Comment by jnwatson
1 year ago
The "liabilities" aren't subtracted from the deposit amount when counted as M1 supply. (Actually loans are accounted for as assets and deposits are liabilities, but that's beside the point).
If customer A deposits $100 in cash, and customer B borrows $100 from the bank and deposits it back in the bank, M1 goes up because there are now two checking accounts with $100 in it. That the bank's internal bookkeeping balances doesn't change the fact that the Fed considers that more money exists.
> That the bank's internal bookkeeping balances doesn't change the fact that the Fed considers that more money exists.
The Fed considers that more M1 exists and the same amount of M0 exists. Both are considered monetary aggregates, but M0 is the "money" the bank needs to worry about to stay solvent, and it can't "print" that.
Whilst it's semantically correct to refer to both M1 and M0 as money, it's pretty clear that it's wrong for people people to elide the two to insinuate that banks are printing themselves balances out of thin air like token issuers or insolvent companies that screwed up their customer balance calculations, which is what the OP was covering.
And the Fed wouldn't consider more money to exist if the bank's internal bookkeeping didn't balance...
I agree. The main point is that if B knows that they don't have to repay the $100 until 10 years in the future, then for the 10 next years everyone can pretend there are $200 in total.