Note 43

"Capitalists earn what they spend; workers spend what they earn."
Kaldor

The value of money is the value of consumption through time. The nominal value of money is the rate of exchange of total money supply with that value. If the value of consumption through time decreases, the nominal value of money increases (inflation). This is because there is more money supply per value.

Now the nominal value of money in the asset markets have been increasing. This is an inflation valve. By increasing asset consumption, the fed can keep interest rates low without risking baseline inflation, at the cost of increased financial volatility. Doing so also increases baseline nominal growth as a function of asset transaction volumes. The economy essentially profits from churning. Asset churning prevents deflation in a low growth economy.

Scarcity-adjusted marginal utility of consumption goods converge to unity, while prices and marginal utility adjusts, according to relative scarcity and hence elasticities (given elasticity of substitutions from consumption patterns).

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The problem is to take the human out of the equation.

Asset values are claims to future consumption.

If a person saves more than he consumes now, he must consume more than he saves later. The economy must balance. Asset Ownership is trade of future consumption.

Hoarding occurs when the claims to future consumption increase. But the rate of future consumption, or the rate of consumption, remains constant. Total real value of future consumption increases, relative to present, and the real interest rate falls. When the real rate falls below zero, a depression sets in.

A depression is unavoidable when the real yield on assets fall below zero; when all the possibilities of filling up future consumption for the purpose of maximising present income has been exhausted, for a given rate of demographic growth. In such a case, present and future consumption is satiated, and Japanese style deflation sets in.

There are two ways to correct the imbalance: war or tax. War is destruction of assets and productive capacity. It solves the deflationary tendency caused by tendency to excess savings in a growing economy.(think china) It also solves the problem of excess labour and capital, when the habits of labour would be to create excess savings in an economy.

Tax forces asset prices down, allowing consumption to be forwarded to the present. It offsets the tendency of the economy to produce more than it can consume, thereby smoothing the business cycle. A tax on asset values also forces a consumption to income ratio that sustains healthy and correct growth rates.

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An excess of savings causes a similar fall in prices and a fall in interest rates. The price of money rises in relation to the price of goods.

So the correct adjustment only happens if the combination of falling prices and falling rates offsets the tendency to hoard, and to save. If the natural rate is below zero, the adverse money effects kick in, so the natural rate falls even further.

Marginal efficiency of investment = Marginal efficiency of consumption => Natural rate of interest (given by this equilibrium relation)

What about money? Dynamic, income effects and price effects