What is money? Much more on that soon, it gets to the heart of what I am thinking about these days, and what I hope to write about on these pages. I think we're about to have something of a crisis with respect to the meaning of money, and that the resolution of this should not be old bromides like the gold standard, but something completely different.

In the meantime, on Brad Setser's wonderful blog of which I'm a breathless groupie, regular commenters HZ and DF touched upon the question. I wrote a long response, then decided it wasn't really appropriate to Brad's comments, as my response was long and has nothing to do with Brad's main post. So, I'll put my mini-essay here, as a teaser for the much more that is to come on the subject.

Steve Randy Waldman — Friday March 3, 2006 at 1:05pm [ 6 comments | 0 Trackbacks ] permalink

Summary: I claim that financial innovation has coupled the real economy to asset valuations more tightly than in the past. This coupling results from an increase in the liquidity of many assets, which has led to genuine growth, and is mostly a good thing. But the downside is a much higher cost to errors and volatility in the valuation of assets, as asset write-downs feed directly into contractions of nominal GDP.

The argument is based on a thought-experiment substitute for traditional monetary aggregates, which I think yields useful insights (and is inspired by a conversation with HZ in the comments to a previous post).

If I were to make up Steve's estimate of the money supply, it would look something like this...

Related Posts (on one page):

  1. Money, valuation, and financial innovation
  2. Money and debt
Steve Randy Waldman — Monday March 6, 2006 at 8:42am [ 1 comments | 1 Trackbacks ] permalink