The Optimum Quantity of Money

Includes: BRK.A, BRK.B
by: Casey Mulligan

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

Sunday it was reported that now U.S. Treasuries yield about the same as some high grade corporate debt. Berkshire Hathaway (NYSE:BRK.A) debt actually yields less!

Unfortunately, Milton Friedman and successive economists 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 it the average private return? Or the returns on private securities with similar "risk" as Treasuries?

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