Quote of the day

By Bryan

"If you can't put it in your wallet, it is not part of the money supply."
Said by Dr. Mona Makhija, yesterday in an interntional business class at The Ohio State Univeristy.

Dr. Mona is under the mistaken belief that only printed or coined currency is out in the money supply. Even after her mistake was pointed out, she declared that she was correct and she would talk to me after class. I didn't stick around to find out how she was going to justify this statement. It was not the first time she has used misleading or false economic theory. Almost every day this class chills me to the bone thinking about the 300 students who are going out into the world with her misconceptions bouncing around their grey matter.

Mona was not even willing to entertain the thought that she might be wrong. I undestand it is embarrasing, but I am not above being pointed out as wrong. Am I wrong? Surely if any audience can point out my error, the Truck & Barter audience will call me out. With regard to foreign exchange rates, is there any reason to discount almost 90% of the money supply and solely count printed currency?

It saddens me to think that these are the economics lessons that Fisher College of Business students are graduating with. Hopefully most students will be able to sort truth from fiction and take their economics lessons from the three lonely economics classes that are required for graduation.

-- November 9, 2005 9:35 AM |

Comments

Donald A. Coffin wrote:

I kept hoping someone whould comment on this, but not yet. I don't know of any intro econ text that would agree that money is solely coin and currency in circulation, and I sincerely hope that your classmates were not deluded by this misrepresentation.

-- November 9, 2005 3:12 PM ∞

Donald A. Coffin wrote:

And, I meant to add, that I hope that this is the only misrepresentation you get exposed to.

-- November 9, 2005 3:13 PM ∞

William Polley wrote:

Wow. It's especially important to include the broader aggregates (M1, M2,...) when you're talking about international finance. When a multinational hedges currency risk, they're not exchanging suitcases full of bills. Million dollar swaps are not done using currency. They are computer transactions involving deposits.

About the only foreign exchange transactions that fit in a wallet are the ones you make when you get off the plane when traveling abroad. That's a pretty small part of the international monetary system.

The only possible explanation (that I can think of) for her statement would be if she insists on thinking of deposits as credit instruments. There are some contexts in which you might want to make that distinction. But that would presuppose that the class has a pretty sophisticated understanding of the relationship between money and credit. That's usually not a good thing to presume. At a minimum, it requires more explanation.

-- November 9, 2005 4:01 PM ∞

Kevin Brancato wrote:

"If you can't put it in your wallet, it is not part of the money supply."

I do not know the entire context of Dr. Makhija's lecture, so let me not pronounce judgment. Suffice it to say that there are many different definitions of "money". The narrowest aggregate measured by the Federal Reserve, M1, contains of the following:

1. M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) travelers checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions....

In one sense you can convert deposits into cash that fit nicely into your wallet, but that transaction in effect changes the composition of money...

Larger aggregates contain financial instruments -- like Eurodollars -- that you would never put into your wallet, though once again, you could after enough financial transactions.

-- November 9, 2005 4:03 PM ∞

John Palmer wrote:

It would be closer to correct if she(?) had said, "If you CAN put it in your wallet,...." Currency is a pretty small part of even M1 these days.

-- November 10, 2005 3:44 PM ∞

Donald A. Coffin wrote:

Oddly enough, currency has been rising as a percentage of M1, from about 20% in 1959 to about 52$ in early 2005.

John Palmer wrote:

Currency is a pretty small part of even M1 these days.

-- November 11, 2005 10:34 AM ∞

Lawrence H. White wrote:

Maybe she was thinking that a debit card fits in your wallet, and she conflated the debit card with the spendable deposit balances it represents?

Where did you get the idea that currency is only 10% of the money stock? M1 is the closest thing we have to a measure of money as standardly defined (commonly accepted media of exchange). As Donald A. Coffin notes above, US currency in circulation is now more than half of M1. Even if we substract the est. half of currency that's overseas, currency is still about a third of M1.

-- November 16, 2005 5:01 PM ∞

Anonymous coward wrote:

It's not like MBA students who couldn't do better than Fisher will really be in a position to cause too much damage.

OSU's a fine undergraduate institution, but anyone who spends $28k per annum to go to Fisher isn't thinking straight.

-- November 22, 2005 4:19 PM ∞

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