<I don't understand how the money supply can change, unless the government prints more.>
Uh oh, now I have to remember my macoreconomics from xx years ago...
Money is created by economic activity. If I put $100 in the bank they will credit my account and use some of the money (about 5/6) to lend out to someone or invest. When they create a loan that is recorded as someone's debt, and the amount of the loan is credited to his account (eg., $84). The borrower then takes the money and uses it for some real economic purpose, like buying raw materials to buy a house. The person who receives the $84 puts in the bank, which lends out 5/6 of it ($70)...And the process is repeated.
The reason only 5/6 is lent is because the bank is required to hold reserves at the Federal Reserve Bank. Economists used to estimate that the "multiplier effect" of that initial $100 is 6 times. I don't know what the present multiplier estimate is, and it's likely different because of changes in reserve requirements and capital requirements of banks, and the growing position of brokerage houses in the economy (broker loans, etc.).
An allied concept is "velocity of money". The effect of the original money will be greater in a given period of time if Velocity is high. If people are spending like crazy (as they are today) velocity is high, and more money is created in a given period.
The M's (M1 M2 and M3) are statistical estimates of money, ranked by estimated liquidity. M1 is checking accounts and cash. M2 includes some other categories, and M3 includes others, each less liquid than the prior and less likely to be turned into cash or used to pay for something. I do not know if brokers' liquid asset accounts are counted in M3. It should be, but wasn't years ago. They may have changed the statistic. Obviously, if it is not being picked up then there is a lot more money than M3 suggests, ready to go into stocks (That's where the bulk of my investment-ready money is sitting, as I expect yours is).
Hope this makes sense. I know it's not a standard textbook definition of the ideas. But, it's the way I think of them.
Best,
JS |
