Money supply

Many of my friends have not studied Economics and most of those who did have forgotten most of what they learned. One of the terms used in economics is money supply. This refers to the amount of money in circulation including cash, checking and savings and the velocity of money refers to how many times each dollar is spent. If you multiply the money supply times the velocity you get the GDP. The government has three ways to influence the money supply. The first is when the government buys or sells government bonds. If they sell bonds they take money out of the system and if they buy bonds they add money to the system. The second way is to change the discount rate. This is the rate that banks pay to get money from the government. If they lower the rate the banks get more money and if they raise the rate the banks get less money. The third way is to change the reserve requirements. This is the amount of cash banks must keep on hand to back up their loans in case of default. The current requirement is 3 to 10 percent depending on the size of the bank. The reason I bring these things up at this time is to understand why the money supply is not increasing at the expected rate. Under normal conditions when the government buys a bond from a bank and deposits $1,000 in the bank, the bank can then loan out $10,000 and that is how banks increase the money supply. Banks are not making loans. They are investing the money in various vehicles and making a sizable profit. They are taking greater and greater risk with these investments knowing that if they guess wrong the government will come to the rescue. Bank reserves are increasing and bank stocks are rising but if things turn, which often happens, the taxpayer will once again have to ante up. In the meantime the bank stockholders are making money as are the bank executives. This is from an article dated May 16, 2012. May 16 (Reuters) - Big banks are expected to use a larger portion of profits for employee bonuses this year, despite extensive job cuts and a recent outcry from shareholders over excessive pay, according to a closely watched survey of Wall Street compensation.