The new reality: hoarding or avoiding using cash because of Covid- 19 and the relevance of Quantitative Easing

Keynes wrote at length about the increased attachment to cash which he called increased liquidity preference in a time of crisis which leads to a rise in the rate of interest as there are limits to the amount of cash in circulation. Keynes puts it as follows in his Quarterly Journal of Economics article in Feb. 1937, The General Theory of Employment. He writes:

When, as happens in a crisis, liquidity preferences are sharply raised, this shows itself not so much in increased hoards-for there is little if any more cash which is hoardable than there was before-as in a sharp rise in the rate of interest, i.e.securities fall in price until those ,who would now like to get liquid if they could do so at the previous price, are persuaded to give up the idea as being no longer practicable on reasonable terms.A rise in the rate of interest is a means alternative to an increase of hoards for satisfying an increased liquidity preference.Nor is my argument affected by the admitted fact that different types of assets satisfy the desire for liquidity in different degrees.The mischief is done when the rate of interest corresponding to the degree of liquidity of a given asset leads to a market capitalisation of that asset which is less than  its cost of production ( JMK, The General Theory and After,Part II Defense and Development.  Collected Works p.111.

Hence the need for quantitative easing in the current circumstances when the need for near zero interest rates is paramount. Simply increasing the velocity of money will not not satisfy the need and because of liquidity preference will not happen.People will tend to hang on to cash  balances rather than spend them. Corporations with large retained earnings might also avoid spending them on government bonds because of the risk of losses when interest rates rise from their near zero level and asset prices fall. The general public beecause of covid 19 contamination fears  will also try to avoid using cash -a phenomenon already widespread in Montreal- and rely on credit cards and debit cards.

But not everyone has these or uses them particularly in the underground economy which is a significant part of the small trader economy. Economists generally estimate the size of the underground economy as ranging from 8 to 14% of the economy . This only strengthens the need for greater central bank monetization of the debt or QE while the crisis lasts.  Contrary to monetarist dogma there is currently and for the foreseeable future no danger of this policy causing an inflation problem since the deflationary forces growing out of the sharp fall in oil prices  and the wave of job losses is far more powerful.



About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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