View Single Post
  #228  
Old 07-31-2019, 01:07 AM
Wrenching Spanners is offline
Guest
 
Join Date: Jun 2011
Location: London
Posts: 538
Quote:
Originally Posted by Max S. View Post
Loans create M1 money, assuming the funds are allocated to a checkable account. k9bfriender's cite seems to mean M1 money when they say "money".

Below is an example. You can see M1 expand when loans are made in steps 2 and 5, while it shrinks when deposits are made (to savings accounts) in steps 1 and 4. It also shrinks when a loan is repaid in step 9.
Code:
step	Bank	Joe	Bob	Sue	desc

0	 100	 200	   0	  0	Nobody owes anybody anything
	----	----	----	---
	 100	 200	   0	  0	= 300 total money supply (M1: 200)


1	 110	 100	   0	  0	Joe deposits 100 in bank
	-100	+100			(bank liable to Joe for 100)
	----	----	----	---
	 100	 200	   0	  0	= 300 total money supply (M1: 100)


2	 150	 100	   0	 50	Bank loans Sue 50
	-100	+100			(bank liable to Joe for 100)
	+ 50			-50	(Sue liable to bank for 50)
	----	----	----	---
	 100	 200	   0	  0	= 300 total money supply (M1: 150)


3	 150	 120	  10	 20	Sue pays Bob 10 and Joe 20
	-100	+100			(bank liable to Joe for 100)
	+ 50			-50	(Sue liable to bank for 50)
	----	----	----	---
	 100	 220	  10	-30	= 300 total money supply (M1: 150)
			

4	 180	 100	   0	 20	Joe deposits 20; Bob deposits 10
	-120	+120			(bank liable to Joe for 120)
	+ 50			-50	(Sue liable to bank for 50)
	- 10		+ 10		(bank liable to Bob for 10)
	----	----	----	---
	 100	 220	  10	-30	= 300 total money supply (M1: 120)


5	  80	 100	 100	 20	Bank loans Bob 100
	-120	+120			(bank liable to Joe for 120)
	+ 50			-50	(Sue liable to bank for 50)
	- 10		+ 10		(bank liable to Bob for 10)
	+100		-100		(Bob liable to bank for 100)
	----	----	----	---
	 100	 220	  10	-30	= 300 total money supply (M1: 220)


6	  80	 100	 100	 20	Bank adds 2% interest to Joe's account
	-122.4	+122.4			(bank liable to Joe for 126)
	+ 50			-50	(Sue liable to bank for 50)
	- 10		+ 10		(bank liable to Bob for 10)
	+100		-100		(Bob liable to bank for 100)
	------	------	----	---
	 97.6	 222.4	  10	-30	= 300 total money supply (M1: 220)


7	  80	 100	 100	 20	Bank adds 6% interest to Sue's loan
	-122.4	+122.4			(bank liable to Joe for 126)
	+ 53			-53	(Sue liable to bank for 50)
	- 10		+ 10		(bank liable to Bob for 10)
	+100		-100		(Bob liable to bank for 100)
	------	------	----	---
	 100.6	 222.4	  10	-33	= 300 total money supply (M1: 220)


8	  80	 100	   5	115	Bob pays Sue 95
	-122.4	+122.4			(bank liable to Joe for 126)
	+ 53			-53	(Sue liable to bank for 50)
	- 10		+ 10		(bank liable to Bob for 10)
	+100		-100		(Bob liable to bank for 100)
	------	------	----	---
	 100.6	 222.4	 -85	 62	= 300 total money supply (M1: 220)


9	 133	 100	   5	 62	Sue pays off her loan
	-122.4	+122.4			(bank liable to Joe for 126)
	- 10		+ 10		(bank liable to Bob for 10)
	+100		-100		(Bob liable to bank for 100)
	------	------	----	---
	 100.6	 222.4	 -85	 62	= 300 total money supply (M1: 167)
~Max
Hi Max,

Thanks. I think I followed most of that. A few comments:

1) I think at times you're example is looking at the version of m0 measure of money supply which doesn't include bank deposits, and referring to it as m1.

2) m1 includes both currency and demand deposits. So the act of depositing cash into a bank account increases the amount of demand deposits, but doesn't move the m1 measure of money supply.

3) Interest charges aren't part of the money supply, and at a transactional level don't cause it to move up and down.