Hoard, Flow, Save, Spend, Hold

Sometimes you wake up in the morning and there it is.

One way the Federal Reserve can fight inflation is to sell some of its assets. If it sells a T-Bill to someone, in exchange the Fed receives money that someone was willing to spend. That money, spending-money, is M1 money. The Fed receives that money and holds it, and it is no longer in circulation. It comes out of M1.

I get it now. A few days ago I wrote You can only either spend or save. I wrote People make their own decisions.

Here's the thing: You can only either spend or save. But while you're deciding between the two, you are holding money.

Here's the picture that was in my head when I woke up this morning:

The heavy line between HOARD and FLOW represents the range of possible attitudes toward holding money. Call it the Hold line. If you don't hold money very long, your spending happens near the FLOW end of the line. If you do hold money a long time, your spending shows up closer to the HOARD end.

The diagram also shows that hoarding is not the same as saving. If you save a dollar, your bank will put it to use, lending out multiple copies of it. But until you put it in the bank, you are holding that dollar. And as long as you hold it, no one is putting it to use. The money you hold may count as being in circulation; but it is not in circulation. Just like at the Fed.