The Money Supply
What is the government money supply and why does it kill babies?
From the most simple lens of supply & demand, the more of a commodity there is, the less that it is worth. While a bad artist may have a monopoly on their scarce art that few if any value, for something that people already value scarcity impacts price. If nanobots could replicate the Mona Lisa a million times, and mix them up so that the original is literally indistinguishable from the rest, you can bet the going price for any of them will go radically down. If all the apple tree orchards in the world were afflicted by a obliterating blight save one, that orchard would command tremendous prices per apple.
Money does not escape valuation predicated upon supply & demand. As even the 1980s childrens' cartoon DuckTales noted in an episode where gold could be duplicated with a machine, such supply changes destroy the value of money and its related utility as a medium of exchange. https://duckduckgo.com/?q=ducktales+inflation+episode If the money supply were doubled tomorrow, with the new allocation towards a few select entities, this would wreak economic havoc as the general purchasing power of dollars plummets. However, this is essentially what contemporary governments do with fiat currencies every day. They create more fiat money, untethered as it is to any actually-scarce touchstone, out of thin air to subsidize their political inanities. This includes debasing the hard-earned savings of low-income families to fund Saudi bombing runs on Yemeni school-children. https://www.youtube.com/watch?v=fnS3XvxgLUY&t=15s And they have the audacity to claim their value-destroying “target inflation” is for our benefit!
How much their money-creation negatively impacts us, the forced holders of dollars due to currency monopolization/regulation, is determined in large part by the question “how many new dollars are they creating and what means are they using to do it?” Misesian Austrian economists define inflation by an increase in the money supply, therein incorporating a qualitative advantage (incorporates an index of government malinvestment due to the Cantillon effect: new money going to government cronies first) as well as a temporal advantage (money creation precedes ostensible rises in prices levels, particularly government-curated/manipulated price level indices). Therefore having a more accurate picture of the money supply is of significant utility in assessing economic health & future price levels.
It turns out that operationalizing the amount of dollars in existence is not extremely straightforward, but rather involves nuance with regard to what is specifically considered “money.” To explore this, let us start with the status-quo money supply M-number classifications.
On moving from M0 to M2 it is generally regarded as progressing from more to less liquidity, from more to less suitability as a medium of exchange, i.e. progressively less “moneyness.”
The following elaborations of the money supply components include definitions of related terms that may be overly-verbose for those already adept in the finance lexicons. A more succinct compilation of the money supply elements is provided in a summary at the end.
base currency (M0) & monetary base (MB)
Base currency (M0), aka circulating or non-reserve currency, is the “narrowest” definition of money and includes all circulating coins & notes, the latter being physical fiat paper (dollar bills). “Circulating” refers to it being outside of the US Treasury & Federal Reserve Banks.
The monetary base (MB) adds to M0 commercial bank deposits in central bank reserves. The Federal Reserve sets the ratio of money that commercial banks need to keep in “reserve” (i.e. not loaned out). This reserve amount is either kept in a bank’s vaults or with the bank’s account at the central bank, which can be just a digital account ledger. This is generally ~10%, but decreased to ZERO during the 2020 Fauci Flu. At 10% this means that for every $1000 you deposit into a bank, they can loan out $900; for every million deposited, they can loan out $900,000. Thus amounts any bank holds in excess of reserve requirements are not generating interest, but are usually losing value to inflation.
It should be noted that M0 & MB are sometimes conflated into a singular measure.
M1
M1, aka “narrow money,” includes three subcomponent categories: 1) currency (M0); 2) demand deposits excluding three specific entities (depository institutions, US gov, and foreign banks/institutions) & excluding two item categories that would otherwise be double counted (“cash items in the process of collection” & the “fed float”); and 3) “other liquid deposits” (multiple parts as follows).
demand deposits
Demand deposits are simply basic checking accounts, also known as “current accounts.” Customers can withdrawal money “on demand” usually via bank cards, checks, or counter withdrawal slips. They are distinguished from other bank account types such as: savings, money market, call deposit, time deposit, and NOW accounts.
Depository institutions include credit unions, savings institutions, and commercial banks. The deposits of these institutions in their own or other institutions are excluded from M1 demand deposits (lest they recursively leverage up the monetary base ad infinitum).
Excluding “cash items in the process of collection” is to avoid double counting deposits simultaneously on the books of two deposit institutions. Presumably this means that money in transit between two banks is not counted on top of its inclusion from the originating bank.
Excluding “fed float” refers to in-progress Federal Reserve transfers, similar to the cash items in process of collection. To avoid double counting money that is transiently on both the Fed’s and another banking institution’s books, this is subtracted from M1.
“other liquid deposits”
The “other liquid deposits” category includes 5 main account types: 1) NOW, 2) ATS, 3) credit union shared draft, 4) thrift demand deposit, & 5) savings (including money market deposit accounts). Negotiable order of withdrawal (NOW) accounts are interest-earning demand-deposit accounts where customers can write drafts against money held on deposit. They generally required a wait-period (~7 days) to withdraw after providing notice (imparting irony to their acronym). They were created to get around Depression-era regulations (“regulation Q”) preventing general checking accounts from earning interest (hence the apparently infrequently enforced wait period). When restrictions were repealed in 2010, thereafter allowing banks to pay interest on general demand deposits, the purpose of NOW accounts seems to have evaporated much like traveler’s checks in the era of ubiquitous credit cards.
Automatic Transfer Service (ATS) refers generally to automatic transfer of funds within a customers accounts (e.g. checking to bank loan balance or to a linked savings account). It may specifically refer to overdraft protection a bank provides for such transfers (e.g. check written or transfer initiated when insufficient funds). Such overdraft protection is counted by the fed as contributing to the M1 money supply.
