Money supply, illusions and reality

My French friends often come with the term “virtual” when they talk about money. What they mean is that there wouldn’t be enough money, if suddenly all amounts, including cash, bank deposits, notes and all electronic funds floating around were to be called off. They fear that money is in fact “made up” and its fictitious nature is what explains in part the current financial crisis. Since “I don’t know much about economy” I have offered to research the whole subject as if the United States was about to sell out and move to… Mars!
To try to clarify that legitimate hypothesis, I’ve done some research focused solely on the US (the Euro-zone is more difficult as the ECB mixes everything up between the countries using the common currency…

In the US, we have the following setup (all figures are from the end of 2007):
Let’s start with what is called “money stock” also called M1; it amounts to $1.374 trillion, or $5,000 per capita; funny because as a two-person household we don’t carry more than $200 in our valets at any one time! In the euro-zone, this represented, in 2007, $760 billion, which is only $2,500 per capita. This accounts for currency (notes and coins) in circulation and in bank vaults, plus the reserves which commercial banks hold in their accounts with the central bank.

You also add to that the checkable deposits and similar like traveler's checks. The money stock represents the assets that can be used to pay for a good or service or to repay debt. Like checks, debit cards that link to checkable deposits fall into that category.
En d'autres termes, si la masse monétaire augmente plus vite que la croissance du produit national brut, il est plus que probable que l'inflation va suivre.
In the past, it used to be that if money supply increased faster than the GDP, rise in inflation would follow.

“Quasi-money” or “near money” are assets that can be converted quickly and easily into cash with virtually no loss in value. They’re also called M2. Examples of near money are savings account balances and Treasury bills, bank CDs, money market deposit accounts for individuals, bonds near redemption date and foreign currencies, especially widely traded ones. In the US, quasi-money amounts to $10.1 trillion

“Domestic credit stock” is even bigger; it means trade and consumer credit; in the US, it amounts to $15 trillion, while it’s a whopping $21 trillion in the EU and $70 trillion in the entire world. Finally, lets’ keep our external debt in mind, that before all the financial bailout and the new stimulus plan was already at a whopping $12.25 trillion as of June, 30 2007. Today we should be close to our total GDP, which if I need to remind you, amounted to $14.58 for 2008.

Now, let’s get a good accountant to figure out that mess and see if we can bail out to another planet. I personally doubt it and think that we, our kids and generations of their descendant going to be stuck on earth for a very long time in order to clean up the mess!