This was a funny exchange between two pretty well known economists:
SCHRAMM: Question here.
LUCAS: Uh-oh. (Laughter.)
QUESTIONER: Ed Prescott, Arizona State University. There’s one area I’m a little bit confused. there seem to be that a little shuffling of assets — you know, I own a little bit less of some, a little bit more deposited in the bank’s going to make much of a difference at all. There’s plenty of assets out there for the transaction purposes and it just A goes up and down; B goes down and up on the two assets.
LUCAS: What do you mean by asset?
PRESCOTT: I don’t see how the money does anything real.
LUCAS: What do you mean there’s plenty of stuff out there? Like we could all sort of start trading in gold?
PRESCOTT: I’m saying that I — when the Fed gets my junk bonds, and I get deposits in my bank, where’s the — it’s just changing my portfolio a little bit, changing the Fed’s a little bit, and I guess our banks — and my bank’s portfolio. These are all — there’s nothing real. They’re just bookkeeping entries, I mean, sort of shifting assets around.
LUCAS: Shifting assets around when liquidity’s involved — I mean, is seems like what you’re saying is that Lehman Brothers couldn’t have failed. Liquid assets have the property that — I hold them because I know I can pass them on to the next guy. Why does he take it? Because he knows he can pass it on to the next guy. And that’s true of U.S. currency, I’m going to go take my money into Walgreen’s, you know, and get in an argument about whether or not they’re going to accept it or not.
But all these probably created liquid assets seem to me to be analogous to kind of unregulated money or private money — used to be called inside money. And it does matter.
I’m not sure about the Lehman example. If you wake up in the morning and all your assets are worthless (as in they’re not productive), the problem isn’t that you can’t sell them. Not finding some sucker to buy them is an indication that they’re not worth that much.
Anyway, I’ve been doing this grad school thing for a while, studying macro, and I’m still not sure if money (policy or nominal fluctuations) has real effects or not.