Procrustean Art of Backtracking: “Money Supply Fixed”

 

Opening a text book on Principles of Economics, one of the first things we come across is “Supply.” Fact one, the supply is at the marginal cost of production. Fact two, the value of cost is accounted for in the sovereign currency unit.

             Fact three, the supply schedule of the product exists with no regard to the Demand and a price. The price would be the opportunity “benefit” per unit in compensation for all the money and time spent for the supply. It’s more or less “weird” that no economist has ever referred to opportunity benefit, the mirror image of opportunity “cost.” Again, the article “the” means the single highest value of all opportunities forgone.

             Such a narrative as the opportunity cost of “liquidity preference” is the interest rate is fatally misleading. To most everyone other than a macroeconomist, the opportunity cost of “preferring liquidity” would never ever be the almost negligible “fed fund rate.” With our money in hands, there out there are “so many” things to do before looking forward to the fed rate. 

             Fact four, “Supply” is periodic (T^-1, or per period) first because Demand is periodic and second because carrying a stock of inventory is costly. This is so sure-fire a fact that almost no author refers to it. Incidentally, each and every one of us, macroeconomists included, has by creation blind spots in our visionary system. Consequently, we in general and macroeconomists in particular often miss the periodicity out, with or without FOMO.

             Now let us put “Supply of Money” on the table. What would be the marginal production cost of legal tender, for instance, one-dollar bill? Your guess is as good as mine, zero or otherwise “infinitesimal.” Second on, what is the marginal cost of loaning the unit dollar out of a loan contract? Ditto. (Note: The fixed cost of  loaning is sunk as for the marginal cost.)  

             All in all, the supply schedule of money from the only two sources, printing and loaning, is the abscissa, also called “the axis of X.” 

             Question one, where is the market for money? Well, the market is everywhere except for in the reality on Earth. When is the market? It’s Now or Never (T⁰). 

             Question two, where and when is the money supply fixed? Ditto.

 

Amongst the rest of us, all that the central bank “control” is the fed fund target rate, not even “the fed fund rate” per se. We already know that there is no such thing as a definitive relationship between the fed rate and John M. Keynes’ interest rate in the liquidity preference function. Then, what is the relationship between the rate under ‘the central bank’s control” and the size of outstanding loans? Ditto.

             May the nose of some of us not grow! By the way, a celerity macroeconomist suspected that Milton Friedman had ante mortem been “intellectually dishonest.” The same blessing to either as well!