The Truth About Economics: Part 4 Money Supply Growth

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(See Comic) Text from comic: Fractional Reserve Banking Most people don’t realize that when they put say $1000 in their bank account, the bank is then allowed to lend out 90% of that money ($900) at interest. When that $900 that was lent out inevitably gets re-deposited into the banking system, it is lent out again ($810). And this process just keeps on going. This is called fractional reserve banking and it is where most of the creation of money comes from--not from physically printing it. Money is anything that can be used to settle debt. And only a tiny percentage of money exists as physical currency. Money Supply Measurements: M0, M1, M2, M3 M0: The total of all physical currency, and accounts at the central bank (FED) that can be exchanged for physical currency. M1: M0 minus the portions of M0 held as reserves or vault cash plus the amount in "checking" or "current" accounts. M2: M1 plus most savings accounts, money market accounts, and certificates of deposit of under $100,000. M3: M2 plus all other CDs, deposits of eurodollars and repurchase agreements. Note: The FED stopped reporting M3 in 2006. It was increasing too much to continue to let anyone know about it. FDIC: In US banks you will see a sign saying FDIC Insured. The Federal Deposit Insurance Corporation is a government corporation that guarantees deposits held in banks up to $100,000 per depositor. This is necessary because if there was ever a run on the banks and people demanded withdrawal of their money they’d quickly find out their money doesn’t really exist. If there is big demand for money (borrowing) and the supply grows faster than the economy (real GDP), inflation follows. That is what has been happening lately. Just Remember, the more money out there chasing goods and services, the more its purchasing power is eroded. Coming Next: Part 5, Protecting Yourself from Inflation

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