In economics, the money supply is the total value of monetary assets available in an economy at a specific time. There are several ways to define "money", but standard measures include currency in circulation and demand deposits. Money supply data are recorded and published by the government or the central bank of the country. Public and private sector analysts have long monitored changes in the money supply because of the belief that it affects the price level, the exchange rate and the business cycle; that relation between money and prices is associated with the quantity theory of money. There is strong empirical evidence of a direct relation between money-supply growth and long-term price inflation, at least for rapid increases in the amount of money in the economy. For example, a country such as Zimbabwe which saw rapid increases in its money supply saw rapid increases in prices; this is one reason for the reliance on monetary policy as a means of controlling inflation. The nature of this causal chain is the subject of contention.
Some heterodox economists argue that the money supply is endogenous and that the sources of inflation must be found in the distributional structure of the economy. In addition, those economists seeing the central bank's control over the money supply as feeble say that there are two weak links between the growth of the money supply and the inflation rate. First, in the aftermath of a recession, when many resources are underutilized, an increase in the money supply can cause a sustained increase in real production instead of inflation. Second, if the velocity of money changes, an increase in the money supply could have either no effect, an exaggerated effect, or an unpredictable effect on the growth of nominal GDP. See European Central Bank for other approaches and a more global perspective. Money is used as a medium of exchange, a unit of account, as a ready store of value, its different functions are associated with different empirical measures of the money supply. There is no single "correct" measure of the money supply.
Instead, there are several measures, classified along a spectrum or continuum between narrow and broad monetary aggregates. Narrow measures include only the most liquid assets, the ones most used to spend. Broader measures add less liquid types of assets; this continuum corresponds to the way that different types of money are more or less controlled by monetary policy. Narrow measures include those more directly affected and controlled by monetary policy, whereas broader measures are less related to monetary-policy actions, it is a matter of perennial debate as to whether narrower or broader versions of the money supply have a more predictable link to nominal GDP. The different types of money are classified as "M"s; the "M"s range from M0 to M3 but which "M"s are focused on in policy formulation depends on the country's central bank. The typical layout for each of the "M"s is as follows: M0: In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money.
MB: is referred to total currency. This is the base from which other forms of money are created and is traditionally the most liquid measure of the money supply. M1: Bank reserves are not included in M1. M2: Represents M1 and "close substitutes" for M1. M2 is a broader classification of money than M1. M2 is a key economic indicator used to forecast inflation. M3: M2 plus large and long-term deposits. Since 2006, M3 is no longer published by the US central bank. However, there are still estimates produced by various private institutions. MZM: Money with zero maturity, it measures the supply of financial assets redeemable at par on demand. Velocity of MZM is a accurate predictor of inflation; the ratio of a pair of these measures, most M2 / M0, is called an money multiplier. The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created; this new type of money is.
In short, there are two types of money in a fractional-reserve banking system: central bank money commercial bank money In the money supply statistics, central bank money is MB while the commercial bank money is divided up into the M1-M3 components. The types of commercial bank money that tend to be valued at lower amounts are classified in the narrow category of M1 while the types of commercial bank money that tend to exist in larger amounts are categorized in M2 and M3, with M3 having the largest. In the United States, a bank's reserves consist of U. S. currency held by the bank plus the bank's balances in Federal Reserve accounts. For this purpose, paper currency on hand and balances in Federal Reserve accounts are interchangeable. Reserves may come from any source, including the federal funds market, deposits by the public, borrowing from the Fed itself. A reserve requirement is a ratio a bank must maintain between deposit reserves. Reserve
The business cycle known as the economic cycle or trade cycle, is the downward and upward movement of gross domestic product around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence; these fluctuations involve shifts over time between periods of rapid economic growth and periods of relative stagnation or decline. Business cycles are measured by considering the growth rate of real gross domestic product. Despite the often-applied term cycles, these fluctuations in economic activity do not exhibit uniform or predictable periodicity; the common or popular usage boom-and-bust cycle refers to fluctuations in which the expansion is rapid and the contraction severe. The first systematic exposition of economic crises, in opposition to the existing theory of economic equilibrium, was the 1819 Nouveaux Principes d'économie politique by Jean Charles Léonard de Sismondi. Prior to that point classical economics had either denied the existence of business cycles, blamed them on external factors, notably war, or only studied the long term.
