Then the next area, which is sort of a purplish blue, is M1 or
the purple blue area plus the yellow is M1, so M1 again including not
only cash, but the money that we have in banks that we can spend immediately.
And then you can see when we add the red area to
the blue and the yellow, we get M2, and M2 includes deposits
with agreed maturity up to two years, plus deposits redeemable of a
period of notice up to three months as you see on the chart.
So this is, these are savings that can't be spent directly,
but can very easily converted into M1 to be able to spend.
And then you can see M3 which would be
the black, the red, the purple, plus the yellow,
and M3 has other kinds of, of money which
have to be converted before they can be spent.
So the idea is, authorities somehow have to keep track of how much
money is washing around in the economy, because it could be quickly spent.
If there's too much of it then probably
the number of goods being produced in the economy
can't rise fast enough to meet this amount of
money, and so we might have an inflation problem.
So with money supply, what the monetary authorities have to do is get
the amount right so that it's enough to buy our GDP, it's enough to allow
some growth, but it's not so much that inflation begins to accelerate.
Okay, so it's much harder than it seems to
get the money growth, or the money supply right.
So, who takes care of the money supply?
Well, we have some institutions, which are called central banks.
Now, in the United States, suddenly, there's
been a lot of conspiracy talk about
central banks, but in most countries, we don't know a whole lot about them.
Central banks are public institutions.
They're sometimes owned by the government, sometimes owned by the private sector, but
they are institutions that an easy way to think about it is, they do the same thing
for commercial banks, for the banks in our banking system, as those banks do for us.
In other words they lend them money when they need them.
They hold extra cash for these banks when these
banks don't need them, and they kind of keep
an eye on them to make sure that they're
following reasonable policies, that they're not being too risky.
In much the same way that a cen, a commercial bank might
watch us, and would lend money to us and take our deposits.
Now, one thing that's important about these central banks is that
they should be removed from politics we say that they're independent, alright?
