Let's talk money.
We all need money to carry out day to day transactions in our lives. Whether it is to visit the grocery store or buying food on an airplane or whatever in between.
So let me ask a question. How much money do you have?
The first thing that comes to mind is "Okay.. maybe this person is asking. How much cash do I have?". On an average folks might carry anywhere between $20 to $100 in cash for day to day use. Of course we all love to use the plastic card everywhere we go, cuz it is convenient. But imagine for an instant that we carry cash everywhere we go and for each and every transaction. Wouldn't that be a pain?
Now let's ask, how much money is in circulation? Let's use a systems approach and break it down. Money includes Currency, traveler's checks, demand deposits and yada, yada, yada....
Humor me for a minute. Let's say you live in California with a population of ~50 million people. And let's say on an average a person carries $40 in currency. So, one can appr oximate it to be ~2B in currency Now we of course assume that every infant, toddler and teenager is carrying $40 in cash. I know it is preposterous. Chill, it is just an assumption.
On the other hand, let's ask this question. How much currency is in circulation in the United States? In order to answer this question, let's turn to our favorite friend "The Federal Reserve". The amount of currency which includes notes and coins in circulation as well as the reserve balances at the Federal Reserve is referred to as "Monetary Base" or denoted by M0.
Reserve balances are deposits held by banks and other institutions in their accounts at the Federal Reserve. So just like you have a bank account with the Bank of America, so does the Bank of America have a bank account with the Federal Reserve.
This is an interesting attribute. Did you know that in 2003 the value of M0 was ~630 Billion, but in 2020 that value has ballooned to ~4.7 Trillion. So what the heck happened?
You can credit most of this money creation to our good old friend, Ben Bernanke. Pay attention to the above chart. In September 2008, the value of M0 was ~$900 Billion and by December 2008 that ballooned up to $1.7 Trillion. This is what is meant by the Fed creating money from thin air. More on this in a subsequent post. Anywho.. the value of M0 which includes currency as well as reserve balances is now standing close to $4.7 Trillion.
Now let me introduce to the next attribute M1, which is defined as the currency held by the public and the transaction deposits at the depository institutions (aka "Banks"). The value of M1 in February 2020 was $4 Trillion and as recently as August 2020 is $5.4 Trillion. Notice the huge spike in the graph below from March and on as the pandemic took shape. People started saving more and resulted in a spike in currency and deposits held by the public.
The next attribute is M2, which includes M1 as well as savings deposts held at banks, time deposits for amounts lesser than $100,000 and money market securities and mutual funds. The latest value of M2 as of August 2020 is $18.3 Trillion. Again this rose from just $15.3 Trillion in February 2020 to a whopping $18.3 Trillion by August. We should say a big thank you to Jerome Powell (If you know what I mean 😉).