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Money Supply Contraction?

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I understand how money supply increases, through low interest rates, fractional reserve banking and central bank stimulus but I don't understand how money supply contracts as it did earlier this year.

So what is actually happening when broad money supply growth is negative?

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I understand how money supply increases, through low interest rates, fractional reserve banking and central bank stimulus but I don't understand how money supply contracts as it did earlier this year.

So what is actually happening when broad money supply growth is negative?

Normally every pound in circulation is spent several times. If I give you a pound and you give it to someone else, for example.

But if people save, that money ceases to move around the economy. If they use it to pay off debt, it is destroyed altogether. Deflation follows. It's more to do with the velocity of money than the amount.

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I think the initial idea was to keep IR low so people could borrow more and "spend their way out of recession" - remember the sentence? B). Anyway, it looks like people (at least some of them) have open their eyes and realised the size of their debt (credit cards, etc). With low IR they have spotted opportunity to repay the debt and the initial capital. So it looks like sheeple are not taking more loans (credit cards, personal) and repay the old ones. Add to this recent activity on a mortgage market and tightening rules on loans for businesses and maybe that is your many contraction. What you think? :)

Edited by LittleSteroid

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Yep, repayment of debts is what I didn't think of thanks.

Surely by saving, assuming it's not in cash then aren't you just contributing to the fractional reserve system and so actually funding more money creation down tr line? Although with banks capital requirements increases this would slow the creation of new money.

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Yep, repayment of debts is what I didn't think of thanks.

Surely by saving, assuming it's not in cash then aren't you just contributing to the fractional reserve system and so actually funding more money creation down tr line? Although with banks capital requirements increases this would slow the creation of new money.

Repayment of debt surely only has a slight impact. Dept defaults are more likely the cause - when a default occurs the loss cascades all the way up the lending chain.

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Repayment of debt surely only has a slight impact. Dept defaults are more likely the cause - when a default occurs the loss cascades all the way up the lending chain.

But when the money is lent out it is spent inmediatly by the borrower. So if they default, the money lent out is still in circulation and nothing is repaid. So the money created hasn't actually been destroyed?

This is frazzling my brain!

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when a default occurs the loss cascades all the way up the lending chain.

Lending chain? You only lend something once.

The bank who lent takes the hit.

Repayment of debt surely only has a slight impact.

How much debt is repaid each month vs defaulted?

Edited by Alan B'Stard MP

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But when the money is lent out it is spent inmediatly by the borrower. So if they default, the money lent out is still in circulation and nothing is repaid. So the money created hasn't actually been destroyed?

That's right.

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  • 149 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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