A look at money supply

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The comments below were provided by Peter Greene of Fusion IQ.

One of the most important factors to watch for regarding the US economy and commodities is money supply. Put simply, money supply is the total amount of money available in the economy. This includes bills, coins, credit and all other forms of liquid financial instruments. There are a couple different measures of money supply but at US Global we follow M2 the closest because it is the broadest measure of money currently available – all money in circulation plus savings deposits and money-market accounts for individuals.

As you can see from the chart above, M2 spiked in the fall of 2008 as the Fed sought to inject additional liquidity into the US economic system. This particular chart focuses on the US but the same is true on a global basis. Countries in Europe, China and other places around the world have seen a jump in money supply. According to ISI, global money supply now sits near 10 percent. With so much excess money in the global financial system the idea was that some of it had to find its way into financial markets.

In some of these cases excess supply often ends up landing in riskier areas – which may help explain why the Nasdaq has outperformed other markets so far this year. Over the same period many commodities have rebounded sharply.

Increases in money supply have fanned inflationary fears and pushed funds towards traditional inflation-hedging instruments like gold, oil and other commodities. Deflationary forces have been strong during the economic downturn and it may be some time before inflationary pressures set in. However, if the supply of money continues to grow faster than our economy can absorb it, the likelihood of higher inflation increases.

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Source: Peter Green, Fusion IQ, August 6, 2009.

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2 comments to A look at money supply

  • Jim Hancock

    Ah, but what about the velocity of money? It is shrinking …making this article at best inconclusive.

  • TF

    A highly inaccurate look at the U.S. economy. It completely ignores the more important M3 numbers.

    M0: M0 (M-zero) is the most liquid measure of the money supply. It only includes cash or assets that could quickly be converted into currency. This measure is known as narrow money because it is the smallest measure of the money supply.

    M1: M1 is M0 + checking accounts. This is used as a measurement for economists trying to quantify the amount of money in circulation.

    M2: M2 is M1 + small time deposits (less than $100,000), savings deposits, and non-institutional money-market funds.

    M3: M3 is M2 + all large scale deposits (over $100,000), institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. The broadest measure of money; it is used by economists to estimate the entire supply of money within an economy.

    The Fed stopped publishing the M3 numbers in 2006. M3 or large scale deposits (over $100,000) and institutional money-market funds are exactly where money pumped into the system by the Federal Reserve actually goes! Not publishing this number has freed the Fed to pump in money at will and keep the average person ignorant to what is going on.

    Pumping in money to our economy is like splitting a stock without giving new shares to those who own it. This has effectively cut the value of the dollar by 32% in the last 27 months that M3 has not been published and there is more to come.

    This article is too narrow in its focus to be of any value in assessing the state of the U.S. economy. Try again with a more accurate and realistic picture of our economic reality.

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