Is there enough Money to Cash Out Assets and turn them into Cash (Currency in any form)
A partial inventory of asset (wealth) types includes Business Equities, Financial Securities,
Trusts, Stocks and Mutual Funds, Non-Home Real Estate, Deposits (various financial institution accounts), Pension accounts, Life Insurance, Principal Residence, Debt, and
All other personal property. (Anything, that has a cash value)
[ FOOTNOTE “Total assets are defined as the sum of: (1) the gross value of owner-occupied housing; (2) other real estate owned by the household; (3) cash and demand deposits; (4) time and savings deposits, certificates of deposit, and money market accounts; (5) government bonds, corporate bonds, foreign bonds, and other financial securities; (6) the cash surrender value of life insurance plans; (7) the cash surrender value of pension plans, including IRAs, Keogh, and 401(k) plans; (8) corporate stock and mutual funds; (9) net equity in unincorporated businesses; and (10) equity in trust funds.
“Total liabilities are the sum of: (1) mortgage debt; (2) consumer debt, including auto loans; and (3) other debt. From Wolff (2004, 2007, & 2010).”
http://sociology.ucsc.edu/whorulesamerica/ END FOOTNOTE]
Consider that estimating the value of all business equities owned by citizens and foreign residents in the United States can at best be done with a snap shot at a given point in time or a series of snap shots at regular or irregular time intervals. It would involve taking the market or fair market value for all (a census, if you will) at the same time. There is a problem with market value that needs to be addressed. Fundamentally, the market price of anything is for the number (quantity) of the good/service/property/instrument offered for sale by the given number of sellers with a given number of buyers seeking the good/service/property/instrument at a specific time and place. Were any of the numbers to change, the market price would also be subject to change. For example if more sellers enter (leave) the market or fewer (more) buyers there will be movement on the supply and demand curves changing the settled price. At any given time all of a good/service/property/instrument is not offered for sale, nor are all possible buyers in the market at a given time. So only a small fraction (and probably an insignificant, in a statistical sense, number) of the good/service/property/instrument sets a current price or market value. But that is the nature of a market. History shows that if too many sellers enter the market at once, the bottom falls out of the “valuation” of the good/service/property/instrument. History also shows if too many buyers enter the market at once the price (cash value) of the good/service/property/instrument goes through the roof.
That having been said, suppose it were possible to convert all wealth to cash. With over 3,000 companies, some coming into the exchange and some leaving on any given day (in 2012) a rough estimate of total market valuation for the New York Stock Exchange was $15 trillion. Consider that measured at M3 the total US money supply was less than $14 trillion; “Houston, we have a problem.” There is simply not enough cash to make the conversion-clear the market at market value. Needless to say that as we attempt to add to our cash conversion other forms of wealth it is impossible as we have already run out of money just attempting to cash out the New York Stock Exchange. It is worth noting that had we started with bank deposits there is not enough physical currency in circulation to cash out bank deposits; however, the Feds would order the printing and cause the delivery of physical currency to cover every bank’s needs for that is what the Fed does to insure that there are no reasons for runs on any bank.
While there is not anywhere near enough money for us to convert more than a small portion of the wealth held by all citizens and resident aliens, money still is the measure of choice for estimating the value of what is properly termed wealth. Moreover, people used cash and credit (promise to pay cash in the future) to acquire wealth. Yes, some people inherited wealth, but aside from early land grants, thievery and other shenanigans, most people’s ancestors originally paid cash or sweat equity for their wealth.
Given that the monetary or market value of wealth accumulations far exceeds the money supply, it logically follows that a large money supply is not required for wealth accumulations. Yet, if managed, wealth accumulations, as we have shown elsewhere, do tend to take currency out of circulation at the rate of return on business expenditures, including depreciation of capital. This is true otherwise rather than investing in a business it would be rational for the investor to deposit his or her money in an interest bearing account in a financial institution rather than engaging in business activities.
In hard economic times, DeLong asserts that the velocity of money (literally the volume of transactions in a time period) slows and given uncertainty over how long the overall economy will be in the contraction rational economic actors fall in what DeLong calls the liquidity trap-converting holdings (non-monetary wealth) into cash or as near to cash as they can. Literally this means buying treasuries or converting to cash. (John Hicks asserts that in a downturn creditworthy governments will be able to place debt instruments at low interest rates).
It is only in hard economic times that individuals want to convert “chunks” of their assets (wealth) into cash; just at the point where the relative scarcity of money will drive down the cash value of assets as there are more people wanting to sell assets for cash than there are buyers of the assets. During contractions, wealth drags down the supply of currency in circulation.
So what does that make wealth accumulation relative to money in circulation. Is there a parallel to the tidal bulge caused by the moon slowing the earth’s rotation? For example is there some critical size of wealth accumulations and the number of them which dictates a reduction in the money supply? Can we model the money supply in relation to wealth accumulations. Further, is it the case that people with large wealth accumulations tend to engage in less economic activity in proportion to their wealth than do people who live hand to mouth. Consider a family which uses all of its income to live, 100 “percenters.” Compare this to a family which uses only 1% of its income to live and invests (places into some wealth holding vehicle or instrument) the other 99%.
