Continuation off this line of questioning. If I issue an IOU, it would need to be fungible, transferrable, etc in order to be considered "money." Understood - My follow up questions are:

  1. Remaining agnostic as to whether or not my Note Payable is money: Say my friend takes out a cheaper loan because he uses my Note as collateral. So his interest rate 10% => 7%. While it may not technically be money (not all collateral is), its silhouette remains. Thus, has my IOU not increased the money supply? How is this conceptually treated?

  2. Let's assume my IOU IS money because I'm heavily trustworthy, etc. For example, ABS, MBS, some CDOs (effectively) trade as information-insensitive debt. How much of the Monetary Supply is created Endogenously (in private situations like this), vs. Exogenously (by the Fed, etc) ?

  • 3
    $\begingroup$ I’d recommend splitting this into at least two separate questions. The first is about a mix of the production of what is often referred to as “private money” (see: Gorton, Pozsar, Mehrling, Kindleberger, and others), and how monetary aggregates are counted; the second is about the relative importance of “base money” vs “broad money”— you’re trying to cover a huge amount of ground here, so breaking it up into small pieces is a good idea. $\endgroup$ Commented Apr 1, 2020 at 16:19
  • $\begingroup$ Hey, I don't disagree. Economics Stack Exchange doesn't seem to get TONS of traffic, though - which is why I was reticent to get too granular. I'll let this sit for a little bit, then potentially bifurcate later. ---- Take a stab at them, though? J ... I'm trying to understand the relative importance + nuances of private money vs. "official" money. $\endgroup$
    – David
    Commented Apr 1, 2020 at 17:53

1 Answer 1

  1. No or not necessarily because you can't know if the actor will save income or pay down debt, or spend more. The interest rate is not a single factor that determines behaviour.
  2. Nearly all of it is privately created debt money (97%), in circulation. Your 'money' is some bank's liability. You trade their IOUs and they are trusted/licensed to create them. (By all of it I mean in practical terms...there are nominally huge amounts of certain types of security but I don't think their relevance to mainstream social function is useful in the context of this kind of topic)

For more info: https://positivemoney.org/how-money-%20works/how-banks-%20create-money/

Video explanation:https://youtu.be/b6_SLwReMqo

Video from BoE: https://youtu.be/CvRAqR2pAgw

On the influence of the Fed, this is a huge topic. Basically since 2007/8 the Fed creates enough money to compensate for credit contraction in the private sector so that the appearance of growth is maintained. So if in the US nominal GDP growth is 2%, after removing fed stimulus you would see that actual growth is depression level negative. Also the fed sends signals. It could say it would start purchasing corporate bonds directly, which would trigger fund managers into a snowball doing the same. But basically the situation since 2008 is that the Fed is forced to keep monetary policy loose, stimulus ample, to keep lending up and credit growth going.

  • $\begingroup$ Hey, thanks. I think I could take dismal's advice though & split out my questioning. I see your overall points, but for example: Money Market Funds + Repo are considered quasi-money. Not just retail deposits. I think MMF + Repo are in M3 / MZM. My question may have been kind of poorly framed... $\endgroup$
    – David
    Commented Apr 1, 2020 at 22:50
  • $\begingroup$ @DavisClute sure, but still, broad money dwarfs that and it is in fact all just private IOU. Watch the video from the Bank of England, last link. $\endgroup$
    – Frank
    Commented Apr 2, 2020 at 4:43
  • $\begingroup$ Hey, just watched it. I understand Commercial Banks create M1, not M0, etc. I guess my (unwieldly) phrased question was trying to understand how the non-commercial banking system produces money. How it influences economic activity, etc. Check out my new question here: economics.stackexchange.com/questions/35775/… $\endgroup$
    – David
    Commented Apr 2, 2020 at 17:35
  • $\begingroup$ "positivemoney.org" seems based on the McLeay paper, which has been discussed here before: economics.stackexchange.com/questions/26991/… $\endgroup$ Commented Apr 3, 2020 at 5:31

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