Growth in money supply is relatively flat, but is money more expensive?

Between September 2023 and September 2024, M2 money supply went from approximately $18,110.3 billion to $18,151.4 billion, according to data from the Board of Governors of the Federal Reserve System. This amounted to a decrease in money supply of 2.17%. During that period, the money supply dipped as low as $17,923.3 billion in February 2024.

The Federal Reserve defines M2 money supply as:

“M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (2) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing small-denomination time deposits and retail MMFs, each seasonally adjusted separately, and adding the result to seasonally adjusted M1.”

M1 money supply is defined as:

“(1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of other checkable deposits (or OCDs, which comprise negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, share draft accounts at credit unions, and demand deposits at thrift institutions) and savings deposits (including money market deposit accounts). Seasonally adjusted M1 is constructed by summing currency, demand deposits, and other liquid deposits, each seasonally adjusted separately.”

Sorry for sharing the wonky definitions, but to understand how the Fed defines the money supply, especially since they regulate the supply of money, gives you more insights into what their monetary policy should be targeting.

The price of money, like any other commodity, is determined by supply and demand. As more money is pushed into the markets, the increase in supply should serve to drive down interest rates, the price of money. Political actors do not talk about money supply, preferring to focus on what taxpayers feel directly which is the increase in the price of goods and services.

If we refer to the Federal Reserve’s preferred consumer price gauge, the data raises a few eyebrows. Over the same period, September 2023 to September 2024, the amount that American consumers spent on goods and services went from $19,024,890 million in September 2023 to $20,024,259 million in September 2024, according to data from the U.S. Bureau of Economic Analysis. This amounted to a 5.25% increase in expenditures.

In theory, the decrease in money supply should also result in a decrease in expenditures since there should be less money floating around to bid up prices. Rather, based on our PCE data, the opposite appears to be happening. I am assuming (dangerous, I know) that the consumer may be paying more in sales taxes but more importantly the higher interest rates that may be created from the decreased supply of money. As the supply of money decreases, the cost of acquiring scarcer dollars may increase.

For political actors crafting and selling a narrative on inflation, being able to convey this dilemma to voters may go a long way in validating the political actor’s position as someone who can address the electorate’s concern on the issue.

Political messages go over better, however, when there is a villain to blame. The political actor can point a middle finger at the Federal Reserve (ask Jerome Powell how many times Elizabeth Warren has given him the middle finger), but the electorate has neither time nor patience for going down the rabbit hole created by a conflict between the monetary and legislative branches of State power.

The inattention of the electorate to the issues underlying inflation of money supply and consumer price changes bode well for the political actor. From the State’s view, it is best to have the dark, foreboding figure of Darth Vader appearing out of white, steamy exhaust than to offer the constituency clarity on the economy.

Alton Drew

9 November 2024

The Campaign for Real Money

I have launched an advocacy campaign called “The Campaign for Real Money.” This campaign calls for the Congress to recognize individually issued currency backed by valuable assets and bank issued currency backed by valuable, employment-creating assets.

The United States’ monetary policy encourages the issuance of deflated dollars based on the issuance of IOUs backed by no productive value. If the United States is to maintain a currency that attracts investors, while competing against the currencies of resource-based countries, the U.S. must issue currencies backed by real money, by productive energy.

The cost of advocating before Congress and the Executive branch is expensive. Your donations will allow me to provide the most effective advocacy. Thank you for your support.

Meet Alton Drew