Credit Union shared draft accounts are essentially the credit union equivalent of personal checking accounts at standard commercial banks.
Thrift demand deposit accounts are accounts at “thrifts” or Savings & Loan Associations (S&Ls), which focus on home mortgage origination and savings accounts. These institutions are distinct from commercial banks in generally offering higher yields & having limited commercial business (by law <20%).
Savings accounts previously were not included, but as of 5/2020 have been part of M1 allegedly due to increased liquidity of these types of accounts.
M2
M2 is derived from M1 PLUS two addition categories: 1) small-denomination time deposits (<$100k) & 2) retail money market funds. IRA & Keogh plan balances are excluded from both of these categories.
Time deposits aka term deposits are interest-earning accounts w fixed date of maturity, generally yielding slightly higher rates than savings accounts. Certificate of deposit (CDs) is the best known type of these accounts. Money can be withdrawn prior to the maturity date with penalties (fees/interest-loss).
retail money market funds (MMFs)
Retail money market funds are a specific type of mutual funds. A mutual fund is a professionally managed fund allowing participating investors easier access to diversified portfolios via pooling ownership in securities such as stocks, bonds, and money market instruments.
The “money market” part of the name implies the fund only invests in so-called “money market instruments” or “cash & cash equivalent securities.” These instruments are “very liquid short-term investments” with average maturity <=60 days & with elements marked as high credit quality. Examples include CDs & treasuries.
The “retail” part of the name means they have restrictions on purchase limited to individual investors. “Retail” vs. “institutional” funds is a purely SEC-created distinction where the purchase of retail instruments is limited to individual investors putting up their own money. Other entities such as small businesses, corporations, and pension plans are considered “institutions” and thus cannot purchase retail funds. The institutional funds in contrast, do not have such purchasing limitations (i.e. individual investors can purchase them in addition to the aforementioned institutional examples).
Notably the “fund” part of the name distinguishes these from retail money market accounts, that seem oft-conflated in such discussions/elaborations of M2. The accounts are interest-earning savings accounts with limited transactions/withdrawals & are insured by the FDIC. Funds in contrast have no guarantee of principal.
exclusions
Investment Retirement Accounts (IRAs) are tax-advantaged long-term savings accounts designed mainly for self-employed individuals that don’t have access to employer-derived 401k plans. There are many subtypes with nuanced features. Generally money placed into these cannot be withdrawn before age 59.5 without a 10% penalty.
Keogh plans are tax-deferred pension plans for self-employed people or unincorporated businesses.
refs
- Fed
- investopedia
- money supply: https://www.investopedia.com/terms/m/moneysupply.asp
- monetary base: https://www.investopedia.com/terms/m/monetarybase.asp
- on depository institutions: https://www.investopedia.com/terms/d/depository.asp
- on bank deposits: https://www.investopedia.com/terms/b/bank-deposits.asp
- on reserve deposits: https://www.investopedia.com/terms/b/bank-reserve.asp
- traveler check https://www.investopedia.com/terms/t/travelerscheck.asp
- M1: https://www.investopedia.com/terms/m/m1.asp
- M2: https://www.investopedia.com/terms/m/m2.asp
- NOW: https://www.investopedia.com/terms/n/nowaccount.asp
- shared draft: https://www.investopedia.com/terms/s/share-draft.asp
- thrift bank: https://www.investopedia.com/terms/t/thriftbank.asp
- Keogh plans: https://www.investopedia.com/terms/k/keoghplan.asp
- IRAs: https://www.investopedia.com/terms/i/ira.asp
- time deposit: https://www.investopedia.com/terms/t/timedeposit.asp
- money market fund: https://www.investopedia.com/investing/do-money-market-funds-pay/
- mutual fund: https://www.investopedia.com/terms/m/mutualfund.asp
- NAV: https://www.investopedia.com/terms/n/nav.asp
- NAVPS: https://www.investopedia.com/terms/n/navpershare.asp
- retail vs. institutional https://www.investopedia.com/ask/answers/06/institutionalinvestor.asp
- Mises-related
- https://wiki.mises.org/wiki/Money_supply
- https://mises.org/wire/standard-open-market-operations-how-fed-and-commercial-banks-create-money
- TMS https://wiki.mises.org/wiki/True_Money_Supply
- https://mises.org/wire/latest-recession-alarm-money-supply-growth-fell-september-37-month-low
- https://mises.org/library/austrian-definitions-supply-money
- https://mises.org/wire/how-calculate-money-supply
- https://qjae.scholasticahq.com/article/30784-the-inverted-yield-curve-austrian-business-cycle-theory-and-the-true-money-supply
- misc
summary: mainstream money supply elements
- M0: base currency / circulating currency
- coins
- notes: physical fiat paper / dollar bills
- MB: monetary base
- M0 + commercial bank deposits IN central bank reserves
- M1: narrow money
- M0
- demand deposits excluding:
- 3 specific classes:
- depository institutions
- US gov
- foreign banks & official institutions
- 2 categories to avoid double-counting:
- fed reserve float
- cash items in process of collection
- 3 specific classes:
- other liquid deposits (mostly near-equivalents to checking accounts)
- savings accounts
- credit union share draft accounts
- thrift institution demand deposits
- ATS (overdraft protections)
- NOW (nearly defunct/useless)
- M2
- M1
- small denomination time deposits (<$100k; including CDs)
- MMFs: retail money market funds
- exclude from addition categories: IRA & Keogh balances