A user, Mr. English posted this in our forum and we’re reposting it here.
I have been investigating something for a while know but as yet have not been able to establish conclusive answers to what would seem fairly straight forward questions.
* The question being in any countries economy does anyone here understand exactly how the total monies are monitored to establish money available in the economy and how this is policed and measured?
I have heard about MO M1,M2, & M3 being the totals measured; the question that has been on my mind is that on bank notes there are serial numbers, which my understanding was that presumably these are printed under an organised global finance system overseen by laws which state that these notes are printed at an authorised legal amount in line with legally merited ways that these monies have been acquired e.g. serial number 0123,435,234,234 would equate to an indication of their being $123 Bn in the economy.
A query I have also relates to our national debt.
* If for example we have an economy of $123Bn and a national debt of $150 Bn I imagine as a country there are laws which govern against the Bank of England printing the deficit when necessary?
I am endeavoring to understand how money supply is regulated and policed/measured
I would very much appreciate if a few people that know the answers to these questions can shed a little light. Thanks very much.
Answer (From Barry Econ):
Ok, some great questions, i can’t answer them all.
I don’t know of any connection between serial numbers and money supply. MS is always moving, especially with global markets and foreign currency trading. You are right, there are a number of M1, M2, used to measure levels of Ms.
So basically you’re asking who pays attention to the monetary policies? Quite frankly there is no body that polices anybody else. IMF and World Bank may cast judgment on the economic situation in a particular country that may prevent investment, however, it’s up to the country itself to conduct monetary policy themselves.
This is why there are many countries who just fix their dollar to the dollar, or to the Euro. Many countries don’t have the discipline necessary to maintain monetary policy because, just as you’ve said, it’s very easy to print money to meet debt obligations……But you can’t just print money or inflation would sky rocket. You need to issue bonds, investment tools, etc.(increasing the interest rate perhaps) and then pay some debts…. DISCIPLINE is the key, and it’s country specific. Generally smaller countries watch and peg to world economic powerhouses…..
HOpe that helps.
Interesting stuff. So if inflation would shoot up presumably the rationale behind it is because there is an excess of money in the system which is fuelling demand and therefore prices are responding and going through the roof; is this about right?
How does the discipline, investment vehicles and interest rates fit in?
I understand how interest rates seems to move to keep inflation in check; the primary effect of this being it seems to police the feel good factor in society so it doesn’t go mad with excess income.
I don’t understand how the investment vehicles, bonds etc also come into the equation to produce a well round and organised economy, which is what I would imagine the better economies do.
Where does the discipline with countries that bolt on to other currencies come into it? It sounds like they are following their leaders a tad. So emerging countries like China & India would these have been in a similar situation to the foloowers but having gotten a handle on how to manage things have learnt now to do it for themselves?
There are more than one reason why inflation would increase. The demand for housing may increase pushing prices higher; a big one is the rise in energy prices pushing inflation higher. There’s nothing wrong with demand so long as it’s sustainable.
The primary effect of interest rates is to reduce investment/borrowing, or increase it. That is a consumption factor really.
How bonds would help money supply is like this. You have excess money supply and you want to get rid of it, basically remove it from the system. You issue a bunch of government bonds and people will purchase them in $ and you take it out of the system.
You can also do this with interest rates, lower interest rates may increase money supply because more people borrow, but in reality there is less demand through investment channels because nobody wants to invest in a coutry that has lowering interest rates.
Countries that peg to a vehicle currency tend to do that for foreign exchange reasons, so basically their currency isn’t worthless. The thing is, you don’t have much control over US policy so you’re goods may become more expensive or less expensive depending on decisions abroad.
Hope this helps.