First, think macro economically with a time basis. The monetary base is the money that is <most likely> to be spent in the near future. Cash, is <more likely> to be spent than electronic money on a current/checking account, although in todays world, it may be comparable in likelyness, since distant purchases leave no other option. But both are part of the monetary base, so it doesnt matter in this discussion. A savings deposit is less likely to be spent in the near future, and term deposits again less likely than savings deposits. Different intrest rates are used to control the behaviour / the choice people make. Macro economically seen, on a short time basis, non monetary base money is not spent. It can be spent, everything can be spent, but it isn't, because people chosed to not do so, with their choices (partly) controlled by the macro economical supervisors / central planning/banks. And IF they would all of sudden decide to spend right now, the monetary base would grow with it, as a result. But even then, throttling/bank office closures/cash withdrawal limits/transfer limits, can block them. See, this actually does happen, the last example being Cyprus. Second, they haven't saved a cent yes. On a specific moment only, being the end of week 4. With the same 'kind' of argumentation, you can state that they saved it all. Also on a specific moment only, being the begin of week 0. Chosing an average, over a chosen period, is again the same: drawing conclusions yourself. What does the central planning see: Week 0: a high likelyness that the next week $250 will be spent, and a low likelyness that the remaining $750 will be spent. Week 1: a high likelyness that the next week $250 will be spent, and a low likelyness that the remaining $500 will be spent. Week 2: a high likelyness that the next week $250 will be spent, and a low likelyness that the remaining $250 will be spent. Week 3: a high likelyness that the next week $250 will be spent, and a high likelyness for a new $1000 deposit. Week 4: the new $1000 is deposited, and a high likelyness that the next week $250 will be spent, and a low likelyness that the remaining $750 will be spent. This all of course on the macro economical scale. So, the monetary base simply reflects peoples choices. Stating that people also spend broader money supplies (M1+) is of course possible, but simply not the case, because IF they would do so, that money would shift from the broader supplies to the monetary base. The one thing that is unclear to me, is why the central banks chosed to make excess reserves a part of the monetary base. I can only see one reason for this: to mislead people about inflation potential. Can you think of any other (central planning) objective? The central pivot of the entire money flow, is the monetary base. Why: because it's a balance that serves as the direct link between all the products and the product money. Why: because the central bank invented it for exactly this purpose. It's its existence reason. When the Fed swaps new dollars with US treasuries (which is actually just lending, the Fed buys no intrinsic value-products there) then the US State uses those new dollars to pay its personell and that personell in turn uses those new dollars to spend, or to save. If that State personell decides to put the new dollars on their savings account, the new dollars enter a higher money supply balance, that includes those savings accounts. If that State personell decides to withdraw the new dollars as cash or keep them on a bank current/checking account, the new dollars enter the monetary base. So, looking at the monetary base, IS looking at what people do in the aspect of spend or not spend. So how can you then claim that they do spend higher money supplies? They CAN, but they DO not. And it's important to keep thinking macro economically in this, because imagine that all that State personell DID spend the new dollars shortly after, but OTHER people compensated for these new dollars by doing the opposite: saving instead of spending, then the net result is that the monetary base does not change. So, the Fed must have a specific reason to make excess reserves a component of the monetary base, since those excess reserves violate the very design / purpose of the monetary base, as a macro economical central planning control/monitoring instrument. They have to constantly subtract the excess reserves in order to control/monitor the monetary base evolution. Much like I and some others that apparently also were puzzled about this, had to do. And that specific reason might be obvious, especially since the excess reserves story only started in 2008, during a crisis: its an alternate way to control banks/peoples spending behaviour. In the past they used interest rates to do so (increasing to make people spending less, decreasing to make people spending more). In this time, our time, they already had dropped intrest rates to close to zero. Below zero would make unpleasantly clear what they do (bank savers would need to pay instead of receive intrest, which makes way more obvious that they lose, than 2% price inflation and 1% intrest rate). So my theory is that Quantitative Easing / all that dollar and euro creation, was actually just a scam to trick people into willingness to pay already higher prices for certain stuff (like silver) where the central planning/parasitic entities frontrunned themselves in. How 'coincidental' is it that the IMF purchased 200 ton gold from the market in 2008, just ahead of the QE? To then sell it 2 years later? I started to think this a year ago, see https://www.kitcomm.com/showthread.php?t=107120 The big question now is where this will end. See, it's for a reason that intrest rates approached zero. The two supertrends (production and spending) form a tunnel that gets narrower upon every cycle. A breakout to the positive side requires some new industrial 'era', wherein production is multiplied without costs multiplying too, and a breakout to the negative side requires the basic consumption level to be breached in the downside direction (like you illustrated with your week0>4 $1000>$0 list). If all people together, as a macro economical net result, start to show that earning>spending time horizon, then the fiatcurrency is effectively abandoned as storage of value, with the next phase the abandonment as medium of exchange/unit of account. As long as people can chose whether to spend or not, it's not the case, but if the basic consumption level is breached to the downside, then the choice is gone.
