Back dating bank deposits
Additionally, if they did this their liquidity ratios (one of the key measures of any bank’s soundness) would steadily deteriorate, restricting their ability to make further loans.Their capital ratios would also steadily deteriorate, reducing their ability to raise funds. To me, then, the question of whether you measure the total money supply to include or exclude deposits in the banking system is really irrelevant.That may well be a standard (and useful) measure for economic policy questions.However, to me, the total amount of funds in an economy does not include bank deposits (whether chequing or otherwise) but does include total liquid funds (cash, government bonds etc.) held by the banks – a much smaller figure.So what is more liquid – funds held in a central bank or a government bond?The answer really is heavily weighted towards to former – as it takes less time to negotiated the settlement of the funds via electronic payment systems than it does to price and settle a government bond (which is “generally” traded as trade date plus a few days).
Central banks insist on this liquidity to ensure a solid platform for economic stability.
I do not want to labour this point and I would be the first to say that my opinion is not in full agreement with the mainstream of economics.