You make $16 an hour. That barely covers your rent & food. If you want a new pair of boots or you have to get something fixed, the only way is with a credit card. So when did credit become money? It’s a good question, isn’t it? After all, isn’t the use of credit tied in some way to the Money Supply? THE WHAT?
Chillax. The Money Supply simply refers to the amount of money in the economy, some or all of which can be used to buy stuff.
In Canada, the terms used to describe the money supply are:
M1: Measures currency in circulation plus the money in personal chequing accounts.
M2: Adds in personal savings accounts and other chequing accounts, along with personal/non-personal deposits that require notice be given before withdrawal.
M2+ includes all deposits at non-bank deposit-taking institutions, money-market mutual funds, and individual annuities at life insurance companies.
M2++, also includes all types of mutual funds and Canada Savings bonds.
Are your eyes glazing over? You’re not alone. Many people find economics, and the terminology used, to be mind-boggling. To make things even more confusing, different countries measure the money supply in different ways. Regardless of how it’s measured, central banks monitor the rate of money growth and then exert their influence by changing short-term interest rates. When the central banks’ rates change, other rates, like those paid by consumers for loans, change along with them. In theory, when interest rates rise people are apt to borrow less and pay back existing loans, slowing the growth of M1, the money in circulation.
In economic theory, the availability of money and credit must expand over time, and central banks are responsible for ensuring that the rate at which more money is introduced into the economy is consistent with long-term, stable growth. By influencing the rate at which the supply of money and credit is growing, total spending can be kept stable.
So what’s the bug in the ointment? It boils down to three things that don’t seem to fit in with the desire to control the growth of the money supply and credit use.
First, credit cards aren’t the traditional form of borrowing. Have you noticed that their very high interest rates in no way motivate borrowers to pay back their credit card debt quickly?
Second, nothing the central bankers do ever has an impact on the interest rates that credit card companies charge. That’s why despite periods of record low interest rates, credit cards were still charging 10%, 18% and 23% in interest.
Third, credit available through credit cards is acting like money – it’s used to buy goods and services – but it is in no way reflected in the calculation of the money supply. So we allow credit to be issued at a whim, to whomever credit card companies want to give it to, in whatever amount, without a whit of consideration to how that “extra spending power” is impacting the economy as a whole.
And so we come to the fallout of a rampant spending problem, a problem that comes from having an unlimited supply of money. Hey, that’s what credit has become in many people’s minds: disposable income. Never mind that it’s income that hasn’t yet been earned.
Spending money on credit that isn’t immediately (on time) paid off is an act of madness because you are spending money that has yet to be earned. It’s a huge hamster wheel and half of us are scrambling to keep it turning. (The other half knows better.)
Once upon a time you had to have a good reason to borrow money: You wanted to build a business; you wanted to improve an asset; you wanted to invest in something that would generate a return. When borrowing became just another way to buy STUFF, credit stopped being a tool for building wealth and became the best destroy your future. If we don’t start taking “credit as money” into account in terms of it’s impact on our economy, we’ll just keep running on that wheel and wondering how things went so badly off the tracks.
And if we don’t stop spending money we haven’t yet earned, we don’t have a hope in hell of ever getting off the hamster wheel.