Money supply, also known as money stock (Money Stock), indicates the value of the total amount of money circulating in the market in a country within a certain period of time. Currency circulating in the market usually includes cash, coins, bank account balances, and some tangible or intangible assets that are also liquid and tradable, such as retail money market mutual fund shares. The money supply indicator is divided into different categories: M0, M1, M2 and M3. According to the increase in number, the currency types included in it increase in order. Different governments and financial institutions use different money supply indicators to analyze and forecast the economy. A country's government, central bank and other institutions will control the country's currency issuance based on policy adjustments. In the past, the adjustment of money supply would closely affect a country's economic environment, including the extent of inflation, the speed of economic development, etc. However, with the continuous complexity of financial products and asset types, the relationship between money supply and inflation has become less stable than before. Money supply includes many types of physical assets (Physical Assets) and intangible assets (Intangible Assets), such as coins, banknotes and other cash held by residents, savings deposit balances in depository institutions, transaction deposit balances in financial institutions, and retail money market mutual fund shares, etc. However, the money supply does not include things like long-term investments, home equity, loan amounts, mortgage amounts, credit card lines, and physical assets that must be sold to be converted into cash. The U.S. money supply indicator is divided into: Monetary base, M1, M2 and M3 according to different contents, but the M3 indicator is no longer used after 2006. All indicator data are released weekly or monthly on the Federal Reserve's money supply official website. The money supply in the United States, like the money supply in other countries, will directly affect the economic development of the United States, including inflation, economic development speed, consumer shopping ability, etc. At the same time, the U.S. government and the Federal Reserve will also adjust the money supply based on changes in the U.S. economic environment. Among them, the Federal Reserve's policy is the most important determinant of the U.S. money supply. For example, when the Federal Reserve restricts the money supply through monetary tightening policy, borrowing costs will increase accordingly, thus suppressing inflation, but it may also lead to a slowdown in economic growth. Types of U.S. Money Supply The money supply in the United States is mainly divided into three categories: Monetary Base, M1 and M2, and M3, which has been no longer disclosed since 2006. Among them, M1 mainly includes the sum of cash held by the public and the sum of transaction deposits in depository institutions. It is the most commonly used indicator of money supply. In addition to the sum of all currencies in M1, M2 also includes savings account deposits, money market funds, and time deposit balances less than $100,000. M3 is the loosest money supply indicator type, covering almost all tangible and intangible money supply. The Federal Reserve releases different money supply indicators every week and every month on its official money supply website, but starting in 2006, the Federal Reserve no longer releases the M3 indicator value. Methods of measuring types of money supply in the United States Monetary Base Currency in Circulation (Currency in Circulation), including coins and banknotes, and bank reserve balances (Reserve Balances). The bank reserve balances here include the deposits of commercial banks and the total reserves of commercial banks at the central bank. M1 Contains all monetary aggregates in the base currency indicator and contains:
