Velocity Wanted: Effective Ways to Stability 02

 

Solving the trouble of mismatch between the unlimited desires and the limited resources most of us rely on “the market” for trade after specialization called hereinafter “commerce.” The purpose is of course efficientiating the process from production to consumption.

Bridge 2.0 over Troubled Water. On the flipside of being confined to 125 years (T^-1), life is cyclical. As a result, we are destined to manage obtainable utilities as efficiently as possible over the long run  of lifetime. Individually like Robinson Crusoe and collectively as Mr. and Ms. Does we “manage the portfolio” of assets, human and physical.

             In the earlier cycles, we buy, or invest in, physical or human assets; while on the other hand we as needed sell credit, or “short-sell an asset,” usually human but sometimes backed up with physical. In the later cycles, we disinvest of physical assets partly to make up for the shortage in purchasing force for the present and partly to buy back “the short-sold” in the past. All in all, we rely on “markets” for striking a balance between the stocks, money included, that are ear-marked for the present and those for the future or the past.

             C’est la vie! As bridge 2.0 it’s the Finance, Your Excellency!

Commercial Transaction Costs. More fortunately than unfortunately, there are frictions in the physical worlds. Fortunately to some and unfortunately to others, there surely are transaction costs in conjunction with “commerce” and “finance.”

             As well known, the first barrier to commerce is the triple coincidence of barter trade: the kind, the degree and the location of the two products in exchange. There are many other barriers such as a lack of information about potential trade partners, transportation costs and administrative hassles. Money in the form of legal tender is invented for the sake of helping save “commercial transaction costs.” Subsequently, money has long become the generally accepted medium of exchange (GAME).

Financial Transaction Costs. No one would deny the Fisherian maxim that money is useless until spent (1930). On the other hand, the rest of us as no macroeconomist invest for the future always and everywhere in assets of the highest return rates feasible. Then on, at the spot of spending for the present, we  would, if we could, transform into GAME a piece of asset in the portfolio with a relatively low rate of return.  

             Hurray, there in reality surely are financial transaction costs in such a transformation. Now we need to hoard money on one hand, while on the other hand having the Baumolite equation on rationally how much: M^d= (b∙P∙Y/ 2i)^1/2. In this regard, the monetary balance out there in the national economy is critical inasmuch as the aggregate “money supply” (M^s) is dictated by the government, democratic in general may it be.

             Still better, at any rate, we have this aggregate trade-off relationship derived from the equation as above: g+ π = 2m+ Δi/ i– Δb/ b; the percentage change per annum respectively of Y, P, M, i and b. This formula offers all the clues how to grow the economy with “stability” in the relatively short run, say, a decade or less.

Economy vs Finance. First clue of all: “Don’t mix ‘em together as in the IS-LM”; economy (typically of I and S, T^-1) is a species while finance (of L and M, T⁰) is another. Alchemy has never worked in the Common Era.

             Second clue of all: Don’t overheat the printing press at the central bank; money affects the economy through a double channel, ΔM/Δt and ΔV/Δt. Beware of the 2 in 2m!

             Third clue: There are some ways to stop the financial transaction costs from changing (Δb/ b) “unpredictably” in a financial crisis or else. This helps promote the efficiency of monetary policy.

             Fourth clue: We can think of many ways to reduce commercial transaction costs so as to promote the growth rate. This means that by way of promoting economic growth (g) we can keep the inflation (π) relatively low.

             Fifth clue: Economy is much more than commerce. We do not discuss how to promote the economic growth (g) in general. Instead, we seek how to enhance economic resiliency through reduction of industrial transaction costs Ronald Coase talked about.