One statistic widely followed by investment professionals is the money supply. But what exactly do we mean by “the money supply?” Moreover, why did the US Federal Reserve announce on December 17, 2020 that it was changing some definitions of money supply and the data it would release in the future?
It turns out that there are a variety of definitions. Perhaps the most important is the amount of coins and currency in circulation. Even there, the meaning is not as obvious as you might suspect.
For reporting purposes, the Federal Reserve counts as currency in circulation coins in circulation and paper money that are not in the custody of deposit-taking institutions (primarily banks and credit unions). I have not found any report listing changes in total coins and currencies in circulation, excluding those held by governments and central banks or including coins and currencies held by governments and the central bank.
In its January 7, 2021, Monetary stock measures report, the Federal Reserve offers nine pages of different measures of money supply. Some of the data is “not seasonally adjusted”, which means it is raw data. Other components are “seasonally adjusted” indicating that statistical modifications may have been made with the raw data. There is a delay in the reported data, the most recent being as of November 2020.
The Federal Reserve defines the monetary base, generally referred to as M0, as being composed of the currency in circulation plus “the balances held by deposit-taking institutions in the main accounts and excess balance accounts of Federal Reserve banks”. At the end of December 2019, the report lists the currency in circulation at $ 1,796.4 billion and reserve balances at $ 1,630.1 billion. By the end of November, the corresponding totals had risen to $ 2,058.4 billion (an increase of 14.8 percent) and $ 3,034.7 billion (up 86.2 percent). Together, the monetary base increased by 48.6% from the end of December 2019 to the end of November 2020.
The next step in the definition of money supply is M1, which includes all assets counted in M0 plus demand deposits (i.e. current accounts) in commercial banks, credit unions and other institutions. savings. Many people consider the balances they have on their checking accounts to be “cash”.
The M2 definition of money supply includes everything in M1 plus savings accounts, individual money market accounts, and smaller certificates of deposit (up to a maximum of $ 99,999), excluding these accounts for Individual Retirement Accounts (IRA) or Keough Retirement Accounts.
The Federal Reserve Bank stopped publishing M3 money supply data in 2006, although it is still published for the United States by the Organization for Economic Co-operation and Development (OECD). This definition of money supply includes everything in definition M2 and adds large certificates of deposits, institutional money market accounts, short-term redemption assets, and other larger liquid assets.
The ultimate definition of money supply is called MZM. This includes all “money” with a zero maturity. This includes all financial assets redeemable at par on demand.
The most common measures of money supply followed for indications of rising consumer prices (referred to as “inflation” in most of these analyzes) are M2 and MZM. However, I would say that these two references miss at least one critical signal of money supply inflation.
If you refer to the Federal Reserve Bank’s Jan. 7, 2021 report, you will find some revealing information. On the first page is listed the Memorandum: Reserves, Total Borrowings, which is not seasonally adjusted. Some key data from this column in the memorandum are:
End of December 2019: $ 21.4 million
End of February 2020: $ 3.2 million
End of March 2020: $ 40.6 billion
End of April 2020: $ 124.5 billion
End of November 2020: $ 66.6 billion
As explained in the footnotes, these amounts correspond to the total borrowings from the Federal Reserve “of the primary, secondary and seasonal credit programs of the discount window and other borrowings from the emergency lending facilities. “. Clearly, these are short-term funds that the banks have borrowed from the Federal Reserve.
As you can see, Fed loans to banks climbed over 3,000% from late 2019 to late November 2020! The huge surge came in March 2020, which just happens to be the month the CARES bailouts and grants law was enacted. It is not a coincidence.
The massive injections of liquidity into the US banking system’s overnight lending market actually started in September 2019. Banks were previously pressured to minimize such loans on the last working day of each month. But, due to economic lockdowns in response to the pandemic, clearing month-end books in banks would be much more difficult and is no longer a priority.
The Federal Reserve Bank of St. Louis publishes historical charts of money supply for the various definitions. If you check any of them, you will see that the money supply increased in 2020. The skyrocketing money supply is a major factor in the decline in the value of the US dollar, where the dollar index US market fell 13.2% from March 19, 2020 to December 31, 2020.
As the public becomes aware of these massive increases in money supply, whichever definition you choose, it triggers a flight from the US dollar to safe-haven assets, such as physical gold and silver. at the price of ingots.
It is possible that the Fed’s December 17, 2020 announcement was made to mask the extent of the surge in money supply. In that statement, the Fed said it would amend future M1 Money Supply reports to add savings accounts, previously only counted in the M2 definition. The Fed has also said it will stop reporting actual money supply data on a weekly basis and only report it monthly. Even more frightening, the Fed will stop reporting real money supply at the end of the base period. Instead, the new numbers reported will be the average of the data over the month.
When governments make significant changes in reporting the size of the money supply, it almost always guarantees bad news for the future value of that currency.
Patrick A. Heller has been honored as FUN Numismatic Ambassador 2019. He is also the recipient of the 2018 Glenn Smedley Memorial Service Award from the American Numismatic Association, the Exemplary Service Award 2017, the Harry Forman National Dealer of the Year award 2012 and the 2008 Presidential Award. Over the years, he has also been honored by the Numismatic Literary Guild (including twice in 2020), the Professional Numismatists Guild, the Industry Council for Tangible Assets and the Michigan State Numismatic Society. He is the communications manager for Liberty Coin Service in Lansing, Michigan, and writes Perspectives of freedom, a monthly newsletter on rare coins and precious metals. Past issues of the newsletter can be viewed on www.libertycoinservice.com. Some of his radio commentaries titled “Things You ‘Know’ That Just Are Not So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings at 1:20 p.m. WILS in Lansing (which broadcasts live and is part of the audio archives published on www.1320wils.com).