Chapter 7 Blog- “Creating Money Supply”

Link: http://www.bworldonline.com/content.php?section=Opinion&title=Creating-money-supply&id=30602

Summary:

This article discusses how the money supply increases the U.S.  Many people believe that the supply of money grows when the government physically prints out more money out such as paper bills and metallic coins.  However this only represents 8% of the total currency circulating in the whole U.S. economy.  The government only prints out money when the old paper bills and coins are wearing out.  The process of injecting or withdrawing money is the change of money of supply which is referred to as monetary policy.  The most important factor in money flow in an economy is its “velocity”.  For example, if a $100 bill is used by 20 people in a year, its velocity is 20.  This is equivalent to the number of times that the bill has changed hand in a certain period of time.  Recently there was an article in the Asian Wall Street Journal which shows how the New York Federal Reserves Bank creates money in the U.S. economy.  The New York Federal Reserve Bank first writes a check for $100 million to buy securities from a brokerage house (a company who buys stocks and securities).  The brokerage house now has $100 million to increase its cash and it deposits that amount into its own bank (Bank A).  The bank will then keep 10% of its cash, and it will lend out the rest of its cash ($900,000).  Then a small company comes into Bank A and borrows $100,000.  The company deposits this money into their own bank (Bank B).  Bank B now has $100,000 in cash and it puts 10% as reserves ($10,000) and 90% for lending to other businesses ($90,000).  Now another business borrows $10,000 and puts it in its own bank (Bank C).  This chain can go on and on.  In these series of transactions, these banks have created $190,099,000.  Therefore loans are the major source of creating money in the U.S. economy.  Last year, Bernanke, the chairman of the Federal Reserve, announced that the Fed was planning to purchase $600 billion of government securities which resulted in adding $5.4 trillion in the U.S. economy.  Many people believe that adding more money in the economy will increase the growth of the U.S. economy but however in the past few years, the U.S. dollar has been decreasing.  The reason for this is because there was a decrease in demand for the U.S. dollar.  The worth of the dollar is determined by its attractiveness.  Wild changes in the supply of U.S. dollar in the pass few years have caused the U.S. dollar to suffer its downfall.

Connection:

This article relates to many concepts in the textbook.  For example, this article relates to the Fisher equation of exchange (MV=PT).  In the past few years, the U.S. had an increase in money supply when the Fed purchased $600 billion of government securities.  The bank gained this amount of cash and used it to make it loans.  After many loans were made by different individuals and companies, money was created as a result.  Money supply has a direct relationship with GDP.  If money supply increases, the GDP increases as well.  Another concept that relates to this relationship is velocity.  Velocity in economic terms is defined as the number of times that each unit of money supply changes hands during a given period.  In the past few years, banks have increased the velocity of money by giving out loans to different individuals.  This action increases the velocity of money and it helps circulate it throughout the economy.  Velocity is also directly related to GDP.  If velocity of money increases, the GDP increases as well.  As a result, we can form an equation between money supply, velocity and GDP.  If both money supply and velocity causes GDP to increase, we can say that MV=GDP (M= money supply, V= velocity).  This article also discusses how money is created by banks.  Banks receive cash from selling securities.  Most of the cash they receive will be used for loans to other individuals but a small portion of the money is kept in the bank to serve the purpose of reserves.  After a series of loans, more and more money will be created.  We can use the formula, ΔM= excess reserves / reserve ratio.  With this formula, we can calculate the change in money supply.  For example if we take the excess reserves in the article ($900,000) and divide it by reserve ratio (10%=0.1), we can calculate the change in money supply.  If we divided $900,000 by 0.1 we get a change in money supply of $9 million.  The action taken by the bank to change the money supply is referred to as monetary policy.  However the increase in money supply has caused the U.S. dollar to drop.  According to the law of supply, when supply increases, prices decrease.  This law also plays a factor in the value of the U.S. dollar.  When supply of money increases, the value of the dollar decreases as well because the attraction has decreased.  As a result, in the past few years, the U.S. dollar has declined even below the Canadian dollar.

