Economics Questions

Re: Money Supply and the Demand for Money.

debtus — Wed, 27 Jan 2010 03:50:44 GMT

chloe732:
(Note: I'm still on point because I'm trying to gain a better understanding of what "the demand for money" means, the subject of the OP.)

Another way to think of "demand for money" is "demand to hold money."

In times of economic uncertainty, people tend to hoard money. This reduces the supply of money available to purchase goods and it leads to a general fall in prices and a rise in the purchasing power of money.

Answering your first question, yes, I believe an increase demand to hold money is a big reason why price inflation is subdued for the time being.

As a side note, hyperinflation occurs when people's demand to hold money is virtually zero. As soon as people receive money, they spend it.

chloe732:
If I understand this correctly, the foreign currency markets can be thought of as a proxy for the "demand for money" in the economic sense? If the DXY strengthens, that means there is an increase in the "demand for money"? And, this money must be "parked" somewhere, so the holders buy U.S. treasuries?

Not really. DXY is the dollar's relative value to a basket of currencies - euro, yen, and pound being the principal components. If DXY falls, it means people have sold dollars and bought some other currency. If DXY goes up, foreigners have sold their currency and bought the dollar. It can give a sense of when people really don't want to hold the currency, but your average American doesn't normally have part of his cash hoard in foreign currencies. When Joe Sixpack increases his demand to hold money, DXY would not respond because he is merely hoarding more dollars.

As with much of AE, there is no precise way of measuring the demand to hold money empirically. Really, there can only be a general sense of when it is high (times of economic uncertainty).

Re: Money Supply and the Demand for Money.

hkarnoldson — Wed, 27 Jan 2010 01:31:21 GMT

Rising prices is also stopped by the fact that there have been over-production during the boom cycle. Now there is excess supply while noone want to buy stuff. This tend to drive prices down and is probably a very big reason why prices don't start shooting up when the government start "stimulating" the economy in times as these.

Re: Money Supply and the Demand for Money.

chloe732 — Sun, 24 Jan 2010 19:16:11 GMT

ClaytonB:
Yes! This LRC daily just put up today explains what's going on.

Thanks, Clayton, this article is very useful to me. If I understand this correclty, the foreign currency markets can be thought of as a proxy for the "demand for money" in the economic sense? If the DXY strengthens, that means there is an increase in the "demand for money"? And, this money must be "parked" somewhere, so the holders buy U.S. treasuries?

(Note: I'm still on point because I'm trying to gain a better understanding of what "the demand for money" means, the subject of the OP.)

Re: Money Supply and the Demand for Money.

z1235 — Sun, 24 Jan 2010 14:55:05 GMT

ClaytonB:
Yes! This LRC daily just put up today explains what's going on. Basically, the long and short of it is that the US gov't needs a global financial crisis in order to keep capital fleeing to safety (US dollars) so they can print money like there's no tomorrow without too massive a hit on CPI... at least, for now.

Clayton, good catch. Except, each time the stock market sels-off the accompanying flight to "safety" (USD) gets weaker and weaker, as "USD safety" increasingly becomes perceived as an oxymoron by the market. Stocks were down a lot on Friday and usually that would boost the USD. This time, however, EUR, AUD, and Copper (among other curencies and commodities) were UP (Not that the EUR is any better, but I included it there as an example of unexpected reactions to the sell-off).

Re: Money Supply and the Demand for Money.

Clayton — Sun, 24 Jan 2010 10:06:55 GMT

chloe732:

Has the U.S. been experiencing an increase in the demand for money since the Sept. '08 collapse? Is this why we have not yet experienced a significantly rising CPI?

Yes! This LRC daily just put up today explains what's going on. Basically, the long and short of it is that the US gov't needs a global financial crisis in order to keep capital fleeing to safety (US dollars) so they can print money like there's no tomorrow without too massive a hit on CPI... at least, for now.

Clayton -

Re: Money Supply and the Demand for Money.

DD5 — Sat, 23 Jan 2010 17:08:36 GMT

scineram:
If banks are not lending that means the money supply is not increasing, only the base money. But rising demand may contribute too.

If you are referring to money that can be used for exchange to bid up prices, then that can increase and it is. Look at M1 it has increased and continuing to increase at a very respectable rate, without an increase in loans.

Much of the money used to increase the base is injected by open market transactions. A good part of the increase in M0 reflects new demand deposits of people who had received this new money. That money if not lent out is just part of M0 and M1 and shows up as excess reserves, however, that money is also being used in exchange through check book money and debit cards.

There is also the government stimulus which was partly financed with new money.

Re: Money Supply and the Demand for Money.

z1235 — Sat, 23 Jan 2010 16:31:13 GMT

chloe732:
But, can this be attributed, at least indirectly perhaps, to an increase in the demand for money?

I want more money. Anybody had enough of it yet?

Re: Money Supply and the Demand for Money.

scineram — Sat, 23 Jan 2010 14:25:36 GMT

If banks are not lending that means the money supply is not increasing, only the base money. But rising demand may contribute too.

Håkan Kindström Arnoldson:

The question is what the increased demand for money could be caused by.

It could hardly be because more of it is demanded for exchange...

A likely cause is regime uncertainty.

What is demand for exchange?

Re: Money Supply and the Demand for Money.

hkarnoldson — Sat, 23 Jan 2010 14:14:51 GMT

The question is what the increased demand for money could be caused by.

It could hardly be because more of it is demanded for exchange...

Money Supply and the Demand for Money.

chloe732 — Sat, 23 Jan 2010 06:16:53 GMT

Thorston Polleit states the following (daily Mises, 01/21/10):

"If a rise in the money supply is accompanied by an equal rise in money demand, overall prices and the purchasing power of money remain unchanged. Once people start to exchange their increased money holdings against other goods, however, prices will start to rise, and the purchasing power of money will fall. That said, it is rise of the money supply relative to the demand for money that brings to the fore the obvious effect of an increasing money supply: rising prices".

Has the U.S. been experiencing an increase in the demand for money since the Sept. '08 collapse? Is this why we have not yet experienced a significantly rising CPI? I understand that much of what the Fed has printed is being tied up in excess reserves as banks are not lending. But, can this be attributed, at least indirectly perhaps, to an increase in the demand for money?

http://mises.org/daily/4016