Interesting question. Ok, back to the basis (when a buiding shake let's examine the basement!). Money is, IMO, a promise of work. Already done (or to be done in future). I explain. Every layman's economic book start describing a barter and how is simpler to use an exchange mean as intermediate mean, making the exchange of good more simple (reducing work to find someone who have what you want and look for what you have to exchange, ie reducing intermediating cost). According with this definition money can be everything. We chose to use "paper" (or electronic impulses) because it is simpler to manage than moving around goods or pieces of gold. This mean exactly one thing: money exist only as a "promise" of work, already done (for example a home or a car) or to be done (I pay you to build a house or a car, or to give me an advice as a financial advisor). The main problem here is, IMO, time. Work is another name for time (we will take in account productivity later). So if I don't work now that work is lost forever. Not the same with money as we know it. If I don't use money now, I'm not losing nothing. With this principle in mind, when people save all together, less people works (less exchanges) and we're losing goods or services we could have had but we hadn't. That work is lost forever (you can't have back that time to use it in future, so that potential work is lost). To avoid this problem, IMO, money supply have to grow at least as savings grows (assuming velocity of money is costant). We have introduced in the economic system a "control variable", money supply, that should be growing when savings grows or velocity slow down, and should shrink when savings shrinks or velocity speed up (assuming work done is costant at full employment rate and productivity is costant). IMO, the target should be mantaining work done at full potential value, because it is at that value that we have the maximum output, so the max increment of wealth (how it is divided is not important in this very high fly reasoning, important here is that it is the maximum production of goods and services). Now, the sad part. According with "economic evolution" of last years, all developed countries allowed raising unemployment rates (more precisely, declining employment rates) and at the same time raising money supply. I'm not a economist, but seems to me that is a recipe for a disaster. Less goods and services to be exchanged and more exchange mean in the system. Should mean inflation, that we haven't (yet?) because foreign goods are flooding our countries. But that goods we can not import (as RE) clearly shows that inflation (in my country a low-income home nearly tripled in 10 years, and I read of same, or more, increase in US). To my understanding, exchange rate between currencies should have adapted to work-exchange between people, but seems there are not (and raising dollar (or CHF) seems to me is working against natural adjustment). It seems to me that money is treated as it had an intrinsic value -that it hasn't- and this is slowing down adjustments needed to start again production of goods and services. Any comment?
Interesting. However, I am worry that there are many types of money. The kind of money banks uses to generate credit is not the 5,10,20,50,100 notes that you and I use. My concern is that because there are some types of money for different purposes, this generates crises. Example: M3 includes money market funds, derivatives, CDS, and many other innovative financial assets. If you look at charts of m1,m2,m3 (even in Wikipedia, you will see how m1 came from being over 60% of the money aggregate in 1950 to below 10% in 2007. M3 did not exist in 1950, and in 2007 it was close to 45% of the monetary aggregate.
"different purposes" is unclear for me. Seems to me that money is money, whatever source created it. Could you elaborate a little? Of course, your note about M* shows that today money is created more from private financial institutions than in the past. Sadly, I believe, because greed is unleashed in this kind of institutions, IMHO. They opened Pandora's box.... Anyway, are you sure that derivatives are counted into M3?
No I am not that sure, but there are things in m2 and m3 that we would not consider them to be money. Check them out please. you will see.
Now I understood because M3 definition is not very clear for me, my old textbook on macroeconomics (italian version of Dornbusch Fischer) stop descriptions at M2. And I never been a mnemonic student... Anyway, I don't really understand how this measure could help us. If I was an happy owner of growing shares, say in XBM Corp., and I decide to sell (expecting grow is ended) and I'm unable to identify another share in the market that I'm willing to bet on, I could decide to stay liquid and, say, invest on CDs or repos. Now I'm the cause of a M3 grow. Multiply for n-thousand puzzled investors and you can have a shrinking dow-jones and a growing "money supply" (M3). But until I'm not using that money to buy anything real, as goods or services, do that money create inflation? Do that money create bubbles? Suppose I invested in CD, and bank lend that money to someone, say Jack, who wants to use it. He is moving today consumption he will have to pay tomorrow (if bank make its work well, we will speak of CDS later). If there're resources (work capacity and materials) to build what Jack wants, that lending only move consumption in time, from future to present, but seems to me it is not inflationary. The same even in case of fractionary reserve lending, until there's capacity for production grow. You may even think this is a pro for FRL, because could help to reduce unemployment. The problem may be that if Jack consume all (or most of) his future earnings today, he will have to stop (or reduce) consuming in future. May be this one another explanation for booms and bust when too much credit is available? IMO, the crazy variable was CDS introduction. That tool, as a lot of derivatives, introduced a crazy speculative behaviour (I believe it was a deliberate steal, but I can't prove it). Banks, free of risk of lending, could give away money as peanuts, people not so smart could consume more than they could afford, more than they produce and so someone else have to pay for them. I personally saw bank clerks selling repackaged derivatives to retired working class people barely able to read assuring they are safe as treasury bond "but with better yield". Some years ago they tried to my grandfather, too. And in Italy regulations require they sign a statement that say "I'm a professional with specific knowledge on financial instruments" to be allowed to buy that kind of "investments". I'm sure there's no bona fides in that kind of transactions, as I believe there wasn't in selling derivatives to communes, by means of politicos unable to even close a family balance without going in deep red. Anyway, that bank behaviour changed the game. Money was pushed to anyone, even clearly potentially unsolvent, and that people used that money to buy goods, first of all RE, they can't afford, inflating all of them who cannot be produced quick enough. At the same time they pushed productive investments in off-shore industry that industrialized other countries (like China) and created new capacity (that almost always means reducing production cost), who created more savings in people lucky enough to intermediate in the process, savings that supplied more money for the game. This is, very rough, my understanding, so I'm blaming who repelled laws that ruled against purely speculative behaviour, and I'm blaming who swindled people unable to defend themself, and I'm blaming who managed all this clerks. Anyway, could you explain better why you think money supply seems relevant to understand present and future of this crisis? I cannot understand it myself.
I am beginning to be of the opinion that the rest of the world has a much larger problem than the US. They have been inflated to death, and "they" are the ones who are going to 0. Here in the US we can print very cheaply while they are forced into the dollar. Do we not have everyone over a barrel at this point? I believe Putin eluded to this at Davos.
I hate it when people criticize and then fail to elaborate on it. What is conspiracy about what he said? He perfectly summed up in basics how the debt-based economic system of ours works.
My concern is about what is in those m1,m2,m3 are not liquid forms of money. They have been dropped there to increase "credit" and for the last decades have increased at astonishing rates. That's why I drop the question "What is money???" Apparently there are many forms of it.
My concern is more about real value of money and goods than on money forms. I cannot find a reason to stop analysis to how liquid money is, as seems to me M* try to do. Seems to me there so many variables involved and that many of them are simply neglected by economic theory (as I know it, so near at layman level). I never found a really convincing modelization of an economic system, even at very macro level. I try to understand it using systems engineering methods, but without good results. Never found a good analogy. Maybe I'm not using right sources, but what they are? This is THE reason, IMO, because we all continue to discuss about different aspects of our problem without arriving to a shared conclusion. Simplifing variables means anyone can find a reasonable case where things goes in a way, and someone else on same premise arrive to another conclusion. Because a neglected variable with two different values is used in the two cases, or (more often) someone is assuming a variable that WAS nearly costant in near past HAVE to remain costant in the future, just because history teach in that way, but without any real proof. Seems to me we're in deep water without not only a map but even without a compass.