Currency: M0/M1/M2 Recommended reading: ★★★ Reading difficulty: ★★★★
M0: The central bank issues currency, mainly physical currency.
M1: Narrow money, all social institutions deposit in banks, stored in digital form, before being converted into M0, strictly speaking, it is just digital.
M2: Broad money, the sum of all M0+M1,
Social wealth is basically obtained through the credit or physical endorsement of different systems from the state to institutions to society, and the huge M2 is created with very little M0, which is what we commonly call an economic bubble
For example:
Your monthly salary is 10,000 M0 (physical currency), and then you deposit 10,000 M0 in the bank for convenience, and you get 10,000 M1 (digital currency).
At this time, the bank has 10,000 more M0 deposits, so it can use 10,000 M0 to pay another person's 10,000 M0 salary, and the other person eventually deposits 10,000 M0 in the bank to become 10,000 M1.
By analogy, 10 people, in the end, each of the 10 people holds 10,000 M1. The bank only uses 10,000 M0 to create these, and finally obtains 10,000 M0 + 100,000 M1 = 110,000 M2.
Then let's see how the bank operates this 100,000 M1.
The bank uses this 100,000 M1, deducting the amount deducted by the deposit reserve ratio as a redemption guarantee, and the remaining part can be released using loans.
For example, if a bank borrows 50,000 M1 from a business owner, the owner will have 50,000 M1 assets in the bank. From the bank's perspective, the boss has an extra 50,000 M1 debt. On the premise that the boss has not used it, the bank has 10M1 + 50,000 M1 = 150,000 M1 assets.
Through this simple example, we can see that M0 is only 10,000 from beginning to end, but it has derived 150,000 M1 and 160,000 M2.
The above is just an example, not rigorous enough, just for your convenience.
However, this is not without risks. When the financial crisis comes, most people will want to exchange their M1 for physical currency M0 because they are worried about the collapse of banks or institutions. At present, the total amount of M1 is 100,000, but M0 is only 10,000. If the M0 reserve is insufficient and cannot be redeemed, the credit will collapse and even go bankrupt. After the credit bankruptcy, the 150,000 M1 derived from banks or institutions will be burned and return to zero!
Credit appears and strengthens, 10,000 M0 to 150,000 M1, wealth appears. Credit collapses, credit is broken, 150,000 M1 is wiped out and wealth disappears.
The entire monetary system, M0/M1/M2 has its own different anchors, based on credit, assisted by gold and physical assets, and finally an inflated economy appears.
If economic inflation is too high, there are two best solutions:
1. Reduce population, reduce social competition, reduce contradictions, reduce demand, and thus reduce bubble pressure, and the probability of triggering a financial crisis is small or even eliminated.
2. Improve social productivity and create more physical objects to endorse the bubble, so that the bubble is no longer a bubble.
Industry is difficult, but it can make the country prosperous. Finance is very cool, but it will harm the country. There must be a balance between industry and finance.
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