Monetary policy is the process by which a government, central bank, or monetary authority manages the money supply to achieve specific goals. Usually the goal of monetary policy is to accommodate economic growth in an environment of stable prices. For example, it is clearly stated in the Federal Reserve Act that the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
Currency
A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.
Generally speaking, each country has its own currency. For example, Switzerland's official currency is the Swiss franc, and Japan's official currency is the yen. An exception would be the euro, which is used as the currency for several European countries.
Investors often trade currency on the foreign exchange market, which is one of the most heavily traded markets in the world.
Sunday, November 29, 2009
Money supply
The money supply is the amount of money within a specific economy available for purchasing goods or services. The supply in the US is usually considered as four escalating categories M0, M1, M2 and M3. The categories grow in size with M3 representing all forms of money (including credit) and M0 being just base money (coins, bills, and central bank deposits). M0 is also money that can satisfy private banks' reserve requirements. In the US, the Federal Reserve is responsible for controlling the money supply, while in the Euro area the respective institution is the European Central Bank. Other central banks with significant impact on global finances are the Bank of Japan, People's Bank of China and the Bank of England.
When gold is used as money, the money supply can grow in either of two ways. First, the money supply can increase as the amount of gold increases by new gold mining at about 2% per year, but it can also increase more during periods of gold rushes and discoveries, such as when Columbus discovered the new world and brought gold back to Spain, or when gold was discovered in California in 1848. This kind of increase helps debtors, and causes inflation, as the value of gold goes down. Second, the money supply can increase when the value of gold goes up. This kind of increase in the value of gold helps savers and creditors and is called deflation, where items for sale are less expensive in terms of gold. Deflation was the more typical situation for over a century when gold and credit money backed by gold were used as money in the US from 1792 to1913
When gold is used as money, the money supply can grow in either of two ways. First, the money supply can increase as the amount of gold increases by new gold mining at about 2% per year, but it can also increase more during periods of gold rushes and discoveries, such as when Columbus discovered the new world and brought gold back to Spain, or when gold was discovered in California in 1848. This kind of increase helps debtors, and causes inflation, as the value of gold goes down. Second, the money supply can increase when the value of gold goes up. This kind of increase in the value of gold helps savers and creditors and is called deflation, where items for sale are less expensive in terms of gold. Deflation was the more typical situation for over a century when gold and credit money backed by gold were used as money in the US from 1792 to1913
Store of value
In economics, money is a broad term that refers to any instrument that can be used in the resolution of debt. However, different types of money have different economic strengths and liabilities.
To act as a store of value, a commodity, a form of money or financial capital must be able to be reliably saved, stored, and retrieved — and be predictably useful when it is so retrieved. Fiat currency like paper or electronic currency no longer backed by gold in most countries is not considered by some economists to be a store of value.
To act as a store of value, a commodity, a form of money or financial capital must be able to be reliably saved, stored, and retrieved — and be predictably useful when it is so retrieved. Fiat currency like paper or electronic currency no longer backed by gold in most countries is not considered by some economists to be a store of value.
Acoount of a Unit
Account of a unit is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt.
* Divisible into small units without destroying its value; precious metals can be coined from bars or melted down into bars again.
* Fungible… That is, one unit or piece must be perceived as equivalent to any other, which is why Diamonds works of art or real estate are not suitable as money.
* A specific weight, or measure or size to be verifiably countable. For instance, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
* Divisible into small units without destroying its value; precious metals can be coined from bars or melted down into bars again.
* Fungible… That is, one unit or piece must be perceived as equivalent to any other, which is why Diamonds works of art or real estate are not suitable as money.
* A specific weight, or measure or size to be verifiably countable. For instance, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
Exchange of Medium
Money is used as an intermediary for trade, in order to avoid the inefficiencies of a barter system, which are sometimes referred to as the Double coincidence of wants problem. Such usage is termed exchange of a medium.
Economic characteristics
Money is generally considered to have the following characteristics, which are summed up in a rhyme found in older economics textbooks and a primer: "Money is a matter of functions four, a medium, a measure, a standard, a store. That is, money functions as a exchange of medium, account of a unit and store of a value.
