More from Guest blogger BF
When JMK is talking about the demand for money he is, as we’ve said, really thinking of the individual’s portfolio allocation decision, and the individual he’s thinking of is basically himself. Contrary to the idea that Keynes’ saver is myopically driven by the amount of his current income and not looking to the future of his asset holdings, he’s actually thinking about a guy who devotes a fair bit of attention to the financial markets (incidentally, forget that stuff about Keynes making his money by reading the financial pages and spending half an hour on the phone with his broker before he got out of bed in the morning – he actually put quite a bit of effort into managing his, and other people’s, finances). This is very much the guy he’s got in mind when he talks about the speculative motive for holding cash.
From our guest blogger BF
The next motive for holding cash is what Keynes called the precautionary motive, and it relates to that stuff in our last post about day-to-day fluctuations in the price of bonds in the secondary markets, and in particular to uncertainty about those day-to-day fluctuations.
From Our Guest blogger BF
To recap a bit. Keynes’ theory of liquidity preference is actually a theory of individual portfolio allocation, where savers (whose total level of saving is primarily determined by their income) make decisions about how to distribute their savings across financial assets of varying degrees of liquidity, with money being the most liquid of those assets. We said earlier that JMK saw savers as having a powerful tendency to want to stay liquid: the interest rate is what induces them to give up some liquidity and put part of their savings into less liquid assets. As JMK puts it, the interest rate is the reward not for saving but for giving up liquidity.