Survival constraint is a very clever and apt name for your blog and a very important financial principal in general. Mehrling is of course one of the most competent and clear speakers on the mechanics of money and banking.
The inside-outside spread visualization is an incredibly useful graphic for understanding market making. The idea that market makers can reliably profit using a markup or discount, despite market volatility, is simple enough, but I have always struggled to visualize it. Thanks for sharing that.
I also talk about "survival" in my rate disparity book, but in the context of assessing interest equilibriums, as there is a mismatch between expected returns and realized post-hoc returns:
I'm glad you like the Treynor diagram. Mehrling uses it throughout his Economics of Money and Banking lectures. I highly recommend them.
I'll have to take a look at your book. I'm not sure if you get into this, but something that Mehrling emphasizes in his money view is the importance of *nominal* interest rates over "real" interest rates as reflecting tightness in the money market. If what you're trying to do is roll over your cash commitments, then it's the nominal interest rate you need to be paying attention to, not the real one.
Obviously, the real interest rate matters, too. And the two are connected. However, the money view starts from the nominal side, unlike Fisher, who emphasizes real interest rates.
My book is certainly dense and wandering, but I try to hit the important points up front.
In my view, Nominal rates are not necessarily restrictive, even for money markets, because they can be mathematically equivalent to a "stock split", ie redivision of the money unit.
In this vein, I identify a third form of inflation:
1. demand pull
2. cost push
3. price drift
demand pull inflation may be indicated by increased real consumption, cost push by a consumption decrease, and price drift is completely neutral, as it would reflect this kind of "stock split" inflation.
the one apparent form of definitive "stickiness" in prices is policy levels: min wage, tax brackets, public benefit and salary levels, etc.
So my view might be the opposite of mehrling on this point! but I think it is a tricky thing to discuss clearly.
The money view starts with time patterns of cash flows and cash commitments. That's an entirely nominal world. The money rate of interest is the price you have to pay to relax the survival constraint.
And yes. Mehrling doesn't really talk about the price level or inflation so much in the lectures. Again, that's because we're talking about an entirely nominal world.
Mehrling is recently working on integrating the price level a bit more. But I think he still has some work to do.
You must be able to distinguish between a neutral rate level and an equilibrium level in order to be dimensionally neutral. Agents tend think in dimensionally neutral terms. the payment system is only a "nominal world" in as much as it operates according to a regulatory unit of account. Thus IOR is functionally a stock split.
In a stock split one money unit gets divided into multiple units. So 1 share gets redivided into 5 shares.
Interest potentially is the same, except at a very granular level: 1 share gets redivided into 1.05 shares. Or 100 shares are now 105 shares.
But this is only a "change of dimensional basis" it is not anything structural. Mathematically it is an accounting isomorphism.
I'm not saying interest is always a stock split, but you have to recognize the possibility.
Credit restrictiveness is primarily determined by collateral appraisal, which is essentially the price level, in Mehrling's "four prices of money" except collateral appraisal dictates the price level.
Again, my book is messy, but it tries to discuss this. interest as a "price of money" is entirely a circular definition.
I discussed this as a guest on the appliedMMT podcast.
I can't speak to everything you're saying here, but I do have a few comments.
1. The unit of account need not be "regulatory." It just has to be the standard that people have adopted.
2. One way of thinking about nominal money-market rates is that they represent a spread over cash. Cash always yields zero (nominally). If you subtract the "real" cash rate from the "real" money-market rate, you'll get the same spread as if you subtract the nominal cash rate from the nominal money-market rate.
Another way to put it is that the nominal yield on cash is rigid (stuck at zero).
3. I'm not convinced that credit restrictiveness is primarily determined by collateral appraisal. There are cases where collateral appraisal matters. But the actual funding rate also matters. Anyway, the two are related because higher interest rates generally correspond to lower asset prices.
4. I'm also not convinced that collateral appraisal is equivalent to the price level. What do you mean by that?
5. You say that I must be able to distinguish between a neutral interest-rate level and an equilibrium interest-rate level. What do you mean by that? And why must I? For what purpose? Can you define what you mean by a "neutral interest rate" and an "equilibrium interest rate"?
6. What do you mean when you say that agents tend to think in "dimensionally neutral terms"?
7. I'm not sold on the idea that IOR is a stock split. The money view emphasizes the effects of the *price*—that is, the interest rate itself—over the effects of the interest payments. It's hard to see how the interest payments matter if everybody outside the banks' balance sheets is only affected by the prices. If you're setting a floor on interest rates, money being pumped into the banks is not the same thing as money being pumped into the economy as a whole.
Let's start with the last part and work backwards. The initial claim is not that IOR is a stock split, it is that if you wanted to do a continuous stock split, at a given rate, then it would look like ior.
Account balances would be increased by some proportion continuously, devaluing the unit of account. So then we must ask what differentiates IOR from a continuous stock split.
It may be a valid answer to say "because we don't claim it as such" but certainly that is not a satisfactory answer. But at the least a stock split is different because all contractual terms are adjusted in a stock split.
