Procrustean Art of Backtracking: “Motives of Money Hoarding”

  

Macroeconomists propose there be three rationales why we keep money free of interest  in cash or deposits. First, the “transactional motive” is in preparation for personal or corporate exchanges. Second, the “precautionary motive” is supposed to be from “the desire for security” via risk diversification or as a buffer just in case. Third, the “speculative motive” be particularly of those prescient speculators who can pick the best time to buy fixed-income securities.

            In other words of theirs, there are three “variables” to define “money demand” (M^d). Probably, on the other hand, they know that “money supply” is fixed as at the moment (M^s, T⁰). 

             What would happen if the “money market” is not in equilibrium as of now (T⁰)? Which should vary, M^s or M^d ?

 

The Rest of Us. We might have no clue in the so-claimed “money market.” The interest rate varies to put the market in equilibrium? How so at the instant? What in the first place is meant by “the interest rate”? Let us keep our fingers crossed that the answer will not be the “fed funds rate.”

             Fortunately, we now have the Baumolite equation for the economy as a whole: M^d= (b∙T/ 2i)^1/2, with no regard at all to the money market.. 

             First, we would not need money if there were no financial transaction costs including brokerage fees and risk premiums in transformation of a  certain  asset  into  money. Money if  any  would be trivial or otherwise limited to pocket change.

             Second, there is only one “motive” we carry money, that is, expected transactions of  all kinds including for goods, services, factor powers, newly-constructed physical assets (“I” for investment in macroeconomics), old assets, financial instruments, foreign exchanges, personal favors, time, distance and quite anything else except for “money.” On the flipside, expectation needs  to be precautionary as well as speculative, and consequently personal. A corollary: interest rates are by nature personal.

             Third, the larger the financial transaction cost (b) the slower the velocity of money. This is because the quantity of money outstanding shall be the same, no matter what the “demand.” Before spending money, after all, we might find a taker and vice versa, while we are in no case supposed to print or bury money.

             Fourth, when the General level of all different interest rates is relatively high, the velocity would be relatively faster because we “prefer” liquidity of smaller size. It may be noted that relative height is across scenarios (L^-1) not over time (T^-1). Please do not come to the IS-LM model.

             Finally, at a financial meltdown we would like to hold more money in preparation for snow-balled uncertainty. We are forced by our logical thinking to hold more money, preferably or otherwise. The velocity  naturally slows down so as to reduce expenditures in the year (Y, if we will). It’s the velocity of money (V) never “the interest rate” (r) that matches the wish or “preference” of liquidity with the monetary outstanding (M) invariable.    

 

There is no such thing as “money demand” (M^d), “money supply” (M^s) or “the interest rate” (r). Macroeconomists shall first get the names correct (正名, zhengming).