Now do investments cause currency circulation to the same degree as living expense transactions? I am going to guess that financial community transactions are different from day to day consumer transactions and do not stimulate the economy as much as “normal” consumer transactions do. Indeed, in general financial community transactions will tend to retard the velocity of money leaving the financial sector (the flow of money entering the financial sector is much greater than the flow of money leaving the financial sector for other parts of the economy). The weaker the economy, the greater the financial sector will slow the velocity of money and conversely, the stronger the economy, say even in a boom, the less the velocity of money leaving the financial sector will be slowed; but, the velocity of money will be slowed when it enters the financial sector. DeLong’s argument supports this as does the conclusion from Hicks-increased demand for aftermarket treasuries as well as fresh ones.
I am going to guess that economists will assert or assume that all transactions are equal-or that there is not a qualitative difference between the purchase of an apple at a truck stop and the purchase of an apple orchard-only a quantitative one. Is that true? Can we model what happens to a dollar in each case? For starters, buying an apple orchard allows the previous owner to cash out, turn an otherwise non-liquid asset into currency. Some of the cash may go to pay off the previous owner’s mortgage. However, unlike the purchase of a single apple, which sends currency spinning off in many directions to cover wages, taxes, electric bills, rent, and the like, selling the orchard tends to confine money received from the sale within the financial sector at least within the short run.
Recall in the simplest form of the economic flow model, it is households that provide labor and materials to firms and in turn purchase goods and services from firms. Aside from household savings and retained firm profits, the remainder of the cash from household and firm transactions is applied to further transactions. As one adds specialties (refinements) to the model, such as a government sector and a financial sector, one siphons or funnels currency into these specialized sectors. Other than in a very few budget years over the past century, governments have spent all the money they have taken in, and more. Currency funneled into the government sector receipts, with the possible exception of debt service payments, has tended to flow back into the overall economy. Currency going to the government sector tends to increase in velocity as it comes out. (Indeed, given the level of debt governments carry at this writing, there are those who would argue that taxes are multiplied by governments into expenditures larger in dollar volume than the taxes taken in.) Yes, governments have so called trust funds. However, these funds are generally sources of loans for other government programs.
Money going into the financial sector, goes in with the intent that some of it will be left behind in that sector. Recall the earlier treatment of money aggregations attracting more money. Keeping in mind that firms in the financial sector exist to accumulate wealth, they have a whole different capital base than do either firms producing goods or services or selling goods and services. For example, any capital investment in goods or services production has a useful life and is depreciated. Money invested in a financial sector firm does not have a limited useful life and is not depreciated, for example bank capital. No, financial firm cash is expected to attract more cash. While the financial firm may put its cash at risk of loss, it does not depreciate that cash. Recall, one of the characteristics of money is that it holds value (or is a store of value). If a non-financial firm produces widgets or haircuts from its input of capital goods, land, labor, raw materials and management, that firm expects to recoup the depreciation of its capital goods (its investment in the firm), along with the costs its land (rent), labor, raw materials and management in the selling price of widgets or haircuts. In contrast, a financial sector firm not only expects to recoup depreciation on equipment and the costs of land (rent), labor and supplies, it also expects to add a percent of the cash it put at risk to its capital base-grow its currency holdings or its investment in the firm.
Least it go unnoticed, startup costs for firms outside the financial sector all involve economic transactions-it is all money spent. Such startups do not withdraw currency from circulation; rather, all the startup costs, especially capital costs do not involve further economic transactions with other economic actors. Even during startups, financial institutions slow the velocity of money involved in firm creation.
While the financial sector provides loans for startups and for firms to meet payroll, they make those loans inversely to the state of the economy’s health. Even then it is not clear that aggregations of money in the financial sector are as much of an economic growth engine as they are attractors of more money. To wit, it was not the normal business loans that brought the economy down in 2008. Rather it was the amount of capital in sub-prime loan bundles. Even with the experience of the recession brought about by financial shenanigans leading up to 2008 as late as 2012, when the economy needed creative lending to create jobs, J. P. Morgan managed to lose billions in credit default swaps.
If anything, the history of the business cycle should demonstrate that the financial sector is far too risky a place in which to house the creation of base money. This is especially true if base money creation is to stimulate the economy or maintain economic growth. It is not altogether clear that currency accumulation in the financial sector actually either stimulates the economy or maintains economic growth other than as an unintended side effect of firms in that sector growing their currency accumulations and portfolios.
[Footnote for DeLong:
“John Hicks; I just didn’t quite believe him. Hicks, one of the clever young Brits dotting i’s and crossing t’s in the writings of John Maynard Keynes in the 1930s, was responsible for the workhorse formulation of Keynesian economics — the IS-LM model — that has been the bane of many an intermediate macroeconomics student. It was his version of the IS-LM model that formalized and elevated a key insight: that interest rates paid by creditworthy governments would remain low after a financial crisis. This formulation holds even in the face of enormous budget deficits that greatly expand the supply of government bonds. A financial crisis initiates a sudden flight to safety among bondholders — widening interest-rate spreads, diminishing the private sector’s desire to sell bonds to raise capital and encouraging individuals to save more and consume less as they, too, hunker down. Thus bond prices rise, and interest rates drop. As rates fall, firms see that they can get capital on attractive terms and so issue more bonds; households see the low interest rate earned on their savings and lose some of their desire to save. The market heads toward equilibrium. Safeguarding Wealth But something else happens on the path to equilibrium. The decline in interest rates and the rise in savings are accompanied by an increased desire among businesses and households to safeguard more of their wealth in cash. As a result, the speed with which cash turns over in the economy, the velocity of money, falls. And as the velocity of money falls, total spending falls, workers are fired, and their savings evaporate with their incomes. Thus the equilibrium turns negative, with high unemployment and low capacity utilization.”
http://delong.typepad.com/sdj/ 11/13/11 End Footnote]