Must-Read: Nick Rowe: Money Stocks and Flows

Must-Read: Diligently and industriously study the Thought of Nick Rowe to understand the qualitative microfoundations of recessions in a monetary economy!

There can be excess demand for all kinds of things–kumquats, Mona Lisas, experiences of the ineffable, savings vehicles, stocks of safe assets, cash–*but unless the excess demand spills over into an excess demand for cash there will not be a recession. The difference between an excess demand for Mona Lisas or kumquats on the one hand and an excess demand for savings vehicles and safe assets on the other is that cash can be–and in some recessions is–pressed into service as a savings vehicle or a safe asset, and thus the initial excess demand propagates itself into an excess demand for cash:

Nick Rowe: Money Stocks and Flows:

Those… differences between money and all other assets means that it is misleading to think of the demand for money, like the demand for other assets, in terms of portfolio choice….

Money is not just a medium of account…. Money is the medium of exchange, which means it flows around the economy whenever anything else is traded…. It matters a lot whether individuals want to save in the form of money or want to save any other non-money asset. If individuals want to save in the form of land, they won’t collectively be able to if the stock of land does not increase. There will be an excess demand for land in the land market, if the price of land does not rise to dissuade that desire to save. There is nothing an individual can do if he wants to buy more land but nobody else wants to sell.

If individuals want to save in the form of money, they won’t collectively be able to if the stock of money does not increase. There will be an excess demand for money in all the money markets, except those where the price of the non-money thing traded in that market is flexible and adjusts to clear that market. In the sticky-price markets there will be nothing an individual can do if he wants to buy more money but nobody else wants to sell more. But… any individual can always sell less money…. Nobody can stop you selling less money…. Unable to increase the flow of money into their portfolios, each individual reduces the flow of money out of his portfolio. Demand falls in sticky-price markets, quantity traded is determined by the short side of the market (Q=min{Qd,Qs}), so trade falls, and some trades that would be mutually advantageous in a barter or Walsrasian economy even at those sticky prices don’t get made, and there’s a recession…. There’s now a stock-flow consistency, of sorts. But it’s a rather ugly one. We call it a recession.