Okay, this one goes out to all the economics-smarties among you, esp. KH (i mainly say this to encourage the others ) :
So, i think i basicaly got the difference between central bank money and business bank money (M1 and M, uhem, 2 ?). I am trying to model the monetary system right now (using Power Sim Constructor light). Since debts and money have different growth rates*, i need to have seperated stocks for both (in order to be able to simulate more than one period).
Now - do i also need different stocks for ´M1-debts´and ´Mx debts´ ? Does this make sense at all ?
I´d appreciate any qualified comment - an ideally ´qualified´ includes some reference, if only like ´according to X-theory´.
Thanks a lot !
*Or - do they ? I base this assumption on the money to pay the interests due tomorrow for the money created by debts today will only be created tomorrow - so there would be at least a lag between the sums of each, money and debts, right ?
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Or - do they ? I base this assumption on the money to pay the interests due tomorrow for the money created by debts today will only be created tomorrow - so there would be at least a lag between the sums of each, money and debts, right ?
There is no lag. The debt is created at the same time as the money (at least on all levels other than M0).
Think about it this way: the local bank has excess reserves, so it is willing to make additional loans. I go to the bank and ask for a 10000$ loan to renovate my house. The bank thinks I look like a nice guy, so they grant it to me, in the form of a line of credit. Now, I still don't owe any money and the money supply has not increased. The moment I actually draw money from my L.O.C. is when the money supply and debts increase.
Money becomes available immediately upon borrowing (otherwise it is a very strange form of borrowing indeed).
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Either you are dealing with M1 or you are dealing with M2. In either case, whatever is defined as "money" for that measurement acts the same.
Since debt can be created in a number of ways, I don't think you can calculate the increase in money by simply adding interest to principal. (if that is what you are trying to do)
Last edited by Vanguard; December 17, 2008 at 21:06.
Well, 1st of all: Thanks to both of You, KH and Vanguard - i appriciate the effort, patience and focus (the topic - not the person) of Your comments. Probably my question already reveals that i am not an economics major, and thus not a ´diciple´ of anything really, be it macro vs. micro, Keynes vs. Friedman or chocolate vs. lolly-pop. So i´d really like to keep this tone of conversation (i am saying this, cause often, on poly, it´s not quite like that - all the more kudos for You).
KH: That is an INTERESTing (get it? - höhöhö) point, you are making there. Didnt think about it, yet. And i cant argue it. What about the following case though: The borrower now pulls out is 10K (leaving out the issue of wether he just transfers money a) to another account at the same bank or b) to another account of a different bank or c) takes cash - for the bank this would make a difference, now wouldnt it, since in case c) it would have lost ´base-money´ while in a) and b) it wouldnt, right ?). From now on, until he pays back, he has to pay interest. In the next period, thus, his debt is more than his money. He cannot spend the interest, but he has to pay it. And that would make money < debts - and thus two different levels, requiring two stocks in the model. Or am i missing something ? Maybe i have to count the interest due, even though it´s not payed yet, as money towards the bank ? Why is this so damned confusing ?!
Would You also care to eloborate on the execption You mentioned in the second sentence a little further, please ?
Vanguard: I am aiming at a rudimentary, indexed model of the monetary system. I know i am probably going over the top with it, and that the end result will not be quite what i am aiming for. But in modeling, much is also about the way - it makes me ask myself (and you) questions i otherwise wouldnt ask. It´s fun, too...
Since we will be talking about different kinds of money a lot if this thread continues, i´d like to thwor a simplified defintion out there - simplified for the simplicity-of-the- model´s sake. I intend two include just two kinds of money and let´s call them:
a) ´base-money´ (or ´central-bank-money´): Well, the monetary base, which is emitted by the CB.
b) ´bank-money´ (or ´giral money´): Money created by (mostly) private people (taking out) loans from business banks.
Liquid assets are not directly included in the model - i rather tend to count them into the real sector as part of the productive capital.
All said above i now leave You for disposition at your leisure. Feel free to comment on each of this. Thanks in advance again !
Macro sux. Micro rox.
What value are you trying to determine?
I'm not sure that there is a way to "model" M1 or M2. You just collect the data about the amount of currency or demand accounts created and add them together.
Are you trying to correlate the money supply to something else, like growth?
Basically: Yes. And the two to each other. I mean they are distincitive from each other, right ? At any given time, there are two ammunts - one for each, theoretically ?
I mean a bank at least needs to make this distinction, as i understand it. As they provide M2, they need to know how much M1 is at their disposal, so that they dont exceed certain legal criteria ? I hesitate two just make M2 a multiple of M1 though, since i dont think that the business banks want to go to their limit always, and that the demand for M2 exists to faciliate the maximum multiplier. Neither does M1 automacally vanish, when M2-debt is paid off. If i am not terribly mistaken (and feel free to notify me if you think so and why) the two must be two different stocks with seperate growth and shrink rates.
Maybe i´ll post pics of what i mean later. Are You guys familiar with modeling-software like ´Stella´, ´Powersim Contructor´ and the likes? Well - even if not... you are probably smart enough to get it without much need for explanation...