MONEY

Money is any object or record, that is generally accepted as payment

for goods and services and repayment of debts in a given

country or socio-economic context

3 functions of money

medium of exchange

a unit of account

a store of value

(a standard of deferred payment)

BARTER AND ITS INCONVENIENCE

Barter uses relative prices

How many sheeps for one cow ?

Some good have a fast

obsolescence (my ice creams melt)

Different forms for moneyCommodity money : stone, conch shell, gold...

Fiat money* : a piece of paper...

*Monnaie fiduciaire

Because it is not always convenient to walk around with gold, banks created deposit money*

It is convenient for the customer who can use credit card, transfer... for his payments.

It is convenient for the banker who can use his customer's money to give loan.

*Monnaie scripturale

Money becomes Currency

The exchange rate is supposed to reflect the differences in outputs, the competitiveness of the countries.

But it express the expected earning on financial products.

Gold Standard : money arrives on the market

1717 in England (until 1931)

1834 in the United States (until 1933)

1880 – 1914 : The classical Gold-Standard

1946-1971 : Bretton Woods (35$ per once)

2010 : World bank president Zoellick calls for new gold standard

Price-specie-flow mechanism

Faster economic growth in the US

U.S. prices fell.

This caused the British to demand more U.S. exports and Americans to demand fewer imports.

A U.S. balance-of-payments surplus was created, causing gold (specie) to flow from the United

Kingdom to the United States.

The gold inflow increased the U.S. money supply, reversing the initial fall in prices.

In the United Kingdom, the gold outflow reduced the money supply and, hence, lowered the price level. The net result was balanced prices among

countries.

The Gold Standard and the Great Depression

In 1931–32, the Federal Reserve raised the discount rate for fear of a run on its gold

deposits. If only the United States had not been shackled by a gold standard, the

Federal Reserve could have avoided the credit squeeze that pushed the country into

depression and a banking crisis.

Means of payment

Common means of payment by an individual include money, cheque, debit, credit, or bank transfer.

Should all this means be called money ?

Money supply (money stock)*

Measuring “money” is very complicated. There are many ways to do it and many different views on the subject.

Different kind of “money” are classified according to their liquidity.

* masse monétaire

MONEY SUPPLY

M1, M2, M3

M0 : coins, bills

M1 : liquid assets

M2 : less than 3 months

M 3 : Treasure bonds

...

Where does money stops ?

*OPCVM : Organisme de placement collectif en valeurs mobilières

ECB's figures

The Fed ceased publishing M-3 in March 2006

The bond market hates inflation

If the interest rates rise, prices of bonds fall but...

Determinants for money demand*

Interest rate

Volume of transactions

Prices

* do not mistake money demand for money greed

Liquidity trap

In keynesian economics, a situation where agents keep money instead of investing in the economy. Because of negative expectations

and/or liquidity preference, government policy is useless.

Irving Fischer (1867 – 1947)"the greatest economist the United States has ever produced." (Milton Friedman)

Let M=stock of money, P=price level, T=amount of transactions carried out using money, and V= the

velocity of circulation of money. Fisher then proposed that these variables are interrelated by the Equation of

exchange:

MV=PT.

T became Q (quantity or real GDP)

Velocity of money

The number of time a bill changes hand on average every year.

When people spend less and borrow less, the velocity decreases

What is a Central Bank ?

A banker's bank.

A lender of last resort.

Banks are subject to reserve requirement and are the only « customers » of the Central Banks.

How does the central bank control money supply ?

1 – Changing required reserve ratio

2 – Changing the discount rate

3 – Buying or selling government securities

Contractionary – expansionary policies

Contractionary monetary policy intends to reduce the money supply.Expansionary policy expands the money supply.Neo classical and keynesians do not agree on the effectiveness of the money.

The equilibrium interest rate

Monetization of the debt

The Central Bank can print bills to pay Government bonds. It is also called Quantitative Easing (QE)

In Europe Lisbon Treaty forbids us to do so.

The Federal Reserve decides how much, if any, of the debt is “monetized”—that is, takes the form of currency or its equivalent. The rest consists of interest-bearing treasury securities. Those central bank decisions are the essence of monetary policy.

TOBIN

European Countries borrow on the market

Bank borrow money for 1% interest rate at the Central European Bank … and lend it to the States.

Monetization of the debtAt year-end 2003, federal debt outstanding was $7,001 billion, of which only 11 percent, or $753 billion, was monetized. That is, the Federal Reserve banks owned $753 billion of claims on the U.S. Treasury, against which they had incurred liabilities in currency (Federal Reserve notes) or in deposits convertible into currency on demand. Total currency in public circulation outside banks was $664 billion at year-end 2003. Banks’ reserves—the currency in their vaults plus their deposits in the Fed—were $89 billion. The two together constitute the monetary base (M0 or MB), $753 billion at year-end 2003.

TOBIN

Printing money is a tax on money

Citizen always pay what the government offers.

The Coming Sovereign Debt CrisisNouriel Roubini (aka Dr Doom)

In 2008 and 2009, the decisions by these governments to do "whatever it takes" to backstop their financial systems and keep their economies afloat soothed investor concerns. But if countries remain biased toward continuing with loose fiscal and monetary policies to support growth, rather than focusing on fiscal consolidation, investors will become increasingly concerned about fiscal sustainability and gradually move out of debt markets they have long considered "safe havens."

Money creation

Exogenous / endogenous

Circuitist : the bank creates money

Mainstream : the central bank creates money

What is a bank ?

A bank is a private intermediary that borrow and lend funds.

What you can read in textbooks...

Bank creates money when it gives a loan.

This money is destroyed when the loan is repayed.

How does a bank T-account look like ?

Net worth : situation nette

ASSETS LIABILITIES

Reserves 20 100 Deposit

Loans 90 10 Net worth

Total 110 110 Total

Reserve requirement : one of the Central Bank's tools

Banks hold reserves in cash (the vault) and in accounts at the Central Bank.Since 1999, the reserve ratio in the European Union used to be 2%

The money multiplier

If the central bank creates 1000 high-powered money

Reserve (10%) New loanBank 1 100 900Bank 2 90 810Bank 3 81 729

...

Maurice Allais :

"In essence, the present creation of money, out of nothing by the banking system, is similar - I do not

hesitate to say it in order to make people clearly realize what is at stake here - to the creation of money by

counterfeiters, so rightly condemned by law."

STIGLITZ : We Have To Throw Bankers In Jail Or The Economy Won't Recoverbusinessinsider.com nov. 2010

Is there any principle ? We all know the answer to that. No, there’s no principle. It’s money. It’s campaign contributions,

lobbying, revolving door, all of those kinds of things

Vous avez dit hors-bilan ?Je veux qu'on tranche la question angoissante du hors bilan. A quoi ça sert de fixer aux banques des ratios de solvabilité sur leur bilan si on les autorise à avoir à côté un hors bilan ? (…) Ce qu'on appelle la titrisation. C'est-à-dire que chaque jour, les banques consentaient un prêt à 10h00 du matin, le revendaient à 17h00 le soir, prenaient la commission, le déstockaient, le mettaient dans ce qu'on appelle un SPV et mutualisaient ce mauvais risque. (N. Sarkozy, fév. 2009)