Talk:Money supply

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[edit] A question for the experts

  • The school-book definition of money is all assets (if you will) that don't pay interest. Would that include the M1 bank deposits? Or do they also pay a little bit of interest sometimes?
  • The destinction is made to explain why the money supply increase with lowered rates. Because money doesn't burn so much in the pocket people are more willing to hold then in an interest-free form.
  • This is the thought process for that (here a rate HIKE):
    • The Fed decides to pay better interest on their loans from banks (the repo lending)
    • That makes banks lend more of THEIR assets to the Fed (not the customers money in M1 bank accounts).
      • (Note that the rates on the Fed lending affects ALL loans instantly. So it's not just the new loans that pay more, it's all loans.)
    • I RETURN the banks can now afford to pay their deposit customers better interest rates.
    • That makes people want to move money from their interest-free accounts to interest paying accounts.
    • Voilá: The money supply has DECREASED
  • If people just moved money from interest-free M1 accounts to interest-bearing M2 accounts (for examplea Money Market Fund that IS included in M2) that would leave the M2 money supply UNCHANGED by this.
  • My answer to my own question would be that the rate in the M2 accounts are also made less interesting in relation to other longer term rate investments. For example something just outside the Ms, like a BOND FUND or something like that. And in that way M2 decrease to.
  • Anybody have any ideas?--Jerryseinfeld 08:16, 19 July 2006 (UTC)

[edit] the balance sheet example

Can anyone tell me why the example shows the 1 dollar bond purchased by the C bank from B1 not on B1's liabilities?

thanks

As someone with absolutely no background in economics, I found this article left me more confused than before! I was lost after the second sentence. Also it only convers "U.S. Money Supply", with all the examples being "Fed this..." and "Fed that..." The article should either clearly label itself as only addressing Money Supply in the U.S., or be more carefully to acknowledge at the start of each paragraph "In the United States, the Fed handles this situation by doing X,Y, and Z..."

Start of J.G.'s comments:

You may be asking a lot if you want to be able to understand the "money supply" and its effects if you have no background in economics. Not understanding is nothing to be ashamed of, of course! I suggest you consult additional sources, keep reading, and in time you'll return to this article and see that it makes a lot more sense.

Regarding "globalizing" the article, it's hard to make the article inclusive of or descripive of every other economy in the world, because most governments or central banks are not so open as the U.S.'s when it comes to stating their economic policies, principles, and actions. Not that the U.S.'s central bank is always crystal clear.

  • I'd suggest there are many economies with policy objectives as transparent as the Fed. The UK, New Zealend, Sweden, Canada, Spain, Finland, Australia and others pursue explicit inflation targeting, more precise than commitments Greenspan would give. More specifically, after the UK government made the Bank of England independent in 1997 policy this transparency has improved further. I'm not qualified to write a 'globalising' update to the entry, but I'd say there's a strong argument for doing so if anyone is? Jamestplunkett 16:47, 23 November 2005 (UTC)

As far as the article focusing on the U.S. central bank, this makes sense inasmuch as the U.S. economy remains the most influential in the international economy for the time being, and it's policies are often "copied" by other central banks. In addition, I would think there are few persons with enough expertise to write about the inner workings of more than a single country's central bank. You would need to have a different person from each country, knowledgable about the history and policies of their own country's central bank.

Know, too, that the actions a central banks can be highly influenced by the political environment they operate in. They may have to make economic decisions based on what is good for the party in power, instead of doing what is best for the economy in an absolute sense. So it may be difficult to state clearly that "in situation A, the Fed (or another central bank) does B, which causes C".

A related thought: the economic situation confronted by a given central bank at a given time may be unique. The combination of factors may be such as was not ever encountered by another central bank before. So the actions of a central bank in those conditions may be unique to those circumstances. Certainly there are basic principles of operation, but they can and have to be shaded and molded to meet the specific situation. This can also make it more difficult to understand central bank policies.

It may help to realize that banking and economics at this level - the level of national goverments and international bodies - is a rather rarified field. It's not supposed to be easily understood by the lay person, any more than nuclear physics or other areas of specialization. But I exaggerate, it's not such a difficult subject. Keep studying; there are many good resources on the Net.

