Sunday, March 21, 2010

The Optimum Quantity of Money, 2010

Milton Friedman's Optimum Quantity of Money rule said that government liabilities (of which "money" is one example) should by supplied in large enough quantity that they earn the same return as private sector liabilities.

Today it was reported that now U.S. Treasuries yield about the same as some high grade corporate debt, after decades of yielding significantly less. Berkshire Hathaway debt actually yields less (but see the comment below that Bloomberg made a mistake)!

Unfortunately, Milton Friedman and economists since him do not have an empirically accurate theory of why private sector securities have such different expected returns, so it's not clear which of the many private returns would be the same as the Treasury yield in a world with the optimum quantity of government liabilities. Is the average private return? Or the returns on private securities with similar "risk" as Treasuries?

The answer depends on what is your theory of why private assets can have different returns, but arguably we have now reach the optimum quantity of government liabilities.

2 comments:

Andrew Hofer said...

THey don't. Bloomberg is not benchmarking these instruments properly. The yield curve is very steep and a few weeks makes a big difference.

Unknown said...

Well, what is your theory? My concept is that personal debts can *default*, no issue how big the organization may be (including Berkshire), and the US authorities will never standard. So personal financial debts are a larger possibility than community debts and personal organizations should pay more attention than the US Administration.

Berkshire's potential for defaulting on their debts may be small, but it isn't zero, and so the appropriate decryption of the T-Bill come back amount is that some externality is generating it away from a no cost industry amount, and that externality indicates Friedman's no cost industry evaluation is inapplicable. I dunno, maybe the T-Bill amount is politicized. Any potential for that? .. Yes, I am being a little comical, for those that need to be informed.

Pattaya, Thailand