Sismondi found vindication in the Panic of 1825, the first unarguably international economic crisis, occurring in peacetime. Sismondi and his contemporary Robert Owen, who expressed similar but less systematic thoughts in 1817 Report to the Committee of the Association for the Relief of the Manufacturing Poor, both identified the cause of economic cycles as overproduction and underconsumption, caused in particular by wealth inequality, they advocated government intervention and socialism as the solution. This work did not generate interest among classical economists, though underconsumption theory developed as a heterodox branch in economics until being systematized in Keynesian economics in the 1930s. Sismondi's theory of periodic crises was developed into a theory of alternating cycles by Charles Dunoyer, similar theories, showing signs of influence by Sismondi, were developed by Johann Karl Rodbertus. Periodic crises in capitalism formed the basis of the theory of Karl Marx, who further claimed that these crises were increasing in severity and, on the basis of which, he predicted a communist revolution.
Though only passing references in Das Kapital refer to crises, they were extensively discussed in Marx's posthumously published books in Theories of Surplus Value. In Progress and Poverty, Henry George focused on land's role in crises – land speculation – and proposed a single tax on land as a solution. In 1860 French economist Clément Juglar first identified economic cycles 7 to 11 years long, although he cautiously did not claim any rigid regularity. Economist Joseph Schumpeter argued that a Juglar cycle has four stages: Expansion Crisis Recession Recovery Schumpeter's Juglar model associates recovery and prosperity with increases in productivity, consumer confidence, aggregate demand, prices. In the 20th century and others proposed a typology of business cycles according to their periodicity, so that a number of particular cycles were named after their discoverers or proposers: The Kitchin inventory cycle of 3 to 5 years The Juglar fixed-investment cycle of 7 to 11 years (often identified as "the" business cycle The Kuznets infrastructural investment cycle of 15 to 25 years (after Simon Kuznets – called "building cycle" The Kondratiev wave or long technological cycle of 45 to 60 years Some say interest in the different typologies of cycles has waned since the development of modern macroeconomics, which gives little support to the idea of regular periodic cycles.
Others realize. Since 1960, World GDP has increased by fifty-nine times, these multiples have not kept up with annual inflation over the same period. Social Contract collapses for nations when incomes are not kept in balance with cost-of-living over the timeline of the monetary system cycle - until hardships/populism/revolution are always seen in late capitalism; the Bible and Hammurabi's Code both explain economic remediations for cyclic sixty-year recurring great depressions, via fiftieth-year Jubilee debt and wealth resets. Thirty major debt forgiveness events are recorded in history including the debt forgiveness given to most european nations in the 1930s to 1954. There were great increases in productivity, industrial production and real per capita product throughout the period from 1870 to 1890 that included the Long Depression and two other recessions. There were significant increases in productivity in the years leading up to the Great Depression. Both the Long and Great Depressions were characterized by market saturation.
Over the period since the Industrial Revolution, technological progress has had a much larger effect on the economy than any fluctuations in credit or debt, the primary exception being the Great Depression, which caused a multi-year steep economic decline. The effect of technological progress can be seen by the purchasing power of an average hour's work, which has grown from $3 in 1900 to $22 in 1990, measured in 2010 dollars. There were similar increases in real wages during the 19th century. A table of innovations and long
Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is calculated in real terms - i.e. inflation-adjusted terms – to eliminate the distorting effect of inflation on the price of goods produced. Measurement of economic growth uses national income accounting. Since economic growth is measured as the annual percent change of gross domestic product, it has all the advantages and drawbacks of that measure; the economic growth rates of nations are compared using the ratio of the GDP to population or per-capita income. The "rate of economic growth" refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time; this growth rate is the trend in the average level of GDP over the period, which ignores the fluctuations in the GDP around this trend. An increase in economic growth caused by more efficient use of inputs is referred to as intensive growth.
GDP growth caused only by increases in the amount of inputs available for use is called extensive growth. Development of new goods and services creates economic growth; the economic growth rate is calculated from data on GDP estimated by countries' statistical agencies. The rate of growth of GDP per capita is calculated from data on GDP and people for the initial and final periods included in the analysis of the analyst. In national income accounting, per capita output can be calculated using the following factors: output per unit of labor input, hours worked, the percentage of the working age population working and the proportion of the working-age population to the total population. "The rate of change of GDP/population is the sum of the rates of change of these four variables plus their cross products."Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. Economists attribute the ups and downs in the business cycle to fluctuations in aggregate demand.
In contrast, economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation. Increases in labor productivity have been the most important source of real per capita economic growth. "In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U. S. per capita income, with increased investment in capital explaining only the remaining 20 percent."Increases in productivity lower the real cost of goods. Over the 20th century the real price of many goods fell by over 90%. Economic growth has traditionally been attributed to the accumulation of human and physical capital and the increase in productivity and creation of new goods arising from technological innovation. Further division of labour is fundamental to rising productivity. Before industrialization technological progress resulted in an increase in the population, kept in check by food supply and other resources, which acted to limit per capita income, a condition known as the Malthusian trap.
