0:00:00.496,0:00:02.120 What I want to explore[br]in this video is 0:00:02.120,0:00:04.560 the different ways of[br]measuring the amount of money 0:00:04.560,0:00:06.730 we have in circulation. 0:00:06.730,0:00:09.190 So we're going to start[br]things with our Central 0:00:09.190,0:00:10.630 Bank in the US. 0:00:10.630,0:00:13.360 This would be the[br]US Federal Reserve. 0:00:13.360,0:00:17.340 And let's say that[br]they print $4. 0:00:17.340,0:00:19.830 And we're going to focus, just[br]for visualization purposes, 0:00:19.830,0:00:21.400 on that they're[br]doing it physically. 0:00:21.400,0:00:23.244 They could also do[br]it electronically. 0:00:23.244,0:00:25.160 But we're just going to[br]focus on the physical. 0:00:25.160,0:00:27.118 And the way that they[br]get this into circulation 0:00:27.118,0:00:29.100 is it they'll take[br]these $4 and they'll 0:00:29.100,0:00:32.240 go buy securities in the[br]open market, normally 0:00:32.240,0:00:34.310 very safe and very[br]liquid securities. 0:00:34.310,0:00:36.540 Liquid means it's very[br]easy to buy and sell 0:00:36.540,0:00:38.500 those securities in[br]large quantities. 0:00:38.500,0:00:40.050 For example,[br]government treasuries 0:00:40.050,0:00:43.880 is a liquid security,[br]or liquid asset. 0:00:43.880,0:00:45.761 PEZ dispensers would[br]not be a liquid asset. 0:00:45.761,0:00:47.510 If I bought a billion[br]dollars worth of PEZ 0:00:47.510,0:00:49.780 dispensers it would be very[br]hard for me to sell-- one 0:00:49.780,0:00:51.960 it would be very hard for me[br]to buy a billion dollars worth. 0:00:51.960,0:00:53.668 And it would be even[br]probably even harder 0:00:53.668,0:00:57.060 for me to sell a billion dollars[br]worth in any short or medium 0:00:57.060,0:00:58.042 timeframe. 0:00:58.042,0:01:00.500 So the Central Bank goes out,[br]and let's say they go and buy 0:01:00.500,0:01:03.210 one liquid security for $4. 0:01:03.210,0:01:05.300 So this is a security[br]right over here. 0:01:05.300,0:01:07.510 And the person that they[br]bought the security from 0:01:07.510,0:01:09.152 decides to deposit it in a bank. 0:01:09.152,0:01:11.110 They could either directly[br]deposit it in a bank 0:01:11.110,0:01:12.630 or they could use[br]that money that they 0:01:12.630,0:01:14.600 got from selling their[br]security to buy things, 0:01:14.600,0:01:16.183 and the person they[br]bought things from 0:01:16.183,0:01:17.330 could deposit it in a bank. 0:01:17.330,0:01:19.371 But one way or another we[br]can imagine it all gets 0:01:19.371,0:01:21.050 deposited in a bank. 0:01:21.050,0:01:22.810 So this is our private bank. 0:01:22.810,0:01:26.900 I'll call this private[br]bank number one. 0:01:26.900,0:01:30.760 So now all of these[br]dollars are transferred 0:01:30.760,0:01:34.960 to private bank number one. 0:01:34.960,0:01:38.040 And they are no longer--[br]the Federal Reserve, 0:01:38.040,0:01:40.250 or the Central Bank,[br]in the general case, 0:01:40.250,0:01:42.380 is no longer in[br]possession of them. 0:01:42.380,0:01:44.114 They've been transferred[br]right over here. 0:01:44.114,0:01:45.530 And I want to cross[br]these out just 0:01:45.530,0:01:48.540 so we can keep track of things. 0:01:48.540,0:01:51.670 Now when they deposit it[br]in private bank number one, 0:01:51.670,0:01:55.000 they said, well, I need three[br]of these dollars on demand. 0:01:55.000,0:01:56.880 And I want to write[br]checks against them. 0:01:56.880,0:02:00.979 So they put three of these[br]dollars in a checking account. 0:02:00.979,0:02:03.270 There are at three of these[br]dollars a checking account. 0:02:03.270,0:02:13.390 So checks up too-- so[br]write checks up to $3. 0:02:13.390,0:02:15.490 And so they can get a[br]little bit more interest, 0:02:15.490,0:02:17.090 and the bank's willing to give[br]a little bit more interest 0:02:17.090,0:02:18.923 on a savings account[br]because they don't have 0:02:18.923,0:02:22.530 to keep the reserves, they[br]put $1 into a savings account. 0:02:25.214,0:02:27.630 And they cannot write checks[br]against that savings account. 