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The money supply

by on December 13, 2013

What is the money supply?

What is the total sum of money?

There’s an easy answer to this question, and a hard one.

We are usually given the hard answer. It involves wading through page-long treatises on various types of money, labelled M1 to M3.

The easy answer:
The money in circulation consists of LOANS that were given out, and have not yet been repaid.

Loans that were given out, and have not yet been repaid.

Banks create money out of thin air when someone takes out a loan, a mortgage, or uses a credit card.
==> THIS BRINGS MONEY INTO CIRCULATION.

And they destroy it when that loan is repaid.
==> THIS REMOVES IT FROM CIRCULATION.

Hence: the money supply consists of loans that were given out, and have not yet been repaid.

The End

or is it?

…but for a small epilogue:

First, see wikipedia for how it’s usually explained.

Then, don’t forget:

1.)
printing money doesn’t increase the money supply. (That’s why the graph in wikipedia includes the words “outside Federal Reserve Banks and the vaults of depository institutions.”)

2.)
Buying assets such as government debt only gives more money to banks, but does not, can not, and will not bring it into circulation in the real economy. QE and buying up own debt is tantamount to admitting defeat!

3.)
You might learn a lot about how the babushka dolls are put together, and how exactly the (minuscule) fee is constructed that banks must pay for the privilege of creating OUR money…
…but it will not, and can not disprove this basic and unalienable fact:
The money in circulation consists of LOANS that were given out, and have not yet been repaid.

It will however, quite probably, distract from the two fun facts that…
…money is being created and destroyed all the time (see above).
…and the money needed to pay the interest is never created at all!

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One Comment
  1. Countries can reduce their debt by currency devaluation, e.g. by shopping abroad, inter alia for own debt (see item 2. above) or other weapons. However, unless there’s some kind of debt forgiveness and/or currency reform (not to be confused with ‘monetary reform’, sometimes referred to as ‘monetary modernisation’), the system remains inherently crazy, mad, meshuga.
    People aren’t supposed to worry about this, but are urged to blame the politicians presiding over the debt orgy, and the countries where it accumulates. It’s a bit like the dark side of the moon: out of sight, and trust the experts to worry about it.

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