If you have seen the general news that M2 Money Supply is contracting at the greatest rate in 50 years, then you may be wondering why it is happening and what it means. I hope you do, at least.
Money Supply is a general term that means the total money available to an economy in the form of cash money in the bank plus loans and short term deposits sitting in banks. It is the purest measure of "gas in the tank" for the economy.
If you are going on a long trip (economic growth), it is also helpful to have a tankful of gas to get you there. If you don't have it now, then clearly you will have to stop and get gas along the way.
The economy needs money the way we need air to breath, unless we revert to trading goods and services with each other and we all know that isn't easy at all. It is hard to "make change" in case the trade doesn't balance perfectly.
Either way, the amount of money in the system turns over a certain amount of times per year and that is called "velocity". The velocity of money is the fudge factor to figure the size of the economy and the amount of money in the economy. Obviously, it is very difficult to track as some money gets spent a hundred times or more and other money gets spent once or twice. It is constantly changing.
Net-net though, the quantity of money is the most common way of understanding what inflation "will do" in the future and has been extremely helpful. For now, the indicator points to lower inflation if not deflation in the coming months and quarters. It will take care of itself.
Cheers,
Tim
2:16PM EST Sep 27, 2023
Money Supply is a general term that means the total money available to an economy in the form of cash money in the bank plus loans and short term deposits sitting in banks. It is the purest measure of "gas in the tank" for the economy.
If you are going on a long trip (economic growth), it is also helpful to have a tankful of gas to get you there. If you don't have it now, then clearly you will have to stop and get gas along the way.
The economy needs money the way we need air to breath, unless we revert to trading goods and services with each other and we all know that isn't easy at all. It is hard to "make change" in case the trade doesn't balance perfectly.
Either way, the amount of money in the system turns over a certain amount of times per year and that is called "velocity". The velocity of money is the fudge factor to figure the size of the economy and the amount of money in the economy. Obviously, it is very difficult to track as some money gets spent a hundred times or more and other money gets spent once or twice. It is constantly changing.
Net-net though, the quantity of money is the most common way of understanding what inflation "will do" in the future and has been extremely helpful. For now, the indicator points to lower inflation if not deflation in the coming months and quarters. It will take care of itself.
Cheers,
Tim
2:16PM EST Sep 27, 2023
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