ponnarasi
09-12-2006, 03:08 AM
Before we start, some definitions regarding the money supply are in order. M1, Money Supply; consists of cash plus checking accounts and travelers checks. M2, consists of M1 plus retail money market funds, savings and small time deposits. M3, consists of M2+ large time deposits, Eurodollars & large money market funds.
Myth 1 (Double counting)
A large portion of the M3 money supply is not really money and should not be included in any money supply discussions. Money is cash and spendable checking account balances. That's it. If you take $100,000 that you found in an old trunk and deposit it in a large time deposit, the bank will report it to the Fed as $100,000 in a new large time deposit. This will be counted as part of M3; this bank then lends this same $100,000 to someone who buys a $100,000 Mercedes: When this Dealer deposits this same $100,000 into a time deposit, that bank will then report to the Fed $100,000; which will then be include in M3. You, the first person, owns a certificate saying you have $100,000 in your bank. The Mercedes dealer also has a certificate saying he has a $100,000 in his bank. The Fed will now count $200,000 in M3. But only $100,000 is really in circulation. The truth is that money circulates and is counted many times because it is not labeled correctly. The real money supply in this example is the original $100,000. That's it. The second $100,000 that was counted should really be counted as a financial asset (since the Mercedes dealer bought a large time deposit certificate). It should not be counted as money...................
Myth 1 (Double counting)
A large portion of the M3 money supply is not really money and should not be included in any money supply discussions. Money is cash and spendable checking account balances. That's it. If you take $100,000 that you found in an old trunk and deposit it in a large time deposit, the bank will report it to the Fed as $100,000 in a new large time deposit. This will be counted as part of M3; this bank then lends this same $100,000 to someone who buys a $100,000 Mercedes: When this Dealer deposits this same $100,000 into a time deposit, that bank will then report to the Fed $100,000; which will then be include in M3. You, the first person, owns a certificate saying you have $100,000 in your bank. The Mercedes dealer also has a certificate saying he has a $100,000 in his bank. The Fed will now count $200,000 in M3. But only $100,000 is really in circulation. The truth is that money circulates and is counted many times because it is not labeled correctly. The real money supply in this example is the original $100,000. That's it. The second $100,000 that was counted should really be counted as a financial asset (since the Mercedes dealer bought a large time deposit certificate). It should not be counted as money...................