Author Topic: Money Supply Implications--coles notes  (Read 729 times)


  • 5 O'Clock Shadow
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Money Supply Implications--coles notes
« on: September 20, 2020, 07:26:16 AM »
 Howdy all, I'm doing my research on inflation, and I'd like to hear your coles notes of what is M0 M1 and M2 money supply and what implications do changes to each one have on the economy and purchasing power?

If M0 expands by 30%, what does that imply? What if it doubles?

« Last Edit: September 20, 2020, 07:31:16 AM by fljugamike »


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Re: Money Supply Implications--coles notes
« Reply #1 on: September 23, 2020, 03:13:47 PM »
The definitions and a lot of context can be found here:

Implications for the economy ... well that varies based on one's pet theory and upon a lot of other factors such as the international prices of commodities, the percentage of national income captured by labor vs. capital providers, the savings rate, and the elasticity of the goods being measured in the basket. Even with piles of information coming in from all angles, it is incredibly hard to guess the rate of inflation in the future. One could become a multi-millionaire really quickly with such an ability.  But in practice it's such a chaotic system with so many millions of inputs that it is effectively unpredictable.

We know a little more about how inflation affects the economy. If it is too high or unpredictable, economic friction is created as retailers and service providers must constantly change prices, the return on capital investments becomes hard to analyze, labor disputes occur, bond holders lose money, and the savings rate, paradoxically, can go up because consumers need more money on hand to cover higher future expenses. If inflation is too low, people delay purchases in anticipation of lower prices in the future, loans become harder to pay back, defaults increase, and all these factors create a feedback loop that pushes prices down even more as prices must be cut to sell anything, loans become even harder to pay back, etc.

Beware simplistic ideas about "M2 went up so therefore inflation must occur" or "the increasing money supply is bound to crush the price of bonds soon". Had you invested on these premises you'd have been wrong for decades. The velocity of money has stayed in pretty good balance despite the money printing.

IMO, this is because the U.S. supplies currency to the entire world. E.g. When Europeans or Asians buy oil from the Middle East or minerals from Africa, they need U.S. currency, because the price is set in USD and the contract trading systems are in the U.S. Thus the USD has become the universal currency and has had to grow with the entire world to stay that way. In practice, this means the US government and US consumers have been able to run deficits - sending dollars abroad - and printing more money without raising inflation. If anything, the demand from overseas users plus the ongoing retirement of the huge baby boomer generation has created a massive brake on inflation. If the US stops printing money, as almost happened in 2016-18 when we were talking about stopping QE, the inflation rate drops to near zero.