End of J.G.'s comments. 12:45, 18 November 2005 (UTC)

Hard to know where to draw the line on this topic. Basically it's controlling inflation to the right, and measuring well-being to the left, and never the twain shall meet, as it's a zero-sum game. To some on the left, even inflation has a legitimate purpose, in diluting the value of the money held by idle capitalists, which they earned by exploiting loopholes in prior systems of rules...

Hard to fault the way the article handles it now - the major views (GDP is evil, GDP is the only way to actually measure activity people are willing to pay for and has good correlation to employment, currency integration and simultaneous policy to alleviate the race to the bottom) are all there, basically, although they need me depth and links. Your point about the legit purpose of inflation should be in there, too. Before Milton Friedman it was commonly acknowledged on the right too.
Inflation has a disproportionate effect on the poor. The idle capitalists simply move their money into assets which hold value, for example index linked bonds or commodities. The poor and older people on fixed annuities don't generally have this option. --dilaudid on 165.222.186.194 14:49, 9 March 2007 (UTC)

" and since GDP can grow for many reasons including manmade disasters and crises, is not correlated with any known means of measuring well-being." this looks like original research, and appears to be incorrect too. Just because something has the occasionaly negative correlation does not mean it is not positively correlated. It seems highly likely GDP is correlated with various measures of well being - now let me find some... "This argument must be balanced against what is nearly dogma among economists". Nearly dogma isn't a concept I've seen before in an encyclopedia. Aren't economists an authority on money supply? --dilaudid on 165.222.186.194 14:49, 9 March 2007 (UTC) This is an article about the money supply anyway, not monetary policy (which is changing the money supply). Why are we worrying about monetary policy in this article? --Dilaudid 10:29, 10 March 2007 (UTC)

Changing measuring GDP To measuring well-being is like changing the weight calculation of a person from the actual force of gravity upon them to an aggregate including their compassion and contribution to the community. So instead of weighing 200lbs, I weigh 170 social weight units because I have participated in volunteer programs and given to the United Way. Therefore, you are not allowed to view me as fat or even suggest that I may suffer heart disease or go over the weight limit for your small private plane. The point I'm trying to make here is that GDP and money supply are simply measures of economic activity not measures of ethical values. There are other indexes like the Human Development Index that are subjective measures of social progress that already exist. Trying to replace GDP is merely confusing the issue by applying a dialectic process to try and resolve an uncomfortable dualism such as Social progress vs. economic progress.

What about M4? [1]

This is also called "Broad money" and I think is unique to the UK.

although I agree with the point on GDP I also think it is unrelated in a money supply post. I d like to see some graph showing the decline in the cash part of money supply and the growth in debt based money. If it could be traced back to early 20th century it would be great as we could see cycles.

[edit] GDP

The problem with GDP is not that it is measured; it is that economists tend to view increasing GDP as "good" and decreasing GDP as "bad" regardless of what that GDP change represents. Thus economists tend to favor anything that increases GDP without looking at the micro effects. (This was one of the arguements in favor of slavery -- that having a large unpaid workforce increased general prosperity.) Jaysbro 15:25, 4 November 2005 (UTC)

[edit] L

Can you say where you got this "least liquid" L variable from? The Fed, for one, doesn't seem to measure it. What is the difference between L and M3? --Afelton 20:17, 9 November 2005 (UTC)

[edit] GDP

"although I agree with the point on GDP I also think it is unrelated in a money supply post"

Actually, it is totally related because if the goal of central bankers is to maintain price stability, then that translates into the goal of keeping the money supply rising or falling in step with the rising or falling aggregate supplies of goods and services in the economy in question. Therefore, without the GDP half of the equation, the central bank's whole project of controlling the money supply wouldn't make much sense. Sure, you can talk about money supply as a simple noun without mentioning GDP, but the interesting stuff comes with talking about why money supply is important, and this has everything to do with GDP.

-Robert Nelson

[edit] A Good Review of the Moneterists' Understanding

- This debate needs to be moved to Monetarism. It's not about money supply. --Dilaudid 10:35, 10 March 2007 (UTC)


The discussion of the money supply was easily followed by me, though I am not an economist. However, I took economics in college and have followed the public discussion of monetary policy through the years. My only issue with this article is that it presents one side of the issue: it completely describes a moneterist's understanding, and does not even mention the competing (and major) economic school of keynesianism. It ignores the teachings of John Maynard Keynes on how the money supply should be defined and how they believe it behaves. So what we end up with is a good summary of Milton Friedman's pholosophy, and none of the opposing philosophy of Keynes, which many of us still consider the better policy basis of the two.

