Explore the money supply over the past 10 years through graphs

In Part 3 of the Charting the Economy series, we look at money. This series aims to present recent economic history in an easy-to-understand format using graphs. You can find part 2 here.

Our opening chart looks at the broadest measures of cash and credit in the US money supply, M2 and M3. We can see that both measures have developed over this decade. Note: The Federal Reserve stopped reporting M3 after 2006 due to what it considered unimportant to the measurement of money in the system.

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M3 is the broadest measure of money and credit in the United States. It consists of credit, savings and cash in the system. For our purposes, we want to examine the elements of US monetary measures that are inflationary and affect the prices of the goods people buy every day.

The following table shows the elements of M3 that are not included in M2, to see how they develop specifically. These non-M2 components of M3 include large time deposits, repurchase agreements, Eurodollars and money market funds.

Furthermore, M2 also has some credit components in addition to cash. So we can look at how these specific parts of M2 develop.

Deposits moved from money markets and CDs to savings accounts. People want cash while avoiding risk.

M1 is the simplest measure of money and credit in the US system. It includes the currency itself as well as travelers checks, demand deposits and other verifiable deposits. M1 by itself, however, does not measure all the inflationary money in the system that will affect prices. More on that later.

Most of the increase in M1, around 53%, relates to currency in circulation. Most of the rest is in deposit accounts, including checking accounts. Currency circulation is up about 6% from 2001, suggesting that people are spending more and saving less than 10 years ago.

M1, M2 and M3 showed that people are moving away from risk towards liquidity and “safe” returns.

Genuine Austrian Money Supply (TMS)

True Money Supply, or TMS, is an Austrian economist’s tool for measuring the “medium of exchange” and does not double count money in the system. Any monetary action resulting from a credit transaction requiring the sale of an asset to produce cash is excluded, and any action requiring a time frame (not immediately available) is excluded because it involves the lending of these installment deposits and not their storage in bank vaults. government demand deposits, demand deposits due to foreign commercial banks and demand deposits due to foreign official institutions.

TMS shows that we have had a substantial increase in the money supply as a medium of exchange, which will more accurately reflect amounts that can be spent on demand and are therefore inflationary to the economy. As a corollary, the difference between the monetary measures TMS and M3 represents credit transactions in which money has been pledged but is not kept in a vault.

For example, if a company wishes to recover its securities under a repurchase agreement, it must find cash from another transaction – sales of goods, issuance of shares or loans from other sources. If it had cash, it would not have pledged assets to obtain cash. These are exchanges of future production against current income. They may be temporarily inflationary as the money is spent, but this is a one-time proposition limited by future output, not continuous inflation of the money supply.

US dollar and other currencies

A popular measure of the US dollar is the US dollar index. This index compares the dollar to a basket of other popular currencies, including the euro, British pound, Japanese yen, Canadian dollar, Swedish krona and Swiss franc. Each currency is weighted differently against the dollar, with the euro having by far the largest weighting. This is an attempt to benchmark the dollar against other popular currencies, although some very important currencies have been excluded from the index.

We can see that the US Dollar Index is falling, which means that the US Dollar is devaluing faster than the overall basket of currencies included in the US Dollar Index.

The following chart looks at the Austrian TMS against the US Dollar Index to see if the US Dollar Index is a good measure of US Dollar strength.

Set at a reference value of 1 in 2001, this chart shows that the TMS rose 84% in 2009, while the dollar, weighted against other currencies, fell only about 30% in value per against other currencies measured in the US dollar index. All currencies in the USD index inflate, and therefore the USD index should not be used as a measure of the purchasing power of the dollar itself. The phrase “everything is relative” applies here.

I have put together the following table to compare the USD, TMS and M2 index together. M2 is commonly used as a measure of the inflationary effects of the dollar, or the amount of money in circulation and savings that would apply to the purchasing power of the dollar.

The USD is losing 30%, compared to an 84% increase in TMS and a 56% increase in M2 since 2001. M2, in this case, underestimates the true average of the exchange value by money growth in the United States of 28% since 2001. So when you see M2 used in economic analysis, remember that it does not include all measures of money that can lead to future inflation of currencies prices or a reduction in consumer purchasing power.

Other world currencies

To compare the dollar with other currencies, it is useful to find the corresponding values ​​in these currencies. Here we look at the different measures of the euro.

The measures of the euro are composed as follows:

M1: Currency in circulation + demand deposits

M2: M1 + deposits with maturity less than or equal to two years + deposits redeemable at notice less than or equal to four months.
M3: M2 + repurchase agreements + shares/units of monetary UCITS (OPCVM) + debt securities up to two years.

The closest comparison to TMS in euros would be M1, as M2 and M3 include time deposits and credit transactions.

The rate of the euro exploded beyond the dollar from 2005. Emissions in euros have increased by 102% since 2001, against 84% for the American TMS and 56% for the M2.

Japan M1 is the closest measure to TMS, excluding savings accounts which are part of M2. Other M2 data includes time deposits and credit transactions. M1 increased by 45% while M2 only increased by 15%.

Here we see the Austrian TMS against four major currencies in the US Dollar Index basket (by weighting).

The euro is the most weighted currency in the USD index basket and has depreciated more than the dollar, which has allowed the dollar to appear less devalued than it is. Again, the USD index is not a measure of purchasing power, as all currencies in the basket have been inflated.

Note: Reporting of Britain’s M0, the closest measure of the two available real money in the system, ceased in 2006. UK monetary measures were as follows:

M0: Cash outside the Bank of England + banks’ operational deposits with the Bank of England. (No longer published.)

M4: Non-bank cash (i.e. in circulation with public and non-bank enterprises) + deposits from private sector retail banks and building societies + deposits and certificates of deposit from wholesale banks and building societies from the private sector.

M4 is a poor proxy for actual inflationary money supply, so I haven’t plotted it.


China is an important trading partner of the United States and currently holds the most Treasury debt behind the Federal Reserve. Therefore, the strength of the Chinese currency is an important factor in how the United States trades with it and how much debt the Chinese can afford to buy from the United States.

China has been inflating the money supply to support its rapid economic expansion. It seems to be very vulnerable to price increases resulting from monetary inflation. Japan has the lowest monetary inflation rates since 2001 as it tries to maintain export competitiveness.

Finally, we have the US Austrian TMS against other major currencies.

Notice that China has been printing renminbi at a faster rate this decade than the dollar or euro. When researching for this project, it was quite a shock. While the Chinese currency is not a global reserve currency like the US dollar is, the Chinese are following the same path as the US. This data reinforces the idea that at least part of the Chinese economy is in a bubble induced by fiat money, which is the subject of another article.

Disclosure: I have no positions in the stocks mentioned and do not plan to initiate any positions in the next 72 hours.

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