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Frozen Money? Or a Trick?

 
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Richard Glover



Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Fri Dec 03, 2010 9:02 am    Post subject: Frozen Money? Or a Trick? Reply with quote

Most of us are paid monthly; our bank account sees a huge rise on payday and a gradual fall over the month as about as much is paid out. This is a wonderful aspect of money. Our monthly life-cycle will work well on a share of the nation's money supply to the tune of at least our monthly income.

As a nation of people, our collective annual income is the gross domestic product (GDP). For the most part, this is represented by similar monthly payments to households. With a little investigation of numbers, it may be possible to estimate how much money the nation needs. All the following figures are approximate.

UK GDP is about £1300Bn, representing the goods and services bought over the year, and also the income we collectively receive in the year to pay for them. It is the total gross income for everyone in the nation. Most of this is distributed monthly.

Of the GDP (data from UK Blue Book):
55% is gross payments to employees
10% is self-employed gross income
25% is gross corporate profits
10% is VAT

If we assume that VAT and corporate profits are paid quarterly (35% of GDP), and the rest is paid monthly (65% of GDP), it can be calculated that £141Bn (~11% of GDP) is paid every month.

Life has its adventures, and so it may be prudent to provide a national money supply to cover 3 months of the above, a total of £434Bn. A little cooperation amongst us should ensure this is more than adequate for the full functioning of the real economy.

BUT......... the UK total money supply (M4) is about £2200Bn. So where is the other £1776Bn? It seems to exist yet does not seem to flow in the real economy. It is held as deposits in the banking system because virtually all of the £2200Bn has been created by the banking system.


Is £1776Bn of the nation's money supply frozen?
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Chris O'Brien



Joined: 17 Jul 2010
Posts: 9
Location: Harpenden, Herts

PostPosted: Wed Jan 05, 2011 2:08 pm    Post subject: Reply with quote

Happy New Year, Richard!

I think your question maybe related to HG's 'Wealth from Production' and 'Wealth from Obligation'.

Most MO money and all wages are from production and go round and round every month. However, as soon as anyone saves some of their 'production wealth' it becomes 'obligation wealth' and frozen for a length of time. If the borrower, like the banks recently, reneagues on his obligation then the money is destroyed unless someone, like the taxpayer takes over that obligation.

I believe that that the real economy is driven by 'production wealth' and those who live off 'obligation wealth' do so by stealing 'production wealth' from others.

PS I cannot spell to save my life. Is there any spell check hidden away in this system?
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Richard Glover



Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Tue Jan 18, 2011 10:26 am    Post subject: M4 to GDP ratio: 1982 to 2010 Reply with quote

Chris, I agree with HG's wealth analysis being very helpful. An interesting consideration could be:
When you lend someone a fiver, they spend it. The obligation (£5) may not be settled for 20 years, but the money remains in circulation and is part of GDP. So what is the nature of obligation that keeps money out of GDP? Perhaps something to do with the financial world would give a clue.

An indication of substantial changes in the use of money over the years can be seen in the attached graph. This brings together GDP and M4 data from ONS and Bank of England websites; their ratio is plotted.

In 1982, M4 was 70% of annual GDP and is now 200%. This loosely correlates to a fall in the "velocity of money" indicator.

I have read that in 1938 the broad money supply was about half GDP, although getting good data going back that far will need more work.



M4GDPRatio2.pdf
 Description:
Corrected graph; shows ratios of M4 to GDP. Also shows ratios of the retail and wholesale components of M4 to GDP.

Download
 Filename:  M4GDPRatio2.pdf
 Filesize:  92.7 KB
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Last edited by Richard Glover on Tue Jan 18, 2011 5:54 pm; edited 1 time in total
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Richard Glover



Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Tue Jan 18, 2011 5:51 pm    Post subject: Correction Reply with quote

Please note the correction in previous posting:
Old: In 1982, M4 was twice GDP and is now six times.
New: In 1982, M4 was 70% of annual GDP and is now 200%.

Graph download has also been corrected!
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Peter Bowman



Joined: 02 Nov 2008
Posts: 27
Location: London, UK

PostPosted: Fri Jan 21, 2011 8:35 pm    Post subject: Reply with quote

Isn't the "trick" double entry book-keeping? The other half of the story of that £2.2 trillion created by the banking system is the corresponding debt that was created to go with it. So the banks argue that they don't actually create money since (before the interest payments start to flow) the debts and credits add up to zero.
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