[[Reply: Keynesianism is crap. It is responsible for the devaluation of 90%+ of the dollar's worth since 1913 and has led the international financial system into the precarious state it's in now. But if you insist on a Keynesian view as well as a Monetarist view, then you'll have to include the Austrian School view as well.]]

Reply to reply from a non-economist: Your comment seems to be criticizing the entirety of the development of the world's economy since 1913. I am. The past hundred years seem to be enormously more successful economically than any other period in history. Two world wars and the greatest economic depression the world has seen - well, you certainly have raised the bar for us all, haven't you? Perhaps you could clarify your comment?

As for "Keynesianism is crap", I am pretty sure it is not the worst thing to have happened to economic thought during the 20th century. You're right. Socialism and communism. To say the least, it saved lives. These are the lives of the people who had nothing to eat during USA's Great Depression. Who do you think caused it? The Fed. Oh, and by the way Keynesianism became important after the Great Depression, which incidently took place in the 1930s (a while after 1913). And lastly, there are few things better for an economy than its currency's loss of value. Have you lost your mind??? Where do you live? Zimbabwe? I'm sure the loss of the value of the currency was a great thing for the citizens of Weimar Germany in 1923 as they wheeled it around in handcarts in search of a loaf of bread to exchange it for. Because in such a case foreigners are more willing to buy this country's products and so so this country becomes richer in terms of having what to eat, drive, sleep in, etc. So long as the creditor country - China - is willing to keep lending the money. --Cryout 03:00, 8 August 2006 (UTC) Better stick to your knitting.

Would the whiny monetarist please engage in serious debate? Keynesianism is not crap; monetarism is all-but-abandoned among serious Anglophone economists (I don't know what the situation is in Austria :P), and among the active schools of thought on the subject, the two primary contenders are Keynesianism simpliciter and neo-Keynesianism. This isn't the place to debate economic policy, but suffice to say that your views on inflation (oh, sorry, "devaluation") and economic growth are precious. To blame the Great Depression on Keynes, as you seem to do in the previous paragraph, reveals a profound misunderstanding of economic history. The belief that the devaluation of the dollar itself, rather than the negative effects of hyperinflation/inflationary spirals, is a bad thing is textbook idiocy. If you have anything intelligent to say, feel free to say it. 140.247.154.154 04:29, 5 February 2007 (UTC)

Agree with the spirit of this last comment - this isn't a good article and should be rewritten by someone who fully understands the issues. However, monetarism and Keynesianism have much in common - its a mistake to play them off against each other. Keynes knew that monetary policy could be used to stimulate demand, but he emphasised fiscal policy because interest rates were already very low in his day, and he thought printing more money would be inneffectual under those circumstances.

Friedman emphasised the monetary side but thought it best not to intervene lest we make things worse - he advocated steady, measured growth in the monetary aggregates. Today, I would say that, yes, macroeconimists operate in a broadly Keynesian framework in so far as they believe that an overall shortfall of demand causes recessions, and that recessions can be cured by active intervention using a mix of monetary and fiscal policy. But I would add that Friedman filled in the detail of much of this framework, dramatically improving our understanding of monetary and fiscal policy and their limitations (his work on the natural rate of unemployment and permanent income theory fully establish him as a brilliant economist who has had a lasting impact). The basic thrust of this article should be as follows:

1. Recessions are caused by a shortfall of aggregate demand relative to the potential output of the economy (not everything than can be produced can be sold because of lack of demand, so some resources will end up unemployed). 2. The good news is that monetary policy can be used to control demand. Print money and you increase demand, take money out of circulation and you reduce demand. 3. The basic rule is: if the economy is in recession, print money at a greater rate until demand is equal with potential supply, then ease off! If you print too much money then demand will exceed supply and, rather than stimulating more production, you will just get inflation. 4. Once this basic logic of monetary policy is stated, then the more detailed M1, M2 stuff can be explored. 5. Ditch the stuff on alternative GDP measures - it is hopelessly confused!Pjtobe 09:39, 19 February 2007 (UTC)

[edit] Innaccuracy

[Deleted] -- did not realize there was that much cash out there 68.196.112.152 16:38, 11 August 2006 (UTC)Karl

[edit] What are IRA and Keogh balances?

What are IRA and Keogh balances?--Samnikal 13:23, 19 November 2006 (UTC)

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