Reflection:

Overall, in my opinion I think it’s a good idea to increase the supply of money.  The increase in supply of money will cause the rate of interest to decrease.  Lower interest rates would encourage more borrowing and less saving by the public.  This increases circulation of the money within an economy and therefore it will increase the level of GDP.  U.S. is a good example of this because it has been increasing the supply of U.S. money.  As a result of this, U.S. has one of the lowest interest rates in the world and it is the world’s leader of having one of the highest GDP.  Therefore this will have a positive affect on the economy of the United States.  However, on the other hand, there are some disadvantages of increasing the supply of money.   Increasing the money supply can be a disadvantage to one’s economy as the value of the currency will decrease if the money supply increases.  According to the law of supply, if the supply increases, the price will decrease.  This law also plays a role in currency in money.  If there is a larger supply of money, the worth and value of the dollar will decrease.  U.S. in the past few years had increased its money supply and as a result, the U.S. dollar declined below the Canadian dollar.  The U.S. dollar no longer has a huge attraction as before and therefore the value of the U.S. dollar has decreased.  However having a lower dollar can have its advantages too.  If the currency of the U.S. dollar decreases, more people will buy American products because its currency is lower.  Overall I believe that increasing the supply of money is good for an economy because it has more advantages than disadvantages.

Virtual Cards

Virtual cards

1. http://business.financialpost.com/2011/04/23/smart-phone-money/
2. http://www.articlecell.com/Article/Advantages-and-Disadvantages-of-Virtual-Credit-Card-Processing/989668
   3. http://money.cnn.com/2011/04/28/technology/facebook_credits/?section=money_latest
   
   

1.      How long do you think it’s going to take to get to all virtual cards?  How many years?
(1 point)

I think that this world will start using virtual cards in 30 years.  In 2040, I think virtual cards will dominate and there will be no more coins or paper bills anymore.  Paper bills, coins, and our credit cards are very inconvenient to carry around.  Also virtual cards allow us to make purchases anywhere we want.  The transaction is accounted at a much faster process and we don’t have to go to the store to make a purchase anymore.  If we started using virtual cards, we no longer have to carry our wallet and we only have to carry a smart phone.  Also there are some signs where virtual credit cards are being used in some countries such as the United States.  Right now there are some signs that virtual cards will one day take over.  For example, Facebook right now is starting its own virtual economy as our currency is going through a major change due to our highly advanced technology.  However a sudden change in our currency may receive a negative response from the public so that is why gradual change is necessary instead of quick immediate changes.  Therefore I think it may take about 30 years in order for people to accept virtual cards.

2.      Why? (1 point)

Virtual cards will one day replace coins, paper bills, and credit cards because it is more convenient to do it virtually than carrying a wallet full of cash with you all the time.  Virtual credit card processing devices have been the new trend in electronic business lately.  Many people do business online on the internet just because it is more convenient.  With our highly advanced Internet, any credit card device is compatible with any Internet connection.  However having virtual cards completely replace paper bills and coins is a very serious matter to this world.  Some people are in favour of having virtual cards to dominate our currency and some people are against in having virtual cards.  There are both advantages and disadvantages of using virtual cards.  One reason why people support using virtual cards is because unlike credit cards, there is less chance of having credit card frauds.  The virtual credit card process uses only one number for a transaction.  Once the number is used, it cannot be used again.  Since the amount of spending is fixed, the virtual credit card process is very safe.  It is also very difficult to hack into these cards because they expire in shorter period of time than our regular credit cards.  On the other hand there are some disadvantages of using a virtual credit card.  In my opinion I think it may take as long as 30 years until we start using virtual credit cards because I think it will take that amount of time for more people to accept the idea of virtual credit cards.  Some people may think that virtual credit cards are a great method of making purchases and payments however there are also some people who do not accept the idea of using virtual credit cards.  According to one of the laws of circulation of money, money must be recognizable and readily accepted.  If people do not accept virtual credit cards, than it cannot play the role of money.  One disadvantage of virtual credit card is that the retail store must take a risk with its goods.  The goods are delivered to the customer before he/she makes the payment of the goods.  If the customer is not willing to make the payment after the good is delivered, the retail store suffers the lost.  Also another disadvantage of using virtual credit card is that virtual credit cards have short life spans as they are expire very quickly.  It is a big hassle for the customer to keep renewing their virtual card.

