at some equilibrium prices.
>
>Prices are determined by supply and demand.
>Current supply is only a small part of total current wealth,
>because not everything is for sale at any given time.
>Current demand is only a small part of total amount of money which
>can be created by the banking system.

Commodity prices are indeed set by supply and demand, and usually in
an auction process. However most of the goods and services we buy are
not sold in an auction-like market. Their prices are generally posted
in advance and reflect a markup over production costs. We decide
whether to buy or not. Occasionally we might haggle successfully over
price, but to assert that all prices are set by supply and demand is a
circular argument -- arguing by definition.
>
>Then what is a current dollar, one of those included in M3,
>if not a share of current total wealth of the U.S.?
>
>William, what is your opinion?
>
><skip>
>
>> The US economy does not suffer from a lack of financial wealth in the
>> aggregate. The problem is the mal-distribution of wealth.
>> Supply-siders claim that we need more wealth at the top because it is
>> the wealthy who provide the financial capital that entrepreneurs need
>> to create new jobs. That is largely nonsense. There are enormous
>> pools of financial capital raised from middle and upper income
>> families in pension funds, mutual funds, insurance companies, banks.
>> etc, looking for good investment opportunities. But with supply side
>> philosophy of the Bush administration, we get tax cuts that increase
>> the mal-distribution, and do virtually nothing to improve the
>> aggregate demand which the perennial problem.
>
>I've started discussion about the dollar because that is essentually
>my argument here.
>What is a financial wealth? Dollars in bank accounts?
>Hell, we can print it on computers by extending credit.

Financial wealth usually refers to what can be easily liquidated, such
as most stocks, bonds, and bank deposits. Homes, autos, furnishings,
etc are not financial wealth, although they are real wealth.
>
>> How much aggregate demand does Bill Gates generate with his $50
>> billion in personal spending power? Imagine what an enormous increase
>> in AD would be generated if that $50 billion were in the hands of say
>> 10 million working families. Of course money itself is not a measure
>> of AD. What counts is the inclination to spend. And 10 million
>> working families are far more likely to spend that money than one Bill
>> Gates.
>
>William, correct your mistake.
>First, how you measure his personal spending power?

I use the term "spending power" to refer to the value of assets for
which there is an organized market in which one can quickly convert to
cash.

>Market price of his stock portfolio?
>Amount of money in his bank accounts?
>Either way, please, describe how stocks can be converted into dollars,
>redistributed to those who can improve our economy by spending that
>money, and why that spending would improve our economy.

Disposable income is spending power. Disposable income in a large
number of working class households is much better economically than
the same total income in a few very wealthy households. AD is what
most entrepreneurs want to see before they will invest in new
production. The higher the AD, the more economic growth and the more
vigorous the economy.

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