Friday, August 19, 2005

Second-hand Sales Help Growth Without Inflation

Yesterday, I discussed Mark Gilbert’s disparaging remarks about the second-hand Internet auction phenomenon, with e-Bay and its many competitors and how it had no effect on interest rate decisions.

Gilbert wrote:

More than 50,000 Britons draw income from selling secondhand goods on Internet sites such as EBay Inc., the London-based Centre for Economics and Business Research said this week. Adam Smith's ``nation of shopkeepers'' is becoming a race of junk dealers. No wonder the U.K. economy is heading into the ditch.”

Today, another article on the same phenomenon gives an entirely different account of its impact, along with the billions (trillion?) of transactions paid by credit card over the net. This article is from Mella McEwan, Midland Report Telegram in mywesttexas.com, and what a dfferent account it gives, using the simple quantity of money identity (MV=PT):

‘The "eBay Effect": More resources introduced into financial system by Mella McEwan
One of the modern phenomena that we have observed within this framework is a notable increase in the velocity of money (V). Credit cards, debit cards, paying bills by phone and online, electronic transfers, and a host of other innovations have caused the financial system to become much more efficient. The result is that we can accomplish many more transactions (T) without increasing the money supply or prices. Much of our remarkable era of growth without significant inflation can be traced to this simple fact.


There is another part of this story, however, that to date has not been chronicled. I call it the "eBay Effect," although it is really much more than that. The idea is that, for most of our history, a substantial part of wealth has been tied up in assets that were not liquid (easily convertible to cash). While many of these assets, such as machinery, are essential to productivity and progress, this freezing of available funds was an impediment to transactions. If you had furniture, machinery, or almost any other "used" asset that you no longer needed, you had a difficult time converting it to cash. You might run an ad in the local paper or a trade publication; you might even hire a broker; but it was almost always a slow and expensive process. Because of this lack of liquidity, such assets were also difficult to use as collateral for loans. The money was pretty well locked up.


Those days are gone! With the advent of the Internet, online auctions and specialty sites bring millions of buyers and sellers from around the world together on a non-stop basis. The search cost for finding the right purchasers has dramatically diminished, and virtually everything has become a liquid asset. Thus, more things are acceptable as collateral, more things can be quickly and efficiently converted to cash, and the entire financial system gains efficiency. As a result, more transactions can be accommodated, which in turn provides growth without inflation.”

What a difference is made by a change in perspective! Mark Gilbert’s piece on Blomberg.com needs rapid revision.

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