Comments on economics, mystery fiction, drama, and art.

Monday, April 02, 2012

(Mis-)Understanding Money

I've been reading with some interest the back-and-forth going on online about what role banks have (for a taste, look at Krugman and Rowe).  I was struck by a couple of comments to Krugman's most recent post:

The same way as it does not, the amount of cash the public wants to hold is almost *constant*, so cash is not important at all, despite what PK says.

Comment:  This is the same cash that has grown at an average annual rate of 5.9% since 1947.  Even inflation adjusted, cash holdings have grown.  And cash has been growing, significantly, as a component of M1.


Cash is a small part of the monetary base. Most of the  monetary base is in accounts for the big banks which can bank at the Fed. The Fed is the only "bank" that can actually convert bank deposits to cash and so only deposits at the Fed itself count the same as physical cash.

Comment:  While cash has declined as a % of the monetary base, it’s still about 37% of it.  And, before the expansion of the base in response to the financial crisis (e.g., in January 2007), cash was *only* 88.7% of the base.

It's hard to have a useful conversation when so many people trying to play have no idea what they're talking about.


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