The basic mechanism of charging a rate on credit lines, is to incentivize to keep balances at zero. Note that there must be some other enforcement mechanism, otherwise if credit repayment is never enforced, then people won't mind their outstanding balances exploding exponentially.
The first thing that I will point out, is that a credit balance can go positive or negative. I can owe you $1000, or you can owe me $1000. If you owe me 1k, then I am in essence paying you a negative interest rate.
So because interest payments can go in either direction, if we took a true average rate, for some segment of the market, the rate would be much closer to zero, as some people will pay interest and others will get interest.
Instead we take absolute values, and by taking an absolute value we lose important information. This is the reason why trying to compute an equilibrium rate is problematic, because all interest is transfer payments, and by tossing out the directional information we lose important information about the transaction. This is especially important when one segment of the economy is passively extracting income from another segment, because then the equilibrium point is dictated by the attractiveness of the bankruptcy option, in other words, the amount of extraction which can be tolerated.
But it gets worse, we can actually adjust the point of a "zero rate" to be different from a "zero credit balance". Banks could, for example, charge depositors a service fee above a certain amount of deposits. Or alternatively depositors might only earn interest on deposits above a minimum amount. So representing the average marginal rate on credit, as a market equilibrium, I would say is wholly inaccurate. It's an average measure of stress on the limits of credit lines, not a market wide determined price for money.
Again, if you want to dig all the way down to the bottom of the issue, this goes back to when people claim that banks create money. It's a pedantic debate that I simply prefer to avoid, and instead I describe it thus: banks upgrade credit instruments.
A bank upgrades your signed loan contract to a deposit in their institution. Then central banks can upgrade a portion of balance sheet assets into central bank reserves.
The principle point is that credit is inherently non-fungible, and the upgrading is not just a matter of risk adjustment. It also includes service costs, but also, it's a fee they charge just because they can. Because your credit is not widely accepted, but your local bank's credit is more widely accepted. But even your local bank needs to upgrade its credit to something more widely accepted.
Describing this credit process, involving hierarchical upgrades, as a money market, ignores this hierarchical aspect to it, which is the most important part of all.
There's so much more to discuss, but that's what I have time to explain today.
Survival constraint is a very clever and apt name for your blog and a very important financial principal in general. Mehrling is of course one of the most competent and clear speakers on the mechanics of money and banking.
The inside-outside spread visualization is an incredibly useful graphic for understanding market making. The idea that market makers can reliably profit using a markup or discount, despite market volatility, is simple enough, but I have always struggled to visualize it. Thanks for sharing that.
I also talk about "survival" in my rate disparity book, but in the context of assessing interest equilibriums, as there is a mismatch between expected returns and realized post-hoc returns:
https://ratedisparity.com/wiki2/index.php/Rate_Disparity_Book
I am still working on making that book better and simpler and clearer, as I tried to tackle a lot and took a lot of speculative and complex ideas.
I'm glad you like the Treynor diagram. Mehrling uses it throughout his Economics of Money and Banking lectures. I highly recommend them.
I'll have to take a look at your book. I'm not sure if you get into this, but something that Mehrling emphasizes in his money view is the importance of *nominal* interest rates over "real" interest rates as reflecting tightness in the money market. If what you're trying to do is roll over your cash commitments, then it's the nominal interest rate you need to be paying attention to, not the real one.
Obviously, the real interest rate matters, too. And the two are connected. However, the money view starts from the nominal side, unlike Fisher, who emphasizes real interest rates.
My book is certainly dense and wandering, but I try to hit the important points up front.
In my view, Nominal rates are not necessarily restrictive, even for money markets, because they can be mathematically equivalent to a "stock split", ie redivision of the money unit.
In this vein, I identify a third form of inflation:
1. demand pull
2. cost push
3. price drift
demand pull inflation may be indicated by increased real consumption, cost push by a consumption decrease, and price drift is completely neutral, as it would reflect this kind of "stock split" inflation.
the one apparent form of definitive "stickiness" in prices is policy levels: min wage, tax brackets, public benefit and salary levels, etc.
So my view might be the opposite of mehrling on this point! but I think it is a tricky thing to discuss clearly.
Hmm. I'm not following your stock split point.
The money view starts with time patterns of cash flows and cash commitments. That's an entirely nominal world. The money rate of interest is the price you have to pay to relax the survival constraint.
And yes. Mehrling doesn't really talk about the price level or inflation so much in the lectures. Again, that's because we're talking about an entirely nominal world.
Mehrling is recently working on integrating the price level a bit more. But I think he still has some work to do.
https://youtu.be/2pr3svEbaew?si=-IJ0dEeLlnGDSIob
the stock split analogy is essential for understanding interest relativity and interest rates as an intertemporal exchange rate.
You must be able to distinguish between a neutral rate level and an equilibrium level in order to be dimensionally neutral. Agents tend think in dimensionally neutral terms. the payment system is only a "nominal world" in as much as it operates according to a regulatory unit of account. Thus IOR is functionally a stock split.
