Not directly FAI-relevant, but market monetarism seems like a strong Correct Contrarian Cluster candidate.
From the wikipedia page on market monetarism it is said to advocate such things as “The Fed could impose a fee on bank reserves, leaving banks to impose a negative interest rate on their customers’ deposits.” Being willing to make that suggestion (despite the micro-economic implications of the incentives) is something I count as rather strong evidence of incompetence. Is this the sort of notion that you would support or is that kind of belief atypical of market monetarists?
Obviously there is some degree of evidence that would convince me that this kind of intervention isn’t insane—for example if it was based on a theory with mainstream acceptance in academia I would be highly reluctant to dismiss it and would be motivated to investigate the issue until I understood.
That is a typical suggestion that Market Monetarists make (which I agree with). However, it refers specifically to the (excess) reserves that banks hold with the Fed (so ‘impose’ is weird phrasing). Since 2008 the Fed has paid interest on those reserves, and like all interest rates, sometimes it makes sense for those interest rates to be negative.
The rough logic is that the demand to hold money spiked hard starting in ~2008 because the general business climate got really bad so keeping reserves with the Fed became comparatively attractive and there was a huge shift from banks doing real investment to keeping reserves with the fed (http://www.creditwritedowns.com/wp-content/uploads/2011/04/Excess-reserves-2.png). This is bad because it doesn’t reflect the real productivity of holding money, but the Fed subsidizing it.
Since 2008 the Fed has paid interest on those reserves, and like all interest rates, sometimes it makes sense for those interest rates to be negative.
Interest rates can be whatever real number they like (for the purpose of this question). The issue that Wedrifid_2013 considered necessary to at least acknowledge is that imposing a fee on holding money allows a governing body influence over behaviour up until the point at which it is more convenient to hold any other fungible entity than to hold the controlled currency. Beyond that the fees imposed are largely irrelevant. Of course, coercion could be used to prevent people using alternate forms of value, either in the form of prohibition or via tariffs. Either would call for the development of the next generation of digital currency to have more emphasis on anonymity. We could call it “Moonshine”.
This is bad because it doesn’t reflect the real productivity of holding money, but the Fed subsidizing it.
Subsidising holding money (or subsidising anything else that isn’t a clear public good) does seem to be a bad idea most of the time. If the Market Monetarists mean to say that they oppose the Fed doing things that in effect amount to subsidizing holding money then I tend to agree.
Do you just mean that you can’t encourage people to hold less than 0 money?
This is a good approximation of what Market Monetarists are saying with respect to interest on reserves. I want to point out that, Market Monetarists are also saying its bad to have the attractiveness of holding money fluctuate rapidly (such as if the return on other assets decreases rapidly, but the return on money stays the same) because it puts prices out of equilibrium and thus disrupts the functioning of the economy. If the return on other assets drops rapidly, you probably also want the return on holding money to decrease.
Do you just mean that you can’t encourage people to hold less than 0 money?
Technically. But the ‘just’ is a tad misleading. I mean that if money1, money2 and money3 behave in similar ways and can be freely exchanged between each other then adding fees to holding money1 will have a limited effect on how much (money1 + money2 + money3) is held. It’s a lever without a natural fulcrum.
(Note that this is not intended as a criticism of Market Monetarism itself, just of the specific Wikipedia excerpt. Where your words spoken here in the name of Market Monetarism raise that theory’s credibility, the wikipedia quote lowered it.)
This is a good approximation of what Market Monetarists are saying with respect to interest on reserves.
Pardon me. English’s reference system leaves a lot to be desired. What ‘this’ is this? The stuff about not subsidising?
Ah, I think I understand you now. Yes, if you have very close substitutes, making one less desirable will just push people into holding more of the others and not much less of the aggregate.
This is certainly a problem for physical cash vs. reserves with the fed, though less than it seems, I think because the return on cash has to take into account storage and security costs.
