Day 80: Monetary Policy - Part 3

I commit myself to educate people in what money currently exists as and showing that money itself is a scam and that those who benefit from the scam are obviously not the 'common man', but the few elitist groups such as bankers who are able to suck all the money towards themselves while ripping the common man from his money, his car, his home, his children's tuition fees and all that's required to live a dignified and fulfilling life.

I commit myself to see through the charade and assist others to see through the charade of the apparent generosity of banks in trying to 'help you out' by giving you a loan - where something that doesn't belong to them is lended to you and where you, on top of that, have to pay a fee for their apparent generosity because they're taking 'such a big risk' in giving a helping hand - instead I commit myself to show how, if each puts in the effort, with many willing and committed hands, we are able to provide each one with all necessities and commodities that are required for each one to attain their fullest and most absolute expression as life.

I commit myself to design an economic system based upon life, for life - where, if a mistake is made - it is realised that it is just that: a miss-take - and that the necessary support and assistance requires to be provided for a person to learn to make more educated and informed decisions that will adequately support them and their families - where it is common sense that a person cannot be judged on missing a take, but requires to be forgiven and requires to receive another chance - so that with each miss-take, a person sees and realises the opportunity to grow and expand themselves - instead of seeing mistakes as something that must be avoided and something that causes each one to live in continuous fear - because one cannot 'afford' to make mistakes due to the mercilessness of of greed.

I commit myself to stop considering myself as an individual being that only has to think about his/her own needs - but to realise that I am part of the human race, part of this world, part of life - and as such, I am not only responsible for taking care of myself, but of taking care of my fellow human beings and all fellow life-forms that we share this Earth with - and thus I commit myself to push for a new world of equality and not stop until all beings are taken care of and provided for in a way that allows them to discover and realise their full potential as an inhabitant of this physical planet.

I commit myself to living in this physical reality and stop entertaining fiction such as thoughts, beliefs and opinions - so that I can realise what truly MATTERs and so that as I, within this realisation, take responsibility for all of the physical reality - make sure that it does not suffer under the dominion of mind-creations of personalities, opinions, self-definitions, desires and wants - but to instead focus myself and my entire beingness within the physical as the true God - who, despite continuous abuse and despite our slaughtering of its children, has never stopped supporting us, has never abandoned us and has kept on taking the hits and blows of our delusions.

I commit myself to educate people in understanding real care and real love by pointing at the Earth that is here, still waiting for us to realise that we are a part of it - and not stopping until it is entirely destroyed by human kind - and thus, I commit myself to face my fears and stop my selfish desires so taht I can assist in avoiding the disaster of the end of Earth and the destruction of our chance to manifest Heaven on Earth.

I commit myself to show people that we are not in fact waiting for God, that we are not in fact waiting for saviours to ascend us to heaven - but that we are only waiting for ourselves to leave our selfishness behind us and work together towards the creation of a real Heaven - not somewhere up in the clouds or in a different dimension - but right here on Earth - with that which is already here, already available, but waiting for us to be seen, to be realised.

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Day 71: The Money Supply - Part 1

What is 'Money Supply'?

The money supply refers to the liquid assets that are held by individuals - it includes coins, notes and demand deposits (cheque accounts). What notes and coins are is clear - but what are demand deposits? If you have a cheque account in which money was deposited - the bank has to pay out deposits in cash on demand, or has to transfer it immediately on demand to another bank or account holder. So - demand deposits - the money in your cheque accounts, is as good as notes due to immediacy with which the money becomes available. The money supply, in simple terms, refers to all the money that is in circulation in an economy, that is available to individuals to purchase goods or services with.

Why does it matter how much money is in circulation?

The amount of money available in circulation has an influence on the prices of goods and services. Remember the following from the blog-post 'Inflation - Part 1':

"In other words - whenever the amount of money in circulation increases in an economy, the prices will go up. Check: the more money is available in an economy, the less it is worth, which is reflected in higher prices - because with the same amount of money in your pocket, you can now purchase less stuff, which means that your money is not worth as much as it used to anymore."

If the money supply keeps on increasing - so will prices - and the result will be inflation. Why?

Because - more money in circulation means more money available to people to buy goods and services with. In other words: the demand for goods and services goes up. If the demand for goods and services goes up (more people are willing and able to buy goods and services), so do their prices.

What factors influence the Money Supply?

