* The FED is printing money like crazy(see the attached chart). This is intended to unlock liquidity crunch, different from money financing of fiscal deficit. Different from what our global strategist's expectation for Fed to print "Currency" money, what the Fed is printing is just "Note" money. Even both belongs to Base money, but the effect to boost inflation expectation is very different - Only Currency money can really boost inflation expectation since people can really feel about the flooding of cash in hand. Our global strategist, like in today's report, still emphasizes that he expect the Fed would print "Currency" money after US president election on November 4th. * But anyway, monetary base surged, unlike any time in history. Maybe it is a lesson Bernanke learnt from Great Depression, but it is really a break in record. See if Bernanke can avoid deflation this time, and result in inflation in the near future, as some has feared. In any case, FED will definitely cut rate, by 50 base points as futures market predicted. .
US Monetary base surged by 40% yoy., while money in circulation rose by 12% yoy in Oct.
Empirical measures
Money is used in final settlement of a debt and as a ready store of value. Its different functions are associated with different empirical measures of the money supply. Since most modern economic systems are regulated by governments through monetary policy, the supply of money is broken down into types of money based on how much of an effect monetary policy can have on each. Narrow measures include those more directly affected by monetary policy, whereas broader measures are less closely related to monetary-policy actions.[6] Each measure can be classified by placing it along a spectrum between narrow and broad monetary aggregates. The different types of money are typically classified as Ms. The number of Ms usually range from M0 (narrowest) to M3 (broadest) but which Ms are actually used depends on the system. The typical layout for each of the Ms is as follows:
- M0: Physical currency. A measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. M0 is the most liquid measure of the money supply. It only includes cash or assets that could quickly be converted into currency.[7]
- M1: Physical currency circulating in the economy + demand deposits (i.e. checking account deposits). This is a measure used by economists trying to quantify the amount of money in circulation. M1 is a very liquid measure of the money supply, as it only contains cash and assets that can also be used for payments.[8]
- M2: M1 + time deposits, savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists also use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. [9] M2 is a key economic indicator used to forecast inflation.[10]
- M3: M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. This is the broadest measure of money commonly used and is used by economists to estimate the entire supply of money within an economy.[11]
Fractional-reserve banking
The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. Whenever a bank gives out a loan in a fractional-reserve banking system, a new type of money is created. This new type of money is what makes up the non-M0 components in the M1-M3 statistics. In short, there are two types of money in a fractional-reserve banking system[12][13]:
- central bank money (physical currency)
- commercial bank money (money created through loans) - sometimes referred to as checkbook money[14]
In the money supply statistics, central bank money is M0 while the commercial bank money is divided up into the M1-M3 components. Generally, the types of commercial bank money that tend to be valued at lower amounts are classified in the narrow category of M1 while the types of commercial bank money that tend to exist in larger amounts are categorized in M2 and M3, with M3 having the largest.
Money supplies around the world
United States
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The Federal Reserve previously published data on three monetary aggregates, but now it only publishes data on 2 of them. The first, M1, is made up of types of money commonly used for payment, basically currency (M0) and checking deposits. The second, M2, includes M1 plus balances that generally are similar to transaction accounts and that, for the most part, can be converted fairly readily to M1 with little or no loss of principal. The M2 measure is thought to be held primarily by households. The third aggregate, M3, which is no longer published, included M2 plus certain accounts that are held by entities other than individuals and are issued by banks and thrift institutions to augment M2-type balances in meeting credit demands; it also includes balances in money market mutual funds held by institutional investors. The aggregates have had different roles in monetary policy as their reliability as guides has changed. The following details their principal components[15]:
- M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
- M1: M0 - those portions of M0 held as reserves or vault cash + the amount in demand accounts ("checking" or "current" accounts).
- M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
- M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.
The Federal Reserve ceased publishing M3 statistics in March 2006. They explained that M3 did not convey any additional information about economic activity compared to M2, and thus, had not been used in determining monetary policy for years. Therefore, the costs to collect M3 data outweighed the benefits the data provided.[16] Some politicians have spoken out against the Federal Reserve's decision to cease publishing M3 statistics and have urged the U.S. Congress to take steps requiring the Federal Reserve to do so. Congressman Ron Paul claimed that "M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation."[17] Some of the data used to calculate M3 are still collected and published on a regular basis.[16] Current alternate sources of M3 data are available from the private sector[18].