0:02:27.630,0:02:29.296 Now there are special[br]circumstances now, 0:02:29.296,0:02:32.380 but for simplicity, let's just[br]say that they cannot write 0:02:32.380,0:02:32.880 checks. 0:02:32.880,0:02:34.921 There are some that have[br]restricted check writing 0:02:34.921,0:02:36.200 and things like that now. 0:02:36.200,0:02:38.920 So this bank says, OK,[br]well, this dollar, I 0:02:38.920,0:02:40.920 don't have to even have[br]any reserves against it. 0:02:40.920,0:02:42.128 I could loan out this dollar. 0:02:42.128,0:02:43.680 And the person they[br]lend it to, let's 0:02:43.680,0:02:47.130 say that they immediately go and[br]deposit it into another bank. 0:02:47.130,0:02:50.830 So they immediately go and[br]deposit this in private bank, 0:02:50.830,0:02:52.550 I'll call this private bank two. 0:02:52.550,0:02:54.920 So it's no longer[br]in private bank one. 0:02:54.920,0:02:57.120 Let me draw a private bank two. 0:02:57.120,0:03:00.880 Private bank two is[br]a right over here. 0:03:00.880,0:03:04.690 Private bank number two. 0:03:04.690,0:03:07.470 And they deposit it[br]into a savings account 0:03:07.470,0:03:10.540 in private bank number two. 0:03:10.540,0:03:12.710 And let's say all of[br]this, out of all of this, 0:03:12.710,0:03:15.460 the bank says, well,[br]this is a demand deposit, 0:03:15.460,0:03:16.960 I have to keep some reserves. 0:03:16.960,0:03:18.640 This is a fractional[br]reserve system. 0:03:18.640,0:03:21.670 But I can lend out, in the[br]US, I could lend out up to 90% 0:03:21.670,0:03:22.270 of this. 0:03:22.270,0:03:24.000 And maybe this bank is a[br]little bit more conservative, 0:03:24.000,0:03:25.680 They only lend out 2/3 of this. 0:03:25.680,0:03:27.737 So they lend out[br]$2 out of these $3 0:03:27.737,0:03:29.570 And let's say the person[br]they let it do also 0:03:29.570,0:03:31.910 happens to deposit it[br]in private bank number 0:03:31.910,0:03:33.700 two, just coincidentally. 0:03:33.700,0:03:40.060 So these two also end up[br]in private bank number two. 0:03:40.060,0:03:45.250 And so they're no longer[br]in private bank number 0:03:45.250,0:03:48.760 one, although this person could[br]still write checks up to $3. 0:03:48.760,0:03:50.420 And now here in[br]private bank number 0:03:50.420,0:03:52.045 two-- and let's say[br]these are deposited 0:03:52.045,0:03:53.590 in a checking account. 0:03:53.590,0:03:58.260 These are deposited right over[br]here in a checking account. 0:03:58.260,0:04:00.910 Now private bank number two,[br]it can do a couple of things. 0:04:00.910,0:04:03.160 In this checking account it[br]has to keep some reserves. 0:04:03.160,0:04:04.310 Let's say it's even[br]more conservative. 0:04:04.310,0:04:06.018 It only decides to[br]lend out half of this, 0:04:06.018,0:04:08.280 even though it[br]could lend out 90%. 0:04:08.280,0:04:11.264 And so it lends out[br]one of these dollars. 0:04:11.264,0:04:13.680 And the person that they lend[br]it to just takes that dollar 0:04:13.680,0:04:15.860 and they put it in their wallet. 0:04:15.860,0:04:17.360 So they just put[br]it in their wallet. 0:04:17.360,0:04:19.594 And they could also lend[br]out this entire savings. 0:04:19.594,0:04:21.010 And let's just say[br]that the person 0:04:21.010,0:04:24.370 that they lend that[br]$1 in savings to also 0:04:24.370,0:04:25.370 puts it in their wallet. 0:04:28.370,0:04:30.790 And notice, the original[br]$4 are still there. 0:04:30.790,0:04:32.890 One, two, three, four. 0:04:32.890,0:04:35.870 Now, and just to be clear,[br]this person right over here can 0:04:35.870,0:04:37.420 write checks up to $3 . 0:04:37.420,0:04:39.290 And this person[br]right over here can 0:04:39.290,0:04:43.770 write checks-- let me do[br]that same checking account 0:04:43.770,0:04:53.350 color-- they can[br]write checks up to $2. 