What is money really? Money as debt?

Money

Today I will be sharing a cartoon that I found extremely useful in my understanding of money and inflation. Yes, a cartoon! I had read many of the concepts of money, monetary systems and how they affect, you and me and the common man on the street in multiple books. This video by Paul Grignon, Money as Debt, summarizes these concepts in an extremely easy to understand manner. Must see!

 

Paul Grignon’s Money as Debt video

 

If you have trouble seeing the video, visit Youtube to see the video. Click here.

Other than notes and coins is there more to what constitutes money?

We grow up learning that coins and notes constitute money. But in reality, in our monetary system, there is more. Debt is also money as you just saw in Paul Grignon’s video. He has given a great background which is useful in understanding what is happening in India. If you still have not seen it, do see the video.

Money as debt in India

Figures are in Rs. crore.

DateCurrency with the publicDemand Deposits with BanksTime Deposits with Banks‘Other’ Deposits with Reserve BankM3 or Broad moneyCurrency as % of M3
02 Nov 2012106514967757962031201773794762013%
23 Nov 200752511348008326707744784368075314%
14 Jan 20001940601333207592712976108962818%
24 Jan 19926010049671196493180130806520%
27 Apr 1951139957932428233060%

Source: RBI

 

This is select information from data that RBI publishes regularly. The M3 column is actually the total money in India. And did you notice the funny thing about currency? It is just 13% today. Yes, the rest is debt in the system. All the loans that individuals and companies take are utilized in paying others and end up in others’ deposit accounts (savings or current) or stay in the individuals’ or companies’ own accounts as deposits until they are used. That is what you see as the other columns which make up the balance 87% of money supply in India.

And there are some interesting observations.

  • Currency as a percentage of money supply is only decreasing, just like what Paul Grignon’s Money as Debt video talks of. Credit does multiply wildly.
  • It was at 60% in 1951, had reduced to just 20% post-liberalization in 1992 and has decreased over the years.
  • In the last 5 years, from 2007 to 2012, money supply has increased at a compounded rate of 16% every year.
  • Now you know where the price inflation is coming from in India. I had covered government debt and inflation in previous articles. You can read them here, here and here.
  • The important addition to what I had discussed earlier is that the banking system also adds to the money supply. So, not only the central bank, but public sector and private banks contribute to money supply creation in India.

Summary

Please share this article with others. This is knowledge which most of us do not learn in schools and colleges but profoundly affects us throughout our life. Inflation hits our pockets. High levels of debt in the country are unsustainable beyond a point. Poor fiscal governance affects you and me. Once we know, we can take appropriate steps to protect our wealth from unbridled inflation. But it starts with being aware.

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Comments

  1. DR Biren Parikh Ahedabad says

    Dear sir,
    Excellent article with good easy interpretation. Let me know correlation with other countries, up to how much % we can survive? 10% or 5% ( Our Economy) There will be economic definitely BLAST in near future.
    How can I individually come out from it? I have decided to invest in Apartment as an investment ( Second home ) for capital appreciation.As FD/Post/Stocks/gold other financial tool i think there is not disciplinary saving. Let me know.
    Regards, Biren

    • says

      Hi Dr. Biren,

      First, please don’t use Sir. Kunal is just fine.

      I don’t know about “blast” as you say. But yes, I do feel that things are delicately placed right now. Most people honestly don’t have a clue as to what will happen in the near term. Economics and politics has been thoroughly mixed up.

      No one knows till how long this game will go on. I do not have ready data about where other economies stand with respect to currency as percentage of M3 (broad money).

      One striking observation – the US stopped reporting M3 a few years back. They only report M2 which is a less useful indicator of money than M3. It is strange and scary. Why? Because now you don’t even know what’s happening with the money supply.

      There are third-party entities which are doing the work of estimating M3 in the US. Check http://www.shadowstats.com/