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danbright's avatar

Does money owned by the treasury count as part of the base money supply?

Asked by danbright (8points) 4 days ago

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9 Answers

Response moderated (Writing Standards)
Response moderated (Writing Standards)
danbright's avatar

Question:
In standardly taught economics, does the base money supply include money owned by the treasury

Answer:
No

Response to answer:

Shame, because if it did it would make more sense.

If the central bank increases the money supply by buying treasuries and decreases it by selling treasuries…… then why add the extra complication of saying that a private individual can decrease the money supply by purchasing treasuries, transferring ownership of the money paid to the treasury, which is what you get if you say money owned by the treasury is out of the money supply.

And then, by that concept, you also are saying the treasury too, and not the just central bank, can increase the money supply….. you would have the treasury increasing the money supply by paying off bonds.

Further. you would be saying that taxes decrease the money supply and government spending increases the money supply. And where are we going to stop with that? Do state and local taxes decrease the money supply, and local and state spending increase it?

How about sales tax, would that decrease the money supply ever time it is charged?

Would tolls on toll roads decrease the money supply? if the road is run by government? but not if privatized?

And why stop at state and local government. Why not make it so that every time a person or entity spends it is in the money supply, but if they save it is not??

See, here is the problem with excluding treasury from the base money supply. The distinction between the treasury and the central bank is that the central bank is the one who can create money. and initially put it into circulation. (I know the treasury prints the money, but it is at the behest of the central bank and given to the central bank for distribution). The treasury can’t just print money and use it directly for government spending. (actually they can now with coins, but i am leaving that out of the discussion for now)

ONLY WHEN THE INSTITUTION THAT HAS THE POWER TO CREATE MONEY OWNS THE MONEY SHOULD IT BE CONSIDERED OUT OF THE MONEY SUPPLY.

Why?

Since the central bank can create as much money as they want, simply by declaring it as existing, then saying that money owned by the central bank IS IN HE MONEY SUPPLY would make defining the money supply a meaningless concept. This is becaue in reality the central bank could declare the money supply as being any size it wants it to be, up to any finite number, as high as they want to it to go.

When the central bank sells assets to shrink its balance sheet and that money becomes owned by the central bank, they can say they kept it in a vault, or they burned it, or that it no longer exists and we removed it from the ledger which previously said it exists. None of that matters. If the Central Bank wants to issue new money, in any amount it can create it on the spot. Any accounting of how much money the central bank owns, is meaningless, because they can change that amount any time they want.

If the central bank owned a certain amount of coins or paper currency and they destroyed it, that would not affect the economy at all, because it is not owned by persons or entities other than the central bank and is not available for spending. And if the Central Bank ever needed money for spending, to buy treasuries, they can just create it. The same with virtual money. If this money, declared as existing by the Central Bank and kept track of on a ledger was not OWNED by some person or entity other than the central bank, then is does not affect anything in the economy. Because it is not available for spending by anyone outside of the central bank, and because it has no effect of the ability of the central bank to spend any amount on purchasing treasuries. The central bank can declare virtual money as existing or it can declare it as no longer existing (such as the money it gets from selling treasuries when it wants to shrink the money supply). It doesn’t matter what the central bank says about or does with the money if the central bank owns it, meaning no one outside of the central bank owns it. Since the central bank can create money any time it wants if needs money, have the central bank destroy or declare as not existing any money owned by the central bank and not someone else, has not influence on the amount of spending the central bank will do, and therefore no effect on the economy.

It is only the money that they declare as existing or order to be printed up that they put into circulation (by buying treasuries ) that means anything to the real economy.

THE TREASURY CANNOT DO THIS, THE TREASURY DOES NOT CONTROL THE CREATION OF MONEY. any money the treasury owns must first have been created by (or authorized to be created by) the central bank, and is only put into the money supply by
buying treasuries.

Therefore

MONEY OWNED BY THE TREASURY SHOULD BE CONSIDERED AS PART OF THE MONEY SUPPLY , having, in essence, been created like any other money by the central bank. And it DOES MATTER if the treasury destroys money, because they cannot create money, that would affect the economy because it would affect the amount of money the treasury has to spend.

I prefer to define the money supply as 1) coins and paper currency in circulation owned AND possessed by entities other than the central bank. 2) money held at the central bank and owned by commercial banks, known as commercial bank reserves. 3) Money owned by the treasury no matter where it is held, and in what form, paper currency, coins or virtual money (virtual money is always money held at the central bank (as an entry on a ledger) but owned by someone else.

I also prefer to call it base money, because that is the definition of money supply that most closely approximate what I think the money supply should be, and is, except for the fact that the standard definition exludes money OWNED by the treasury.

zenvelo's avatar

Your answer misunderstands basic accounting. Money in the treasury is not in circulation and has zero velocity, so it is not considered part of the money supply.

It is the same as treasury shares held by a corporation.when a corporation buys back stock and puts it in the treasury, that act increases the proportion of ownership represented by each share. It is no longer part of the float. It is out of circulation.

danbright's avatar

Responder to my comment says
“your answer misunderstands basic accounting. Money in the treasury is not in circulation and has zero velocity, so it is not considered part of the money supply.
It is the same as treasury shares held by a corporation.when a corporation buys back stock and puts it in the treasury, that act increases the proportion of ownership represented by each share. It is no longer part of the float. It is out of circulation.”
————
Money in my piggy bank has zero velocity, but it is still in the money supply. Treasury spends money all the time, therefore it is not true that money owned by the treasury has zero velocity
I am assuming that by treasury shares held by a corporation you mean treasury bonds that corporations own. These are assets not money. However the money they paid for those treasuries is still in the money supply because it is now owned by the ones they bought the treasuries from. If those particular bonds were being sold for the first time since the treasury issued them, then that money would indeed go to the treasury, which, I am claiming, should be still considered, “in the money supply”.

zenvelo's avatar

No, I did not mean treasury bonds, I meant treasury shares, shares of stock bought back by the company.

The money supply is money in circulation, not that held by the treasury. And adding money held by the treasury into the money supply calculation would not change the dynamics of the economy, it would just distort the statistics.

The money in your piggy bank does affect the velocity of money when you take your pennies and nickels out and actually spend it on something. That is how velocity is calculated, how long it remains idle before being spent.

danbright's avatar

Then the money goes to the person they buy the “treasury shares” from, staying in the money supply, and company has those treasury shares instead of the money

As for distorting the statistics, perhaps the way they are doing it now is the distortion if there is a more rational and consistent way to define the base money supply

zenvelo's avatar

You aren’t understanding that I am using an analogy of the accounting practice for corporate treasury shares as a parallel for the accounting treatment of cash held by the treasury not being part of the Money Supply.

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