Liquidity Economics: Evil Is The Root Of All Money

HT to Edward Hugh.

Any fiat money?

What do you think of this:

Cash is not a logical necessity.

...fiat money can only augment the aggregate stock of liquidity if there is demand for it.

Fiat money may disappear, crowded out by ultra-liquid private securities that earn interest.

The thesis that fiat money may disappear is controversial. There are several interesting arguments against it. First, we may be focusing here too much on the supply of liquidity. As the pace of the modern world quickens, people need to respond more quickly to opportunities. To put it grandly, as the time interval in people’s lives shrinks, the problem of finding coincidences of wants in dated goods becomes more severe. Our demand for liquidity may be rising in line with the supply.

Next, our discussion presupposes that (fiat) money and other assets are substitute means of saving. It can be argued that in fact money is complementary. After all, assets such as bonds are promises to pay in money. This may be the point to bring back the idea that money lubricates trade in the absence of markets. We may need to model trading frictions after all.

Finally, cash will always be useful to people who want to conceal their nefarious activities, like drug dealers, because cash leaves no electronic trail. If, in due course, crime turns out to be the only reason why people hold money, then evil will still be the root of all money, but for different reasons ...

Interested in? You can read the full lecture "Evil is the root of all money" by Nobuhiro Kiyotaki, London School of Economics, and John Moore, Edinburgh University and London School of Economics, here!