The rapid economic growth that occurred during the Industrial Revolution was remarkable because it was in excess of population growth, providing an escape from the Malthusian trap. Countries that industrialized saw their population growth slow down, a phenomenon known as the demographic transition. Increases in productivity are the major factor responsible for per capita economic growth – this has been evident since the mid-19th century. Most of the economic growth in the 20th century was due to increased output per unit of labor, materials and land; the balance of the growth in output has come from using more inputs. Both of these changes increase output; the increased output included more of the same goods produced and new goods and services. During the Industrial Revolution, mechanization began to replace hand methods in manufacturing, new processes streamlined production of chemicals, iron and other products. Machine tools made the economical production of metal parts possible, so that parts could be interchangeable.
See: Interchangeable parts. During the Second Industrial Revolution, a major factor of productivity growth was the substitution of inanimate power for human and animal labor. There was a great increase in power as steam powered electricity generation and internal combustion supplanted limited wind and water power. Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency. Other major historical sources of productivity were automation, transportation infrastructures, new materials and power, which includes steam and internal combustion engines and electricity. Other productivity improvements included mechanized agriculture and scientific agriculture including chemical fertilizers and livestock and poultry management, the Green Revolution. Interchangeable parts made with machine tools powered by electric motors evolved into mass production, universally used today. Great sources of productivity improvement in the late 19th century were railroads, steam ships, horse-pulled reapers and combine harvesters, steam-powered factories.
The invention of processes for making cheap steel were important for many forms
Inflationism is a heterodox economic, fiscal, or monetary policy, that predicts that a substantial level of inflation is harmless, desirable or advantageous. Inflationist economists advocate for an inflationist policy. Mainstream economics holds that inflation is a necessary evil, advocates a low, stable level of inflation, thus is opposed to inflationist policies – some inflation is necessary, but inflation beyond a low level is not desirable. However, deflation is seen as a worse danger within Keynesian economics and in the theory of debt deflation, thus the policies advocated by Keynesian economists such as Paul Krugman to prevent deflation in cases of economic crisis are labeled as inflationist policies by others. In political debate, inflationism is opposed to hard currency, which believes that the real value of currency should be maintained. In late 19th century United States, the Free Silver movement advocated the inflationary policy of free coinage of silver; this was a contentious political issue in the 40-year period 1873–1913 defeated.
Economist John Maynard Keynes described the effects of inflationism: Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate; the sight of this arbitrary rearrangement of riches strikes not only at security but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat; as the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be meaningless.
Lenin was right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency; the process engages all the hidden forces of economic law on the side of destruction, does it in a manner which not one man in a million is able to diagnose. Inflationism is most associated with, a charge most leveled against, schools of economic thought which advocate government action, either fiscal policy or monetary policy, to achieve full employment; such schools have heterodox views on monetary economics The early 19th century Birmingham School of economics, which advocated expansionary monetary policy to achieve full employment, was attacked as "crude inflationists". The contemporary Post-Keynesian monetary economic school of Neo-Chartalism, which advocates government deficit spending to yield full employment, is attacked as inflationist, with critics arguing that such deficit spending leads to hyperinflation. Neo-Chartalists reject this charge, such as in the title of the Neo-Chartalist organization the Center for Full Employment and Price Stability.
Neoclassical economics has argued a deflationist policy. This was opposed by Keynesian economics, which argued that a general cut in wages reduced demand, worsening the crisis, without improving employment. While few, if any, economists argue that inflation is a good thing in itself, some argue for a higher level of inflation, either in general or in the context of economic crises, deflation is agreed to be harmful. Three contemporary arguments for higher inflation, the first two from the mainstream school of Keynesian economics and advocated by prominent economists, the latter from the heterodox school of Post-Keynesian economics, are: added flexibility in monetary policy. Added flexibility in monetary policy A high inflation rate with a low nominal interest rate result in a negative real interest rate; as lower interest rates are associated with stimulating the economy under monetary policy, the higher inflation is, the more flexibility a central bank has in setting interest rates while still keeping them nonnegative.