There have been many historical arguments regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. One of these arguments is that the role of money as a exchange of medium is in conflict with its role as store of value, its role as a store of value requires holding it without spending, whereas its role as a exchange of medium requires it to circulate. 'Financial capital' is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized.
There have been many historical arguments regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. One of these arguments is that the role of money as a exchange of medium is in conflict with its role as store of value, its role as a store of value requires holding it without spending, whereas its role as a exchange of medium requires it to circulate. 'Financial capital' is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized.
Credit money
Credit money is any claim against a physical or legal person that can be used for the purchase of goods and services. Credit money differs from commodity and fiat money in two ways: It is not payable on demand (although in the case of fiat money, "demand payment" is a purely symbolic act since all that can be demanded is other types of fiat currency) and there is some element of risk that the real value upon fulfillment of the claim will not be equal to real value expected at the time of purchase.
This risk comes about in two ways and affects both buyer and seller.
First it is a claim and the claimant may default (not pay). High levels of default have destructive supply side effects. If manufacturers and service providers do not receive payment for the goods they produce, they will not have the resources to buy the labor and materials needed to produce new goods and services. This reduces supply, increases prices and raises unemployment, possibly triggering a period of stagflation. In extreme cases, widespread defaults can cause a lack of confidence in lending institutions and lead to economic depression. For example abuse of credit arrangements is considered one of the significant causes of the Great Depression of the 1930s.
The second source of risk is time. Credit money is a promise of future payment. If the interest rate on the claim fails to compensate for the combined impact of the inflation or deflation rate and the time value of money the seller will receive less real value than anticipated. If the interest rate on the claim overcompensates, the buyer will pay more than expected.
Over the last two centuries, credit money has steadily risen as the main source of money creation, progressively replacing first commodity and then representative money. In many cases credit money has been converted to fiat money (see below), as governments have backed certain private credit instruments (first banknotes from central banks, then later certain types of deposits to banks), thus converting central banknotes to legal tender, and other types of notes (deposit certificates of less than a certain value) to a status not very different from fiat money, since they are backed by the power of the central government to redeem eventually with tax collection.
A particular problem with credit money is that its supply moves in line with the Business cycle. When lenders are optimistic, notably when the debt level is low, they increase their lending activity which creates new money. This may also bull market and trigger inflation.. When creditors are pessimistic (for instance, when debt level is perceived as too high, or unwise lending activity in the past has resulted in situations where defaults are expected to follow), then creditors reduce their lending activity and money becomes "tight" or 'illiquid' Bear markets. Characterized by bankruptcies and market recessions, then follow.
This risk comes about in two ways and affects both buyer and seller.
First it is a claim and the claimant may default (not pay). High levels of default have destructive supply side effects. If manufacturers and service providers do not receive payment for the goods they produce, they will not have the resources to buy the labor and materials needed to produce new goods and services. This reduces supply, increases prices and raises unemployment, possibly triggering a period of stagflation. In extreme cases, widespread defaults can cause a lack of confidence in lending institutions and lead to economic depression. For example abuse of credit arrangements is considered one of the significant causes of the Great Depression of the 1930s.
The second source of risk is time. Credit money is a promise of future payment. If the interest rate on the claim fails to compensate for the combined impact of the inflation or deflation rate and the time value of money the seller will receive less real value than anticipated. If the interest rate on the claim overcompensates, the buyer will pay more than expected.
Over the last two centuries, credit money has steadily risen as the main source of money creation, progressively replacing first commodity and then representative money. In many cases credit money has been converted to fiat money (see below), as governments have backed certain private credit instruments (first banknotes from central banks, then later certain types of deposits to banks), thus converting central banknotes to legal tender, and other types of notes (deposit certificates of less than a certain value) to a status not very different from fiat money, since they are backed by the power of the central government to redeem eventually with tax collection.
A particular problem with credit money is that its supply moves in line with the Business cycle. When lenders are optimistic, notably when the debt level is low, they increase their lending activity which creates new money. This may also bull market and trigger inflation.. When creditors are pessimistic (for instance, when debt level is perceived as too high, or unwise lending activity in the past has resulted in situations where defaults are expected to follow), then creditors reduce their lending activity and money becomes "tight" or 'illiquid' Bear markets. Characterized by bankruptcies and market recessions, then follow.
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