Easily. I have non-M0 electronic digits in my account with Bank AA**. I pop down to the supermarket and use EFTPOS to pay for my groceries. Bank AA transfers 100 non-M0 electronic digits from my account to the supermarkets account. I have spent higher money supplies. The non-M0 electronic digits acted just as if they were actually M0. If Bank AA was the only one in the country and every person had an account with them then they don't even need M0. If they only have a portion of the customers then they need some real M0 to balance the transactions that are not between their own customers. ** In reality I have a mix of M0 and non-M0 but as long as my bank is operating in the normal manner I can't tell the difference (and neither can the supermarket).
Also I note in your link back to kitco (hopefully I won't be banned for saying the name of they-who-shall-not-be-named) you aren't a believer in the velocity of money concept, which is good. Ironically though, you don't seem to be willing to accept that there is a demand for money (the medium of exchange) and that changes in the stock can be offset by changes in people's demand. There has been a flight to cash right across the world for a variety of reasons. All else equal this simply means people will want to hold more savings and an increase in demand for the medium of exchange is deflationary in nature but it doesn't mean that people won't change their mind next week and suddenly flood the market with that same money thereby spurring inflation. This is partly what I meant by people's cash balances are "spending" as well - i.e. money is a good that is demanded as well as being a medium of exchange for other goods/services. Edit: on rereading your earlier comment (that we have both been saying back and forth) This is simple definition. That money itself is a demanded good is what will always make any measure wrong except that we can say the stock of money available will alter people's preferences about whether they will prefer money or other non-money goods in their demand function (ie will they "hoard" money or "spend" money). All else equal the stock will drive inflation and the best measure of the stock is TMS rather than M0 (which is the point we disagree on).
Remember, it's not about what you, or anyone CAN do. It's what everybody, as a net result of all together, does. And that net result isn't spending higher money supplies. I'm basically repeating my previous post here, if the net result would be that people DO spend higher money supplies, then that money would be shifted by central banks personell to the monetary base balance. .
Before the electronic banking age I would probably agree with you but since then there are now two money-go-rounds.
In 2008 the central banks moved to another macro economical monetary method. As said. Better not ignore it. Today they published a good explanation of this specific story: http://mises.org/daily/6484/Inevitable-Inflation
Since almost a month I expected an Excess Reserves update (the 2013-06-01 figure) on http://research.stlouisfed.org/fred2/data/EXCRESNS.txt but still not there. Instead, yesterday they added this comment: That 'phase two of the simplification of reserves administration.' links to this: http://www.frbservices.org/centralbank/reservescentral/reserves_administration_resource_center.html and http://www.frbservices.org/centralbank/reservescentral/common_maintenance.html Which is a mess to interprete ('every seven days for 13 or 14 weeks', ???) I know that BASE is updated every 2 weeks, and EXCRESNS every month, so only very occasional same days, which is a mess if you want to calculate the Net BASE (BASE minus EXCRESNS), forcing you to calculate figures that differ upto 2 weeks in time. Maybe this added comment is about synchronizing both/all balances. But I just guess, because the text reads like alien talk (see name of this topic haha). Anyone understands what the Fed says here?
<Federal Reserve> Gobbledygook <Joe> Huh? <Federal Reserve> Ok, we made it too complex. We'll do something 'bout it. <Federal Reserve> We entered phase 2 of the simplification process. We hope it helps Joe. <Federal Reserve> Gobbledygook