In a stock split one money unit gets divided into multiple units. So 1 share gets redivided into 5 shares.
Interest potentially is the same, except at a very granular level: 1 share gets redivided into 1.05 shares. Or 100 shares are now 105 shares.
But this is only a "change of dimensional basis" it is not anything structural. Mathematically it is an accounting isomorphism.
I'm not saying interest is always a stock split, but you have to recognize the possibility.
Credit restrictiveness is primarily determined by collateral appraisal, which is essentially the price level, in Mehrling's "four prices of money" except collateral appraisal dictates the price level.
Again, my book is messy, but it tries to discuss this. interest as a "price of money" is entirely a circular definition.
I discussed this as a guest on the appliedMMT podcast.
By the way, I haven't been able to listen to your podcast episode. Is it available online anywhere?
I mirrored my episode here: https://drive.google.com/file/d/1WyjeQyn5RRkTozQ-qNzbQUgf6AeoiDSh/view?usp=drivesdk
It is also linked on my website: ratedisparity.com
I can't speak to everything you're saying here, but I do have a few comments.
1. The unit of account need not be "regulatory." It just has to be the standard that people have adopted.
2. One way of thinking about nominal money-market rates is that they represent a spread over cash. Cash always yields zero (nominally). If you subtract the "real" cash rate from the "real" money-market rate, you'll get the same spread as if you subtract the nominal cash rate from the nominal money-market rate.
Another way to put it is that the nominal yield on cash is rigid (stuck at zero).
3. I'm not convinced that credit restrictiveness is primarily determined by collateral appraisal. There are cases where collateral appraisal matters. But the actual funding rate also matters. Anyway, the two are related because higher interest rates generally correspond to lower asset prices.
4. I'm also not convinced that collateral appraisal is equivalent to the price level. What do you mean by that?
5. You say that I must be able to distinguish between a neutral interest-rate level and an equilibrium interest-rate level. What do you mean by that? And why must I? For what purpose? Can you define what you mean by a "neutral interest rate" and an "equilibrium interest rate"?
6. What do you mean when you say that agents tend to think in "dimensionally neutral terms"?
7. I'm not sold on the idea that IOR is a stock split. The money view emphasizes the effects of the *price*—that is, the interest rate itself—over the effects of the interest payments. It's hard to see how the interest payments matter if everybody outside the banks' balance sheets is only affected by the prices. If you're setting a floor on interest rates, money being pumped into the banks is not the same thing as money being pumped into the economy as a whole.
Let's start with the last part and work backwards. The initial claim is not that IOR is a stock split, it is that if you wanted to do a continuous stock split, at a given rate, then it would look like ior.
Account balances would be increased by some proportion continuously, devaluing the unit of account. So then we must ask what differentiates IOR from a continuous stock split.
It may be a valid answer to say "because we don't claim it as such" but certainly that is not a satisfactory answer. But at the least a stock split is different because all contractual terms are adjusted in a stock split.
The basic mechanism of charging a rate on credit lines, is to incentivize to keep balances at zero. Note that there must be some other enforcement mechanism, otherwise if credit repayment is never enforced, then people won't mind their outstanding balances exploding exponentially.
The first thing that I will point out, is that a credit balance can go positive or negative. I can owe you $1000, or you can owe me $1000. If you owe me 1k, then I am in essence paying you a negative interest rate.
So because interest payments can go in either direction, if we took a true average rate, for some segment of the market, the rate would be much closer to zero, as some people will pay interest and others will get interest.
Instead we take absolute values, and by taking an absolute value we lose important information. This is the reason why trying to compute an equilibrium rate is problematic, because all interest is transfer payments, and by tossing out the directional information we lose important information about the transaction. This is especially important when one segment of the economy is passively extracting income from another segment, because then the equilibrium point is dictated by the attractiveness of the bankruptcy option, in other words, the amount of extraction which can be tolerated.
But it gets worse, we can actually adjust the point of a "zero rate" to be different from a "zero credit balance". Banks could, for example, charge depositors a service fee above a certain amount of deposits. Or alternatively depositors might only earn interest on deposits above a minimum amount. So representing the average marginal rate on credit, as a market equilibrium, I would say is wholly inaccurate. It's an average measure of stress on the limits of credit lines, not a market wide determined price for money.
Again, if you want to dig all the way down to the bottom of the issue, this goes back to when people claim that banks create money. It's a pedantic debate that I simply prefer to avoid, and instead I describe it thus: banks upgrade credit instruments.
A bank upgrades your signed loan contract to a deposit in their institution. Then central banks can upgrade a portion of balance sheet assets into central bank reserves.
The principle point is that credit is inherently non-fungible, and the upgrading is not just a matter of risk adjustment. It also includes service costs, but also, it's a fee they charge just because they can. Because your credit is not widely accepted, but your local bank's credit is more widely accepted. But even your local bank needs to upgrade its credit to something more widely accepted.
Describing this credit process, involving hierarchical upgrades, as a money market, ignores this hierarchical aspect to it, which is the most important part of all.
There's so much more to discuss, but that's what I have time to explain today.