Occasional X: Clueless economists / Money (CXLXXV)

“That money is a store of value is absolutely wrong. Money is a receipt issued at purchase and extinguished when buyer turn seller.” (Scott Cahill) Scott Cahill has never had any idea of the difference between transaction money and money as a store of value. Let's clarify some basics about the two with the summary in table AXEC237e ⇓. Microfoundations are methodologically false. First, a Paradigm Shift is required. Therefore, the elementary production-consumption economy is given with three macroeconomic axioms in lines 1, 2, 3. Under the initial analytical conditions of market-clearing and budget-balancing, this yields the price P in line 5. The price is the dependent variable here. That's a starting condition. Methodologically, the formula in line 5 replaces the silly Supply-Demand-Equilibrium cross. Line 9 delivers the generalization with ρE≠1. In the initial state, the price is equal to unit wage costs W/R. The workers get the whole product O. The profit Qm for the business sector is zero. Price increases can come only from wage rate increases or from productivity decreases. The quantity of money is not a determinant. The methodologically right approach to start with in Monetary Theory is that transaction money is pure fiat money at the Central Bank. How money developed historically is not an issue. Symmetric fiat money is zero at the beginning and the end of a given period; see line 16. It is periodically created out of nothing and returns to nothing. There's no problem here; money is endogenous. It's a medium. The quantity of the medium is determined by the autonomous transactions between the business and the household sector. (i) If the wage rate W doubles in line 5, the price doubles, and the average quantity of transaction money M doubles in line 16. It is still zero at the period's beginning and end. If tested, this yields a proportionality between price P and the average quantity of transaction money M. However, this is NOT causality. The common cause is the doubling of the wage rate W. However, empirically this correlation between P and M seems to be a strong indication that the Quantity Theory holds. (ii) If the real variable employment L is doubled, output O in line 2 and wage income Yw in line 1 double. The market-clearing/budget-balancing price P remains unchanged in line 5. The average quantity of transaction money M doubles in line 16. Now, there is no relationship between the price and the average quantity of transaction money. The Quantity Theory fails. Reality is a mix of (i) and (ii). That money is created out of nothing and backed by nothing is NOT the critical point of a fiat money system. In period 0, the transactions between the business sector and the household sector are symmetrical. At the beginning, transaction money is zero. Monthly, the households receive wage income and spend it successively on consumption. This increases and reduces their deposits at the Central Bank. The business sector mirrors the transaction. Thus, deposits and overdrafts are always equal. At the end of the initial period, transaction money is again zero. The average stock of transaction money is calculated in lines 16, 17. If the household sector saves in period 1, its deposits increase. This gives rise to losses Qm in line 11. Accordingly, the business sector's overdrafts increase. The average quantity of money M in lines 16, 17 increases because of the household sector's saving. Here, money as a store of value emerges. In period 2, one has both: money as a transaction medium and money as a store of value. In period 3, the households dissave, and the business sector makes a profit, according to line 11. Over all periods, the sum of profit/loss is zero. Things are rather simple as long as ρE=1. As soon as balances appear, i.e., ρE≠1, complexity increases and money as a store of value logically emerges from transaction money. The store-of-value money can also be used to buy financial assets. It then vanishes again. But that's a different story.

— AXEC (@EgmontHandtke) November 11, 2026