Saturday, August 21, 2010

M1 is the Money we Spend

M1, not M2, is the money that we spend.

I know: Economists like to use M2 all the time. But if you spend M2 money, you're spending the part of M2 that is M1 money. Either that, or you withdraw money from savings and spend it; in that case it comes out of the "savings" part of M2 and into the M1 part.

Either way, you are spending M1 money.

It is not informative to look at M2 when we consider spending. M1 is spending-money. M1 is one part of M2, and savings is the other part. But you can't spend savings.

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