1. Banks

The supply of money can be increased by increasing either the amount of notes, coins or demand deposits. Banks play a crucial role within the latter: banks have the ability to create money by increasing the amount of demand deposits.

The question, then, is:

How are demand deposits created?

Firstly: if a person deposits, for instance, $100 in banknotes with a bank, the bank will in return give the person a cheque book, which will give the person the right to write out cheques to the value of $100.

Secondly - and more importantly: Banks noticed that the demand deposits held by them were never all claimed/withdrawn at the same time. They would always have demand deposits 'laying around'. They figured that, instead of leaving the money to collect dust, they could lend this money to other people and charge interest on the loan. This means: the bank would give money to people who hadn't put money in the bank beforehand.

In the First case, nothing actually happened to the money supply: $100 was deposited into a bank - and thus removed out of circulation. This means the money supply decreased by $100. However, the bank issued a cheque book of the value of $100, thereby again increasing the money supply by $100. The money supply before the creation of the demand deposit is thus the same as afterwards.

In the Second case, however, the money supply does change. Using the same amount as an example: Someone deposits $100 into a bank. The bank issues a cheque book of $100 - the money supply balances out. However, of the $100 deposited, the bank decides to lend out $80 to someone who needs and seems creditworhty enough (showing the capability to pay back loans). Now the money supply has increased with $80. At first there was just one person with $100 in their pocket, after the bank did its magic: there was one person with a $100 cheque book and another person with $80 of credit.

Is there a limit to the amount of money a bank can create?

Although small, there are limitations to the amount of money a bank can create.

At any time, a bank must have sufficient cash reserves to be able to provide for cash withdrawals. Secondly, a bank must be able to provide for claims of other banks. What does this mean?

Remember our example of someone bringing in $100 in his bank and receiving a cheque book of the value of $100. If this person writes a cheque of $100 to his landlord, the landlord will go to his bank to cash the cheque and receive $100 for it. The thing is that the landlord's bank and the bank of the person who wrote the cheque, are not necessarily the same one. A bank must therefore always make sure that it is able to provide for the claims of other banks.

Individual banks don't decide how big a percentage of received deposits they keep aside in the form of cash reserves - this is the job of the monetary authorities: the central banks.

Let's say that the central bank dictates that at all times a bank is obliged to hold 2.5% of their total demand deposits in the form of cash resrves. We say that 2.5% or 0.025 is the 'cash reserve ratio'.

Taking again our example of someone depositing $100 at his bank - what implication does a cash reserve ratio of 2.5% have in terms of limiting the bank's ability to increase the money supply?

Firstly - consider what would happen without there being a cash reserve requirement:

Step 1: A person (Person A) deposits $100 at the bank and receives a cheque book of the value of $100.
--------> Money Supply: Nothing changed
Step 2: The bank lends out the $100 that was deposited to someone else (Person B).
--------> Money Supply: + $100.
Step 3: Person B deposits the $100 at his bank and receives a cheque book of the value of $100.
--------> Money Supply: still + $100.
Step 4: The bank lends the deposit Person B made and lends it out to Person C.
--------> Money Supply: + $200.

As you can see - the process could just keep on repeating itself until an endless amount of money is created.

What happens then in case of there being a cash reserve ratio of 2.5%?

Step 1: A person (Person A) deposits $100 at the bank and receives a cheque book of the value of $100.
--------> Money Supply: Nothing changed
Step 2: The bank keeps $2.5 dollars in reserve and lends out $97.5 to someone else (Person B).
--------> Money Supply: + $97.5
Step 3: Person B deposits $97.5 at his bank and receives a cheque book of the value of $97.5 in exchange.
--------> Money Supply: still sitting at +$97.5
Step 4: Bank keeps 2.5% of Person B's deposit in the form of cash reserves ($2.44) and lends out $95.06 to Person C.
--------> Money Supply: + $192.56

As you can see, with each deposit, the amount a bank can lend out decreases in comparison to the initial amount of $100. There is thus a limit to the amount of money that can be created this way. We can actually calculate how much money will be in circulation if this process is continued until there is nothing more to lend:

$100 * 1/0.025 = $100 * 40 = $4000

The initial $100 that was in circulation, the fractional reserve banking system (which is what this banking system is called) can turn into $4000 in circulation.


We continue on the subject of the money supply within the next blog.

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