“The World Is Ending! The Market Value of Money Market Accounts Is Dropping! Aaaaaaaa!”
[UPDATE below.]
I need to do some more research before I open fire on David, Robert, Ambrose, and all my friends, but I think these guys are all missing some really basic stuff here.
Fortunately for their self-esteem, I am really busy and don’t know when I can deal with this in a careful (and more respectful) fashion.
For now, let me give you an idea of where I’m coming from. Take this quote from the article that has everyone in a tizzy:
Mr Ashworth warned against a mechanical interpretation of money supply figures. “You could argue that M3 has been going down because people have been taking their money out of accounts to buy stocks, property and other assets,” he said.
To me, that sounds analogous to someone saying:
“You could argue that the number of oxygen atoms in the universe has been going down because the growing population has been taking oxygen out of the air in order to engage in respiration.”
UPDATE: Actually in retrospect Mr. Ashworth might be making my point, so I shouldn’t be accusing him of saying something dumb. What I’m saying is that I think it’s possibly very wrong to talk about “the money supply” changing when people take “money” out of MMMFs and put it into stocks. If I sold my TV and bought bottled water instead, nobody would worry about the change in the money supply. I think a similar thing is going on here, though it’s obviously more defensible to put MMMFs into a monetary aggregate (namely M3) than bottled water or stocks.
But surely, If I cash in my MM account and buy stocks, the sellers have the money – it is still in circulation.
More interestingly, loans to businsses are still declining, but have you noticed how bank loans to consumers have jumped recently? One has been concealing the other in bank lending figures, which are the largest constituant of broad money. See charts at St Louis Fed; TOTBKCR, CONSUMER, and BUSLOANS.
The CONSUMER chart is very scary. I’d be interested on your take, Bob.
Bob,
Do you admit that if I use a money market fund to pay my rent, my MMF account drops in value?
Do you agree that if my landlord deposits this MMF check in his commercial bank account tthen the value of that demand account goes up?
If you accept this, doesn’t this mean that use of a MMF will cause a net neutral impact on M2, which counts both demand accounts and MMF accounts, BUT has a plus impact on M1 since demand accounts are included in M1, but MMF are not?
I am shooting from the hip but no, I still think you are wrong on this. What does it mean to “deposit a MMF check” into a commercial checking account? That sounds to me like the commercial bank says to the MMF “send us some dollars from your checking account.” So the people running the MMF have to transfer money from their checking account (part of M1) to the commercial bank (M1).
If you are right about landlords accepting MMF checks as payment, so that the landlord just bumps up the number of shares he owns in the MMF and you bump down the number of shares you own, then OK I see now why economists include MMF balances as part of M3. That makes sense.
But it still wouldn’t be true that individuals shifting into and out of MMFs could alter M1, unless I am really missing something.