Friday, February 24, 2012

Money as a store of wealth

Nick Rowe has a post that decries the idea of money as a store of value. He asks:

How much would I have been willing to pay for my house if the seller had imposed a condition that I could use it as long as I wanted but could never sell it again, or rent it out to someone else? Less than I paid for it, but still a positive amount. It yields a flow of services even if I can't sell that right.
How much would I have been willing to pay for the S20 note in my pocket if the seller had imposed a condition that I could use it as long as I wanted but could never sell it again, or rent it out to someone else? Nothing.
My response:

That's the same question a value investor asks before buying a stock.
The answer usually comes to something like, if I can pay $50 for a stock that is worth $100, then even though I can't resell it in the market I'll still buy it. Because the stock can't be resold, that $50 in value has to be realized through dividends. But if the stock is prohibited from ever paying a dividend, this value can still be realized by the firm repurchasing and canceling shares at higher prices.
I'd say roughly the same applies to central bank notes. If I can buy a note for far less than it's worth and hold it till the central bank begins to mop up the supply notes and cancel them, then I'll go ahead with the transaction. Since central banks are less opportunistic than firms and therefore less likely to announce buy backs, I'd only buy at a huge discount. A huge discount to what? The value of its bonds, bills, gold, buildings, and forex. In sum, the price I'd be willing to pay for non-transferable bank notes is not "nothing" but some number >0.
The store of value vs. medium of exchange argument is one of the oldest arguments in monetary economics. I don't think the answer is is binary, as in either/or. Rather, there is some sort of way to properly configure the two concepts into a logical whole. The answer would be a lot easier if the twin concepts medium of exchange and store of value were to be defined first in a microeconomic sense. In a sense, this sort of integration of monetary economics with microeconomics goes against the grain, since this would be making microeconomics more like monetary economics, and not vice versa, which has been the general approach taken by the whole microfoundations of money enterprise.

3 comments:

  1. This is a great article about money and wealth. Forex bonus has tonnes of information on brokers and finance. Thanks for the post, I really enjoyed reading this.

    ReplyDelete
  2. Cheers for writing this article about money and finances. This is something which I think my friend Tom from Elite Forex Trading would want to have a look at.

    ReplyDelete