Olivier Blanchard, chief economist of the International Monetary Fund, argues that the inflation rates during The Great Moderation were too low, causing constraints in the late-2000s recession, that central banks should consider a target inflation rate of 4% instead of 2%. Wage stickiness Inflation decreases the real value of wages, in the absence of corresponding wage rises. In the theory of wage stickiness, a cause of unemployment in recessions and depressions is the failure of workers to take pay cuts, to decrease real labor costs, it is observed that wages are nominally sticky downwards in the long term, thus that inflation provides useful erosion of real costs wages without requiring nominal wage cuts. Collective bargaining in the Netherlands and Japan has at times yielded nominal wage cuts, in the belief that high real labor costs were causing unemploymen
In economics, stimulus refers to attempts to use monetary or fiscal policy to stimulate the economy. Stimulus can refer to monetary policies like lowering interest rates and quantitative easing. A stimulus is sometimes colloquially referred to as "priming the pump" or "pump priming", In the 1930s, President Herbert Hoover was accused of "pump priming", President Franklin D. Roosevelt used the term favorably; the underlying assumption is that, due to a recession and employment are far below their sustainable potential due to lack of demand. It is hoped that this will be corrected by increasing demand and that any adverse side effects from stimulus will be mild. Fiscal stimulus refers to lowering taxes; this means increasing the rate of growth of public debt, except that Keynesians assume that the stimulus will cause sufficient economic growth to fill that gap or completely. See multiplier. Monetary stimulus refers to lowering interest rates, quantitative easing, or other ways of increasing the amount of money or credit.
Milton Friedman argued that the Great Depression was caused by the fact that the Federal Reserve did not counteract the sudden reduction of money stock and velocity. Ben Bernanke argued, that the problem was lack of credit, not lack of money, hence, during the financial crisis, the Federal Reserve led by Bernanke provided additional credit, not additional liquidity, to stimulate the economy back on trail. Jeff Hummel has analyzed the different implications of these two conflicting explanations. President of the Federal Reserve Bank of Richmond, Jeffrey Lacker, with Renee Haltom, has criticized Bernanke's solution because "it encourages excessive risk-taking and contributes to financial instability." It is argued that fiscal stimulus increases inflation, hence must be counteracted by a typical central bank. Hence only monetary stimulus could work. Counter-arguments say that if the output gap is high enough, the risk of inflation is low, or that in depressions inflation is too low but central banks are not able to achieve the required inflation rate without fiscal stimulus by the government.
Monetary stimulus is considered more neutral: decreasing interest rates make additional investments profitable, but yet only the most additional investments, whereas fiscal stimulus where the government decides the investments may lead to populism or corruption. On the other hand, the government can take externalities into account, such as how new roads or railways benefit users that do not pay for them, choose investments that are more beneficial although not profitable. Keynesians are strongly pro-stimulus and Rational expectations economists against, mainstream economists between the two. Gross fixed capital formation#Economic analysis Policy mix Stimulus bill
An economic bubble or asset bubble is trade in an asset at a price or price range that exceeds the asset's intrinsic value. It could be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future. Asset bubbles date back as far as the 1600s and are now regarded as a recurrent feature of modern economic history; the Dutch Golden Age's tulip mania is considered the first recorded economic bubble. Because it is difficult to observe intrinsic values in real-life markets, bubbles are conclusively identified only in retrospect, once a sudden drop in prices has occurred; such a drop is known as a bubble burst. Both the boom and the burst phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Prices in an economic bubble can fluctuate erratically, become impossible to predict from supply and demand alone. While some economists deny that bubbles occur, the causes of bubbles remain disputed by those who are convinced that asset prices deviate from intrinsic values.
Many explanations have been suggested, research has shown that bubbles may appear without uncertainty, speculation, or bounded rationality, in which case they can be called non-speculative bubbles or sunspot equilibria. In such cases, the bubbles may be argued to be rational, where investors at every point are compensated for the possibility that the bubble might collapse by higher returns; these approaches require that the timing of the bubble collapse can only be forecast probabilistically and the bubble process is modelled using a Markov switching model. Similar explanations suggest that bubbles might be caused by processes of price coordination. More recent theories of asset bubble formation suggest. For instance, explanations have focused on emerging social norms and the role that culturally-situated stories or narratives play in these events; the term "bubble", in reference to financial crisis, originated in the 1711–1720 British South Sea Bubble, referred to the companies themselves, their inflated stock, rather than to the crisis itself.
This was one of the earliest modern financial crises. The metaphor indicated that the prices of the stock were inflated and fragile – expanded based on nothing but air, vulnerable to a sudden burst, as in fact occurred; some commentators have extended the metaphor to emphasize the suddenness, suggesting that economic bubbles end "All at once, nothing first, / Just as bubbles do when they burst," though theories of financial crises such as debt-deflation and the Financial Instability Hypothesis suggest instead that bubbles burst progressively, with the most vulnerable assets failing first, the collapse spreading throughout the economy. The impact of economic bubbles is debated between schools of economic thought. Within mainstream economics, many believe that bubbles cannot be identified in advance, cannot be prevented from forming, that attempts to "prick" the bubble may cause financial crisis, that instead authorities should wait for bubbles to burst of their own accord, dealing with the aftermath via monetary policy and fiscal policy.
