Why additions to cash balances cannot be categorized as consumption or saving/investment. 🧵

We only say a burrito is a consumption good because that is the way it is virtually always used. We say a forklift is a producer's good for the same reason.
But somebody could conceivably try to stand on top of a burrito to reach inventory on a shelf. And somebody could conceivably try to eat a forklift for direct enjoyment.
The purpose of the individual using or holding the good is what determines the category (consumption or production).

Now you see the inherent ambiguity in asking whether cash holding is consumption or investment.
We don't ask that question about other goods because it is either obvious (burrito and forklift) or "it depends."

If you save $ for a specific planned purchase in the future, seems more like investment. If you hold $ because you don't like uncertainty, seems like a present good.
But this question gets asked about money because of the implications for fractional reserve banking. If cash balances are saving, then the changes to the structure of production via fractional reserve lending are ok. If not, then the SoP is distorted with FRB.
My own view is that the demand to hold money is most fundamentally about removing presently felt uncertainty. This, among other reasons, is why I don't think FRB works.
But the main lesson here is that this is yet another question that is answered by subjectivism, similar to the diamond-water paradox, theory of price, theory of interest, etc.
See All