0:04:53.350,0:04:55.780 Now let's think about the[br]different forms of money 0:04:55.780,0:04:56.770 there are here. 0:04:56.770,0:04:59.500 Well, we could think of money in[br]a very, very narrow way, which 0:04:59.500,0:05:03.200 is just what did the Central[br]Bank print, or create 0:05:03.200,0:05:07.210 electronically as electronic[br]reserves of its member banks? 0:05:07.210,0:05:08.710 But for simplicity[br]here you can just 0:05:08.710,0:05:11.060 think about the physical[br]currency that it printed, 0:05:11.060,0:05:12.610 its base money. 0:05:12.610,0:05:17.410 And so that, often, is just[br]referred to as base money. 0:05:17.410,0:05:19.370 And in the US and[br]other countries 0:05:19.370,0:05:21.310 it's often the same thing as M0. 0:05:21.310,0:05:23.640 There's slight differences[br]from country to country. 0:05:23.640,0:05:26.560 And in this example, as soon[br]as they printed it and put it 0:05:26.560,0:05:29.090 into circulation, that was $4. 0:05:29.090,0:05:31.460 We had $4 of base money. 0:05:31.460,0:05:33.770 And that's obvious because[br]as soon as they printed this 0:05:33.770,0:05:35.311 and they bought the[br]security with it, 0:05:35.311,0:05:38.610 and it was in circulation, that[br]$4 could be used to buy things. 0:05:38.610,0:05:41.770 It could be used to[br]facilitate transactions. 0:05:41.770,0:05:44.050 Now that clearly isn't[br]all of the stuff that 0:05:44.050,0:05:47.460 can be used as money in this[br]little universe we created. 0:05:47.460,0:05:50.130 This guy, you have the[br]$4 but these people 0:05:50.130,0:05:52.540 can also write checks[br]right over here. 0:05:52.540,0:05:55.360 And so we can have a slightly[br]broader definition of money. 0:05:55.360,0:05:57.350 And over here, we[br]will call it M1. 0:05:57.350,0:05:59.850 And here, there's a couple of[br]ways you could think about it. 0:05:59.850,0:06:02.300 You could think about it as[br]all of the currency that's 0:06:02.300,0:06:05.700 in people's pockets plus all of[br]the check writing capabilities. 0:06:05.700,0:06:07.200 So if you view it[br]that way it, would 0:06:07.200,0:06:11.340 be this $2 plus $5 of[br]check writing capabilities 0:06:11.340,0:06:12.520 right over here. 0:06:12.520,0:06:14.660 So you could have $2[br]of physical currency 0:06:14.660,0:06:17.520 that's in people's wallets,[br]not in bank reserves, 0:06:17.520,0:06:24.400 plus the $5 of check[br]writing capability, 0:06:24.400,0:06:26.460 which would give you $7. 0:06:26.460,0:06:28.580 Another way you[br]could view it, you 0:06:28.580,0:06:35.390 could view it as M0[br]plus checkable deposits. 0:06:35.390,0:06:37.396 I'll just write checks[br]here, plus-- well 0:06:37.396,0:06:39.770 I'll write-- checkable deposits. 0:06:39.770,0:06:41.410 But if you do that,[br]you are now double 0:06:41.410,0:06:43.620 counting because[br]some of the M0 is 0:06:43.620,0:06:46.002 reserves in the[br]checkable deposits. 0:06:46.002,0:06:47.960 Or you could say some of[br]the checkable deposits 0:06:47.960,0:06:50.110 is held as reserves for M0. 0:06:50.110,0:06:53.155 So then you would have to[br]subtract out the bank reserves. 0:06:56.880,0:06:59.239 And so then you would[br]get $4 because we 0:06:59.239,0:07:01.280 don't want to double count[br]these right over here. 0:07:01.280,0:07:04.200 You would get M0 is $4. 0:07:04.200,0:07:06.420 And I want to do that in white. 0:07:06.420,0:07:10.690 M0 is $4. 0:07:10.690,0:07:16.080 The checkable deposits is $5. 0:07:16.080,0:07:17.580 Let me do that in the pink. 0:07:17.580,0:07:19.610 Plus the $5. 0:07:19.610,0:07:22.070 And then you would want to[br]subtract out the reserves. 0:07:22.070,0:07:24.270 And the reserves here, there[br]are $2 of the reserves. 0:07:24.270,0:07:27.080 So minus $2. 0:07:27.080,0:07:30.920 And you would get[br]yourself back to the $7. 0:07:30.920,0:07:33.420 And the whole point of this is[br]so you're not double counting 0:07:33.420,0:07:35.878 something, you're not double[br]counting this right over here, 0:07:35.878,0:07:41.430 as part of checkable[br]deposits and part of the M0. 0:07:41.430,0:07:43.480 You're not using this twice. 0:07:43.480,0:07:45.660 It's not part of the base money. 