Traveler’s checks; Demand Deposits, mainly including demand deposits from Commercial Banks, Savings and Loan Associations, Savings Banks and Credit Unions. M2 Contains the sum of all currencies in M1 and contains: Savings Deposits; Time Deposits of less than $100,000; Money Market Funds. M3 (not included in statistics after 2006) Contains the sum of all currencies in M2 and contains: Time Deposits with an amount greater than $100,000; Institutional Money Market Funds; Term Repurchase Agreement. How to use the U.S. money supply to analyze the U.S. economy? In some cases, money supply indicators are closely related to Gross Domestic Product (GDP), price levels and inflation. From the trend of money supply indicators, important information about economic trends can be obtained, and at the same time, certain predictions can be made about the future development of the economy. Under normal circumstances, an increase in the money supply usually causes interest rates to decrease, and then consumers can borrow funds at lower interest rates for consumption, and companies can have more funds to increase production efficiency, which generally stimulates consumption, accelerates economic development, and increases employment rates. On the contrary, if the money supply decreases or the growth rate decreases, the opposite situation will occur, that is, interest rates will increase, consumer spending power will decrease, and enterprises will be short of development funds. At the same time, due to the decrease in market demand, production will have to be reduced to reduce cost losses, which will cause the overall economic development to slow down and the unemployment rate to increase. However, since the past decade, the relationship between the money supply indicator and economic development speed, GDP trend, and inflation has become less stable than in the past. It is impossible to obtain accurate analytical information from changes in the money supply as in the past. At the same time, it is also impossible to achieve the expected economic regulation purpose by adjusting the money supply. Even former Federal Reserve Chairman Alan Greenspan believed that if we still insist on relying on the money supply indicator M2 to guide monetary policy regulation, this will lead to economic recession*. So at present, although the money supply is still a widely used indicator, its guiding position in final decision-making is the same as ordinary large-scale economic data. What is the relationship between U.S. money supply and U.S. inflation? The following is the annual average value of M0 from 1959 to 2021, and the CPI in the corresponding years, as shown in the figure below. [amcharts id=”money-supply”] We list the data in the above figure as follows. At the same time, we list the annual changes in M0 and the CPI change rate of the corresponding annual fees. Year M0(Millions)M0 change rateCPICPI change rate 1959 50483 29.2 1960 50008 -0.94% 29.6 1.37% 1961 49308 -1.40% 29.9 1.01% 1962 50933 3.30% 30.3 1.34% 1963 52442 2.96% 30.6 0.99% 1964 55183 5.23% 31.0 1.31% 1965 58108 5.30% 31.5 1.61% 1966 61533 5.89% 32.5 3.17% 1967 64658 5.08% 33.4 2.77% 1968
69383 7.31% 34.8 4.19% 1969 73675 6.19% 36.7 5.46% 1970 77567 5.28% 38.8 5.72% 1971 83267 7.35% 40.5 4.38% 1972 89083 6.99% 41.8 3.21% 1973 94667 6.27% 44.4 6.22% 1974 103650 9.49% 49.3 11.04% 1975 108567 4.74% 53.8 9.13% 1976 114733 5.68% 56.9 5.76% 1977 122958 7.17% 60.6 6.50% 1978 134600 9.47% 65.2 7.59% 1979 147608 9.66% 72.6 11.35% 1980 158633 7.47% 82.4 13.50% 1981 164092 3.44% 90.9 10.32% 1982 172325 5.02% 96.5 6.16% 1983 183433 6.45% 99.6 1984 195292 6.46% 103.9 4.32% 1985 210708 7.89% 107.6 3.56% 1986 230950 9.61% 109.6 1.86% 1987 253375 9.71% 113.6 3.65% 1988 272075 7.38% 118.3 4.14% 1989 283508 4.20% 124.0 4.82% 1990 302033 6.53% 130.7 5.40% 1991 318575 5.48% 136.2 4.21% 1992 341850 140.3 3.01% 1993 376808 10.23% 144.5 2.99% 1994 411633 9.24% 148.2 2.56% 1995 434025 5.44% 152.4 2.83% 1996 448158 3.26% 156.9 2.95% 1997 472100 5.34% 160.5 2.29% 1998 502600 163.0 1.56% 1999 551842 9.80% 166.6 2.21% 2000 585292 6.06% 172.2 3.36% 2001 618458 5.67% 177.1 2.85% 2002 673542 8.91% 179.9 1.58% 2003 716525 6.38% 184.0 2.28% 2004 752733 5.05% 188.9 2.66% 2005 782625 3.97% 195.3 3.39% 2006 811525 3.69% 201.6 3.23% 2007 827183 1.93% 207.3 2008 987300 19.36% 215.3 3.86% 2009 1775475 79.83% 214.5 -0.37% 2010 2009992 13.21% 218.1 1.68% 2011 2517508 25.25% 224.9 3.12% 2012 2641117 4.91% 229.6 2.09% 2013 3251700 23.12% 233.0 1.48% 2014 3926533 20.75% 236.7 1.59% 2015 3974442 1.22%
237.0 0.13% 2016 3763092 -5.32% 240.0 1.27% 2017 3810467 1.26% 245.1 2.13% 2018 3641117 -4.44% 251.1 2.45% 2019 3301433 -9.33% 255.7 1.83% 2020 4615075 39.79% 258.8 1.21% 2021 6052600 31.15% 271.0 4.71% 2022 (As of March) 6092800 0.66% 284.6 M0 money supply rate data source: St Louis Fed, CPI data source: Minneapolis Fed, 2022 CPI data: tradingeconoics