Print Article for : Control Of Money Supply

Your Online Guide » Guide to Finance » How To Handle Finances

[C1016]Control Of Money Supply

by Kalinda Rose Stevenson, Phd, Kal

One of the fundamental functions of government is to control the money supply. The more you understand how governments control the amount of money in the economic system, in a global economy, the better you can take control of your own personal economic system.

In the United States, the central bank is the Fed, or Federal Reserve. Every nation has an equivalent central bank. These banks monitor current economic conditions and respond if the central banks want to heat up or cool down the economy.

Although the news media use this type of language, they don't explain exactly how the Fed increases or decreases the amount of money. What does the Fed do when the media report that the Fed is "pumping money" into the economy to calm fears of an economic panic? What does it do to "drain money" from the system, to cool it down?

First, it's important to be clear what it does NOT mean. The Fed does not pump more money into the system by printing more currency. Currency is not equivalent to money.

The Fed has several methods to control the amount of money in the system.

One method involves the reserve requirements for banks. A bank must keep a portion of its deposits on reserve. In other words, the bank can only loan out a percentage of its deposits as loans. The percentage it cannot loan out is the reserve.

If you deposit $1,000 in the bank, the bank makes money by loaning out most of your $1,000 to other customers. However, the bank cannot loan the full $1,000 amount.

The Federal Reserve sets the reserve requirements for banks. The banks must keep 3-10% of customer deposits on reserve. This means that the bank needs to keep on reserve only 3-10% of your $1,000. With a 10% reserve, the bank must keep $100 on reserve. That means it can loan out the remaining $900. With a 3% reserve, the bank must keep only $30 on reserve. It is allowed to loan out the remaining $970.

The Fed can use the reserve requirements to control the amount of money banks have available to loan. If the Fed wants to increase the amount of money in the economy, it reduces the reserve requirements. If it wants to decrease the amount of money, it increases reserve requirements. This is how the Fed "pumps" money into the system and "drains" money from the system.

When the bank has to keep 10% of its deposits on reserve, it can loan out only 90% of its deposits. When the bank has to keep only 3% of its deposits on reserve, it can loan out 97% of its deposits to customers. With a lower reserve, more money is available. With a higher reserve, less money is available. .

It is a bit misleading to claim that the Fed "pumps" money into the system. In fact, the Fed allows the banks to "pump" more money into the system, because the Fed has reduced the reserve rate. The lower the rate, the more money the banks can pump into the system. The ability of the Fed to change reserve requirements is one powerful tool Fed uses to control the amount of money in the economy.

The masses have been sold on the trick of living a debt filled lifestyle. A large gas guzzling car, a SUV etc. Owning every gadget on the market. Clothes galore, that generally are out of style the very next year. There is no way you can win this battle. It is what makes the rich richer and the economy keep going around. Save yourself, save you family and friends, stop the madness. Financial Independence should be the lifestyle you strive for. You must control your credit and control your money.

I know you have wasted much money getting into debt, it is called “keeping up with the Joneses”. Be careful because it will cost you lots of money getting out of debt. You can save yourself happiness, stressful times, disappointment and money by not digging this dreadful hole. STOP DIGGING NOW. The more money you make, the more money you need, unless you stop digging a deeper hole. If you are like most people, you have probably painted yourself into a financial corner with a 30 year mortgage (ARM), student loans, car loans, multiple credit card payments and even a 2nd and 3rd mortgage. Ouch. You are likely living from paycheck to paycheck and “renting” many of the clothes and toys by making those crazy monthly payments.

I understand why and how you got yourself in this kind of situation because I was there myself. I was miserable and know how stressful life can be when you are deep in debt. But, there is hope, there is light at the end of the tunnel. But YOU MUST STOP DIGGING THE HOLE DEEPER. NOW.

The forces in our society getting us to spend our money continue to win out over those who want us to save, insure and invest for the future. This was never a good thing, but now in the 21st century, it must stop.

Social Security and other government programs will never be able to take care of today's 30, 40 and 50 year olds when they retire. Not nearly as it did for the 60, 70, and 80 year olds. For a long time 15-20 workers were paying into

Social Security for every recipient drawing benefits. Now the ratio is headed for 2 to 1.

WHAT DOES THIS MEAN FOR OUR SOCIETY IN THE 21st CENTURY?

Reductions will have to be made in our medical care and Social Security programs. Many pension plans including those for ex-federal employees, will have to be reduced, as they are as we speak. Employee benefits for many retired people will have to be cut. It is absolutely VITAL that people, from now on, put more of their discretionary income into savings, insurance and investments to give them peace of mind about the future.

Millions of new investors must be created. Millions must turn into regular savers and more careful spenders. Stock ownership must be encouraged. People must be aware of the need to be insured adequately for the longer life they will be living, even if it means fewer new cars, RV's, computers, PDA's and expensive nights out. Smaller liquor bills, fewer cigarettes, less extravagant travel, wiser spending and less abuse of credit must become the norm for millions of people….until they have prepared for retirement and periods of ill health before dying. Their non-working years will last far longer than that of their grandparents.

There are advantages in using credit wisely. These advantages can be enjoyed by consumers who keep their credit buying under control. Most people can afford about 10% of their net income to installment debt. This does not include mortgage payments. If you pay out more than 15% you should cut back: more than 20%, serious financial trouble can result.

To avoid becoming over-extended, keep a record of your credit debts. This should be done each month and any increases should be examined closely and dealt with. Further, do not accept more credit than you need. Keep about $2,000 reserve in unused credit for emergencies. Do not keep credit you don't need. Used credit is counted against you when you apply for a loan or other credit. Do not expand your credit because you receive a raise; inflated costs and taxes seldom leave much surplus for increased spending. You must handle your finances as if there is a TOMORROW…..because there is!

Article Source : Pg. 256

About Author

Both Kalinda Rose Stevenson, Phd & Alphonso Smith are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Kalinda Rose Stevenson, Phd has sinced written about articles on various topics from Writing, Finances and Personal Finance. Kalinda Rose Stevenson, Want to discover how investors use money? Find out how in a about the world's most popular bo. Kalinda Rose Stevenson, Phd's top article generates over 40500 views. to your Favourites.

Alphonso Smith has sinced written about articles on various topics from Finances, Free Credit Report Score and Finances. . Alphonso Smith's top article generates over 9900 views. to your Favourites.