People also sometimes think that this applies to holding cash vs short term government debt, but government debt isn’t a medium of exchange, which makes it not a very close substitute for money.
English’s reference system leaves a lot to be desired.
Sorry, I meant
If the Market Monetarists mean to say that they oppose the Fed doing things that in effect amount to subsidizing holding money then I tend to agree.
From the wikipedia page on market monetarism it is said to advocate such things as “The Fed could impose a fee on bank reserves, leaving banks to impose a negative interest rate on their customers’ deposits.” Being willing to make that suggestion (despite the micro-economic implications of the incentives) is something I count as rather strong evidence of incompetence. Is this the sort of notion that you would support or is that kind of belief atypical of market monetarists?
Obviously there is some degree of evidence that would convince me that this kind of intervention isn’t insane—for example if it was based on a theory with mainstream acceptance in academia I would be highly reluctant to dismiss it and would be motivated to investigate the issue until I understood.
That is a typical suggestion that Market Monetarists make (which I agree with). However, it refers specifically to the (excess) reserves that banks hold with the Fed (so ‘impose’ is weird phrasing). Since 2008 the Fed has paid interest on those reserves, and like all interest rates, sometimes it makes sense for those interest rates to be negative.
The rough logic is that the demand to hold money spiked hard starting in ~2008 because the general business climate got really bad so keeping reserves with the Fed became comparatively attractive and there was a huge shift from banks doing real investment to keeping reserves with the fed (http://www.creditwritedowns.com/wp-content/uploads/2011/04/Excess-reserves-2.png). This is bad because it doesn’t reflect the real productivity of holding money, but the Fed subsidizing it.
Interest rates can be whatever real number they like (for the purpose of this question). The issue that Wedrifid_2013 considered necessary to at least acknowledge is that imposing a fee on holding money allows a governing body influence over behaviour up until the point at which it is more convenient to hold any other fungible entity than to hold the controlled currency. Beyond that the fees imposed are largely irrelevant. Of course, coercion could be used to prevent people using alternate forms of value, either in the form of prohibition or via tariffs. Either would call for the development of the next generation of digital currency to have more emphasis on anonymity. We could call it “Moonshine”.
Subsidising holding money (or subsidising anything else that isn’t a clear public good) does seem to be a bad idea most of the time. If the Market Monetarists mean to say that they oppose the Fed doing things that in effect amount to subsidizing holding money then I tend to agree.
Do you just mean that you can’t encourage people to hold less than 0 money?
This is a good approximation of what Market Monetarists are saying with respect to interest on reserves. I want to point out that, Market Monetarists are also saying its bad to have the attractiveness of holding money fluctuate rapidly (such as if the return on other assets decreases rapidly, but the return on money stays the same) because it puts prices out of equilibrium and thus disrupts the functioning of the economy. If the return on other assets drops rapidly, you probably also want the return on holding money to decrease.
Technically. But the ‘just’ is a tad misleading. I mean that if money1, money2 and money3 behave in similar ways and can be freely exchanged between each other then adding fees to holding money1 will have a limited effect on how much (money1 + money2 + money3) is held. It’s a lever without a natural fulcrum.
(Note that this is not intended as a criticism of Market Monetarism itself, just of the specific Wikipedia excerpt. Where your words spoken here in the name of Market Monetarism raise that theory’s credibility, the wikipedia quote lowered it.)
Pardon me. English’s reference system leaves a lot to be desired. What ‘this’ is this? The stuff about not subsidising?
Ah, I think I understand you now. Yes, if you have very close substitutes, making one less desirable will just push people into holding more of the others and not much less of the aggregate.
This is certainly a problem for physical cash vs. reserves with the fed, though less than it seems, I think because the return on cash has to take into account storage and security costs.
People also sometimes think that this applies to holding cash vs short term government debt, but government debt isn’t a medium of exchange, which makes it not a very close substitute for money.
Sorry, I meant