3.      Who will not be on board with this new virtual wallet? (2 points)

Seniors will not be on board with this new virtual wallet because they are not used to using very advanced technology.  In their childhood generation, technology was not very well developed and they continued life with little reliance on technology.  Since seniors did not work with technology that much in their lives, they have little knowledge about our new technology.  If credit cards, paper bills, and coins have been replaced by virtual credit cards, seniors will have trouble using these highly advanced devices and they may not accept virtual cards as a form of money.  Also people who live in rural or farm areas may not accept virtual cards as a form of money because they rarely interact with technology in their lives unlike people who live in urban areas.  People who live in rural or farm areas accomplish tasks with little reliance on technology and it is very unlikely for them to carry smart phones around with them.  If virtual cards become our form of money, people in rural or farm areas will be very likely to reject it. 

4.      What companies are going to be affected negatively by this? Name 3. Please name 3 industries, not 3 companies. (3 points)

Companies who sell and manufacture wallets will be affected negatively by this because if one day virtual cards replace all our cards, we no longer have a purpose of carrying wallets with us, so the demand for wallets will decrease.  Some examples of companies that sell and manufacture wallets are Marc Jacobs and Louis Vuitton.  Convenience stores and small restaurants who normally only accept cash will be affected negatively by this because they do not have a large sum of money to invest and install one of these mobile devices in their store.  Since paper bills and coins are no longer used by consumers, there will be a lower demand for convenience store goods.  The main purpose provided by convenience stores is that they provide goods that are convenient to customers because they are usually located near people’s homes.  However that problem is already solved with virtual cards because it provides convenience that the consumers do not actually have to go to the store and make purchases.  They can make purchases anywhere they want with their virtual card.  An example of a convenience store is Sunnyside Market (a convenience store that is located on Victoria Street on 58^th Avenue).  Industries that produce metals such as copper will be affected negatively.  Since coins and paper bills are no longer needed, the government does not need to make any orders of copper and other metals from mining industries that are necessary to make coins.  One example of a mining company who sells copper and other metals is Capstone Mining Corporation.  Since there is 1 less purpose for copper and other metals, there will be less demand for their products and as a result, their sales would decrease.

5.      Who is going to make money from this? Name 3. Please name 3 industries, not 3 companies. (3 points)

Mobile companies who sell smart phones and highly advanced devices such as Apple Inc. and Research in Motion Ltd. will make money from this because since everyone requires a smartphone in order to make purchases and to process transactions.  Credit card companies such as Visa and Mastercard will make money from this because even though there are no more physical credit cards, they still control the transactions being made.  In the past few years, credit card companies (Visa and Mastercard) have been working on more limited contact-free payment methods using NFC (Near-field Communications), the technology that will revolutionize and replace our old wallets one day.  There is a high demand for this method and credit card companies can still collect interest from people’s debts.  Also credit card companies and other card companies no longer have to waste money and time on manufacturing the physical credit card.   Companies who provide internet services such as Google and PayPal will also make money from virtual credit cards.  Since virtual cards involve with high use of Internet and online services, there will be a higher demand of using those services.  Since coins, paper bills, and actual credit cards are eliminated by virtual cards, people can only make online payments either on the computer or on the mobile phone.  This method will eliminate the competition of method of payment and therefore companies such as Shaw and Telus who provide Internet services will benefit from virtual cards.