Velocity Wanted: Reasons for Money Hoarding

  

The Theory by Goliath. For the sake of convenience, we copy from somewhere else:  

(Quote)

(i)   The Income-motive. –One reason for holding cash is to bridge the interval between the receipt of income and its disbursement. …

(ii)  The Business-motive. –Similarly, cash is held to bridge the time of incurring business costs and that of the sale-proceeds ….

(iii)   The Precautionary motive. –To provide for contingencies requiring sudden expenditure and for unforeseen opportunities of advantageous purchases ….

(iv)There remains the Speculative-motive. … [Experience] indicates that the aggregate demand for money to satisfy the speculative-motive usually shows a continuous response to gradual changes in the rate of interest….

(Unquote)

             First of all, the first two are of the same nature, and often named collectively as “the Transactional motive.” After all, businesses are us in a different hat. Second of all, the fourth narrative implies that the interest rate is the most critical cause to determine, as opposed to define, the quantity of “liquidity” to be “preferred,” or M= L(r), where r is for the nominal interest rate.

             The market, by the way, would never determine anything for us until we define the two curves of demand and supply for it. Don’t buy the one-way ticket in reverse, or r= f(M) with r for the real interest rate, as macroeconomists including J.R. Hicks do in the so-called “money market.” To be honest, “the interest rate” as called in macroeconomics is more like a chameleon changing colors at the narrator’s convenience than singularly “real” or “nominal.”  

The Theory by David. We stand on the shoulders of William Baumol (1952) from Princeton and come up with the following equation:

M^d= (b∙T/ 2i)^1/2,

where b is the financial transaction costs per transformation of an asset to money,

T is the annual total of uniformly-distributed monetary expenditures, and

i is the interest rate from the asset market as a whole, of course, in nominal.

This equation represents the stock of money required of, not preferred by, the aggregate households.   

             Fact 1: The Nobelists Paul Samuelson from Cambridge and William Nordhaus from New Haven acknowledge that we carry money for the purpose of spending in the market (e.g. Economics, 2010), or in preparation for commercial transactions (cf. Ronald Coase from Chicago) in the near future. In this regard, we may note that money is the only GAME, or generally accepted medium of exchange.

             Fact 2: Economics is one, finance is another. We when in finance reserve the purchasing force for the  coming run, short or long, in forms of assets, the types and kinds of which are beyond imagination. One commonality of all assets, nevertheless, is that a rate of return is expected. In a slightly twisted way, there is no such thing as “money holding for speculative motive” as long as there is a single opportunity out there to invest in an asset with an expected positive rate of return.

             You know what? All expectation is speculative and contingent especially in this era of D.E.I. In other words, we do not usually prefer liquidity particularly for the motive of speculation or contingency. In the first place, money is beyond ear-marking and as a result all money horded is equally for expected transactions.

             Fact 3: When in finance, there are various transaction costs such as “brokerage fees” (bid-ask spread included), risk premiums, communication and transportation costs, wasted time, and the like.

Cost-benefit Analysis. We the “rational” must and do conduct cost-benefit at the “marginal “step forward. Which is more beneficial, GAME or an “interest-bearing” asset?

             Are you game?