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Measuring the Money Supply

The website of the Federal Reserve Bank of St. Louis http://research.stlouisfed.org/fred2/ offers 148 different statistics related to the money supply (of US Dollars). That's a lot of different ways to count the money supply. I've been studying them for a while and I've had difficulty figuring out which statistic is the best to use.

The simplest measure of money is the amount of cash in circulation. As of February 1, there were about 786 billion US dollars (paper bills and coins) in circulation. The problem with this statistic is that nowadays most economic transactions don't use cash. Most economic transactions use checks, credit cards, debit/ATM cards, or electronic funds transfer. For example, I spend only about 5% of my salary in cash each month.

All these non-cash money transactions require the intermediation of a bank. To back up all those non-cash transactions, banks keep cash reserves in their vaults and electronic reserves on deposit with a Federal Reserve Bank. Each night, all the banks in the US tally up their total deposits and withdrawals and exchange their reserves with other banks so everything adds up correctly in the morning. As of February 1, total US bank reserves were $45 billion.

If you add total cash in circulation to the electronic bank reserves at Federal Reserve Banks, you get what's called the monetary base. That's how much real money there is floating around within the economy at any given moment, either inside or outside of a bank. As of February 1, there was about $804 billion in the monetary base. The Federal Reserve calls this total "M0".

Most of us have checking accounts. We think of these checking accounts as money, but banks are required to keep only 3% of checking account balances in their reserves. If everybody tried to cash all of their checking accounts at the same time, banks could only pay out a few cents on the dollar. As of February 1, there was about $621 billion in checking accounts, plus another $7 billion in traveler's checks. If we add together the currency in circulation and all the checking accounts, there was about $1361 billion available to consumers for spending on goods and services via cash or check. The Federal Reserve calls this total "M1".

A lot of us also have savings accounts. Although you can withdraw cash from your savings account at any time, federal regulations limit the number of electronic payments you can make from your savings account (via check, card, or ETF) each month. A savings account is supposed to be a place where you store extra cash that you don't need from day to day. Banks are not required to keep any portion of savings account balances in their reserves! As of February 1, there was about $3624 billion in savings accounts, plus another $728 billion in money market funds.

In addition to savings accounts, some of us have put our extra cash into certificates of deposit (a.k.a. "CDs"). When you buy a CD you agree to let the bank have your cash for a specific amount of time, usually six months or a year, but sometimes for as long as five years. If you need your money before then, the bank can charge a penalty. As of February 1, there was about $1002 billion in CDs.

Adding up all of the above, cash, checking, savings, and CDs, as of February 1, there was nearly $7 trillion US Dollars available for purchases of goods and services, if people wanted to spend it. The Federal Reserve calls this total "M2".

Wealthier people and big businesses sometimes have types of bank accounts that aren't listed above. The Federal Reserve has decided that these types of accounts aren't relevant for the purpose of tracking the money supply, probably because they aren't usually used to fund purchases of goods and services. Until recently, the Federal Reserve tracked these accounts along with those listed above and called the grand total "M3". As of February 1, there was about $10 trillion in the M3 category, but the Federal Reserve ceased publishing the M3 statistic last week.

Another way of counting the money supply is to add together the cash in circulation, plus all the various kinds of US Dollar bank accounts that can be cashed out without penalty or delay. The Federal reserve calls this total "MZM" or "zero maturity money". As of February 1, there was $6875 billion of MZM available for immediate spending.


So which measure of the money supply is the best for predicting how the economy will behave? I don't think anybody really knows. But most of the things we call money are really part of a complicated Ponzi scheme played by the banking system in which a bank takes your money, gives you credit for that money in some sort of account, and then lends out 97+% of that money to somebody else.

If you want to measure how much real money there is inside the system, then you have to look to the monetary base (M0). If you want to measure how much banking bullshit there is inside the system, then see how much more money is added by either M2 or MZM. Right now there's about $800 billion in real money, and another $6 trillion in additional bullshit money.

Then again, it's all bullshit money, because the Federal Reserve can print more anytime it wants ;-)

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