Money Supply influences Stock Markets and Indexes, thus it’s crucial for every investor to understand the concepts of it.
The money supply or money stock is the total amount of money—cash, coins, and balances in bank accounts in circulation. The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term investments.
Money supply measure standard
There is no single “correct” measure of the money supply. Instead, there are several measures, classified along a spectrum or continuum between narrow and broad monetary aggregates. Narrow measures include the most liquid assets like currency or checkable deposits. Broader measures add less liquid types of assets.
This continuum corresponds to the way that different types of money are more or less controlled by monetary policy of the Central Bank. Narrow measures include those more directly affected by monetary policy, whereas broader measures are less closely related to monetary-policy actions.
The different monetary aggregates are typically classified as “M"s. The “M"s usually range from M0 (narrowest) to M2 (broadest) but which “M"s are actually focused on in policy formulation depends on the country’s central bank.
Typical Monetary Aggregates Layout
The typical layout for each of the “M"s is as follows:
- M0 sometimes also MB -monetary base
- M1 - M0 + Demand deposits + Saving Deposits + Other checkable deposits (OCDs) + Traveler’s checks of non-bank issuers
- M2 - M1 + Time deposits less than $100,000 and money-market deposit accounts for individuals
- M3 - M2 + large time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets.
Now let’s check the most important currencies
US Federal Reserve definition of Money supply
Fed Defines Money Aggregates like:
- M0 The total of all physical currency including coinage. It is not relevant whether the currency is held inside or outside of the private banking system as reserves.
- MB - The total of all physical currency plus Federal Reserve Deposits. See monetary base
- M1 M0 + plus the amount of demand deposits, travelers checks and other checkable deposits + most savings accounts!
- M2 M1 + money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit (CD) of under $100,000).
- M3 M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements. FIY FED is not using M3 anymore
- MZM Money Zero Maturity defined as M2 – time deposits + money market funds. is one of the most popular aggregates in use by the Fed because its velocity has historically been the most accurate predictor of inflation.
- M1 Comparable to the US. EU M1 includes currency, as well as overnight deposits.
- M2 M1 plus deposits with an agreed maturity up to two years plus deposits redeemable at a period of notice up to three months.
- M3 M2 plus repurchase agreements plus money market fund (MMF) shares/units, plus debt securities up to two years