A Money and Banking “Crash Course”

Posted on March 3, 2007 by Administrator

By Richard Walrath mailto:
 
Money and Banking 101 used to be the favorite course in Economics and Finance.  M-1, M-2, M-3 — every time someone came up with a new one to get people to spend, they just added another number.  It seems strange, I know, to say that people create money when they spend.  You have to have money before you can spend it, don’t you?

No, you don’t.  I have a Home Equity Line of Credit.  Money, as defined by M-1, is currency, coin, and demand deposits which we know as checking accounts.  I keep as little money as possible — cash, checking accounts — because they pay very close to nothing.  What do I do If I need to buy or pay for something?  I use a credit card or my Home Equity Line of Credit on which I can write a check which becomes "money" when I pay for something.

If people decide they don’t want to buy or spend, the effect becomes noticeable right away.  That’s because the number of transactions slows down, or as the economists like to say, PT = MV — where P = Price…T = Transactions…M = Money…V  = Velocity

Liquidity is very high now — people are still spending.  But if they decide not to, or are unable to, spending slows, liquidity disapears, and a recession appears.  I think we’re close to one now, but then, I don’t see how we got this far without one.

 

I like the money market right now.  It pays almost as much as a six-month CD, and your money is immediately available if you need it.  If you can get 5% locally that’s a good deal.  You can go on-line and find a bank that may pay more, but keeping your money close to home is probably a good idea.  First Merit Bank, Cleveland, Ohio is paying a promotion rate now of over 5%.  After that, it will drop to a lower rate.

Check out all the banks near you.  You may have to move from one to another to keep the highest rate.  That’s easy to do in clummus, ahia because there are so many.  CD’s are fine if you’re not going to need the money until they mature.  But I’d check to see what the penalty s for early withdrawal.  Even if you need the money before maturity, they may still pay a decent rate.

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