0:07:45.660,0:07:48.010 It is both the base money[br]and checkable deposits. 0:07:48.010,0:07:49.790 And we don't want[br]to count it twice. 0:07:49.790,0:07:51.272 So the simplest[br]way to think about 0:07:51.272,0:07:53.480 is, well, what can be used[br]in this broader definition 0:07:53.480,0:07:55.110 to facilitate transactions? 0:07:55.110,0:07:57.410 These $2 in people's[br]pockets, and this ability 0:07:57.410,0:07:59.550 to write up to $5 of checks. 0:07:59.550,0:08:02.160 So that's this view[br]right over here. 0:08:02.160,0:08:04.120 And if we want to get[br]even broader than that, 0:08:04.120,0:08:06.806 we can get to[br]something called M2. 0:08:06.806,0:08:08.680 And here we could say,[br]OK, what's immediately 0:08:08.680,0:08:12.280 usable to facilitate a[br]transaction right now? 0:08:12.280,0:08:14.260 So that would be our M1. 0:08:14.260,0:08:16.250 So that would be our $7 of M1. 0:08:16.250,0:08:19.400 Plus things that can be[br]easily converted to M1. 0:08:19.400,0:08:21.220 So for example, these[br]savings accounts 0:08:21.220,0:08:23.110 can be easily converted[br]to checking accounts. 0:08:23.110,0:08:24.530 It might only take[br]a couple of days. 0:08:24.530,0:08:25.920 There might be[br]some restrictions. 0:08:25.920,0:08:27.025 But it can be converted. 0:08:27.025,0:08:29.400 And when it gets converted[br]will change the bank's reserve 0:08:29.400,0:08:30.770 requirements a little bit. 0:08:30.770,0:08:33.360 But it will allow, if[br]this person converts it 0:08:33.360,0:08:36.169 they will have the ability[br]to write more checks. 0:08:36.169,0:08:38.909 So M2 includes M1[br]plus things that 0:08:38.909,0:08:40.740 are very easy to convert to M1. 0:08:40.740,0:08:45.515 And so they'll include things[br]like savings accounts, money 0:08:45.515,0:08:47.640 market accounts, which I[br]won't go into detail here. 0:08:47.640,0:08:49.190 But they're really kind[br]of similar in that you 0:08:49.190,0:08:50.470 get slightly higher[br]interest, but there 0:08:50.470,0:08:52.440 are restrictions on your[br]ability to access it. 0:08:52.440,0:08:56.480 But it's not too hard to turn[br]it into checking accounts. 0:08:56.480,0:09:00.070 And small dollar value[br]time deposit, CD accounts. 0:09:00.070,0:09:02.070 But for the sake of[br]simplicity, in this example, 0:09:02.070,0:09:03.990 it would be the saving accounts. 0:09:03.990,0:09:09.620 So it would be our[br]$7 of M1, plus the $2 0:09:09.620,0:09:11.180 of savings accounts[br]right over here. 0:09:15.527,0:09:17.110 So this is just to[br]give you a picture. 0:09:17.110,0:09:18.190 When someone talks[br]about the money 0:09:18.190,0:09:19.380 supply you really[br]have to say, well, 0:09:19.380,0:09:20.504 what are you talking about? 0:09:20.504,0:09:23.680 The most typical one is that[br]you're really talking about M1, 0:09:23.680,0:09:27.060 because this is the stuff that's[br]directly usable to facilitate 0:09:27.060,0:09:27.880 transactions. 0:09:27.880,0:09:29.588 Things like the ability[br]to write a check, 0:09:29.588,0:09:31.520 or dollar bills in[br]someone's wallet. 0:09:31.520,0:09:35.310 But they might be talking about[br]base money, M0, narrow money, 0:09:35.310,0:09:36.930 always of referring[br]to the same thing, 0:09:36.930,0:09:38.070 especially in the United States. 0:09:38.070,0:09:40.410 Or they might be referring[br]to something even broader. 0:09:40.410,0:09:41.785 And there are[br]broader definitions 0:09:41.785,0:09:44.400 even than M2,[br]although M3, they've 0:09:44.400,0:09:45.720 stopped reporting about it. 0:09:45.720,0:09:48.630 But M3 would have things[br]that are a little bit further 0:09:48.630,0:09:51.760 from being true money, from[br]being a checking account. 0:09:51.760,0:09:53.980 But they are already[br]fairly liquid 0:09:53.980,0:09:56.130 and so they'll include[br]other types of assets. 0:09:56.130,0:09:57.880 But the Fed has[br]stopped reporting 0:09:57.880,0:10:00.420 this in the recent past. 0:10:00.420,0:10:04.130 So these are the ones that[br]are typically referred to.