What is money supply and what does it mean to you?

Another day, another lesson in financial terminology. This time we are tackling the money supply.

Simply put, money supply is the total number of dollars of highly liquid assets in a country’s economy at any one time.

First let’s define “highly liquid”: assets that are either 100% cash or cash-like, meaning that they are so close to cash that they can be considered cash.

There is M1, which is all cash, like dollar bills, coins, and total amounts held in checking accounts. Then there is M2, which is M1 plus cash in savings accounts and assets held in money market mutual funds, which hold very liquid and short government bonds or commercial paper. term.

Recently, the money supply has grown at an unprecedented rate as the Federal Reserve and Congress fight to put out the fire of the coronavirus-induced recession.

The Federal Reserve increases the money supply by buying bonds to keep interest rates low (rates fall when prices rise, which is caused by the overwhelming demand for the Fed’s liquidity injection). Sellers of bonds – short- and long-term government bonds and even corporate bonds – receive liquidity from the Fed.

You can imagine that one of the biggest sellers here is the banking industry, which deals with the Fed.

Now the banking system is running out of cash to lend to the economy, which borrowers will accept as rates have fallen. It can’t cure the pandemic – a vaccine can. But it allows businesses, households and businesses to stay liquid until the lockdowns are over, employment increases and a vaccine hits the market, bridging the gap between this desperate time and a healthier economic environment.

Research by investment strategists at Morgan Stanley shows that M2 rose 22% in the few months after the start of the Fed’s quantitative easing (QE) program, where it buys bonds from Long-term condition. In the same time frame after QE after the financial crisis in 2009, M2 only grew by 5%.

In addition, Morgan Stanley claims that about $ 800 billion of this new money is now in bank deposits, proof that banks are lending this money to willing borrowers.

To see how this impacts your investments and your portfolio, watch the short video above.

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