Political economist Robert E. Wright argues that bubbles can be identified before the fact with high confidence. In addition, the crash which follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise. A protracted period of low risk premiums can prolong the downturn in asset price deflation as was the case of the Great Depression in the 1930s for much of the world and the 1990s for Japan. Not only can the aftermath of a crash devastate the economy of a nation, but its effects can reverberate beyond its borders. Another important aspect of economic bubbles is their impact on spending habits. Market participants with overvalued assets tend to spend more richer. Many observers quote the housing market in the United Kingdom, New Zealand and parts of the United States in recent times, as an example of this effect; when the bubble bursts, those who hold on to these overvalued assets experience a feeling of reduced wealth and tend to cut discretionary spending at the same time, hindering economic growth or, exacerbating the economic slowdown.
In an economy with a central bank, the bank may therefore attempt to keep an eye on asset price appreciation and take measures to curb high levels of speculative activity in financial assets. This is done by increasing the interest rate. In the 1970s, excess monetary expansion after the U. S. came off the gold standard created massive commodities bubbles. These bubbles only ended when the U. S. Central Bank reined in the excess money, raising federal funds interest rates to over 14%; the commodities bubble popped and prices of oil
In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys services; the measure of inflation is the inflation rate, the annualized percentage change in a general price index the consumer price index, over time. The opposite of inflation is deflation. Inflation affects economies in various negative ways; the negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include reducing unemployment due to nominal wage rigidity, allowing the central bank more leeway in carrying out monetary policy, encouraging loans and investment instead of money hoarding, avoiding the inefficiencies associated with deflation.
Economists believe that the high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Today, most economists favor a steady rate of inflation. Low inflation reduces the severity of economic recessions by enabling the labor market to adjust more in a downturn, reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy; the task of keeping the rate of inflation low and stable is given to monetary authorities. These monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, through the setting of banking reserve requirements.
Rapid increases in the quantity of money or in the overall money supply have occurred in many different societies throughout history, changing with different forms of money used. For instance, when gold was used as currency, the government could collect gold coins, melt them down, mix them with other metals such as silver, copper, or lead, reissue them at the same nominal value. By diluting the gold with other metals, the government could issue more coins without increasing the amount of gold used to make them; when the cost of each coin is lowered in this way, the government profits from an increase in seigniorage. This practice would increase the money supply but at the same time the relative value of each coin would be lowered; as the relative value of the coins becomes lower, consumers would need to give more coins in exchange for the same goods and services as before. These goods and services would experience a price increase. Song Dynasty China introduced the practice of printing paper money to create fiat currency.
During the Mongol Yuan Dynasty, the government spent a great deal of money fighting costly wars, reacted by printing more money, leading to inflation. Fearing the inflation that plagued the Yuan dynasty, the Ming Dynasty rejected the use of paper money, reverted to using copper coins. Large infusions of gold or silver into an economy led to inflation. From the second half of the 15th century to the first half of the 17th, Western Europe experienced a major inflationary cycle referred to as the "price revolution", with prices on average rising sixfold over 150 years; this was caused by the sudden influx of gold and silver from the New World into Habsburg Spain. The silver spread throughout a cash-starved Europe and caused widespread inflation. Demographic factors contributed to upward pressure on prices, with European population growth after depopulation caused by the Black Death pandemic. By the nineteenth century, economists categorized three separate factors that cause a rise or fall in the price of goods: a change in the value or production costs of the good, a change in the price of money, a fluctuation in the commodity price of the metallic content in the currency, currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency.
Following the proliferation of private banknote currency printed during the American Civil War, the term "inflation" started to appear as a direct reference to the currency depreciation that occurred as the quantity of redeemable banknotes outstripped the quantity of metal available for their redemption. At that time, the term inflation referred to the devaluation of the currency, not to a rise in the price of goods; this relationship between the over-supply of banknotes and a resulting depreciation in their value was noted by earlier classical economists such as David Hume and David Ricardo, who would go on to examine and debate what effect a currency devaluation has on the price of goods. The adoption of fiat currency by many countries, from the 18th century onwards, made much larger variations in the supply of money possible. Rapid increases in the money supply have taken place a number of times in countries experiencing political crises, produ