The money supply was mentioned in another thread. Money supply is critical in Macroeconomics so I think it deserves its own thread.
The Federal Reserve follows several different types of money supply. Each is characterized by liquidity – how quickly it can be spent. Cash, checking accounts and money market funds are Money of Zero Maturity (MZM). Money is also held in longer-term, less liquid forms (e.g. bank CDs).
Where does the money supply come from?
Of course, the government prints and coins cash, but that’s only a small amount of the money supply. The Federal Reserve creates money by purchasing debt which is supplied by the Treasury to finance deficit spending. Banks create money by lending more than they have as equity and deposits (fractional reserve banking).
The most liquid form of money is M1, which can be spent immediately. The Fed adjusted the technical definition of M1 in 2020 but it’s currently 1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of OCDs and savings deposits (including money market deposit accounts). M1 skyrocketed in 2020 due to Covid government handouts and peaked in 2022. M1 has fallen from its peak but is still much higher than in 2019.
M2 is less liquid than M1 since it includes time deposits. It’s pretty liquid since time deposits can be cashed in if needed. M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs.
Like M1, M2 peaked in 2020 then fell. It’s been increasing slightly in 2024.
Since the economy is 70% consumer spending we should look at debt in addition to the money supply. The money supply is potentially spendable but a lot of it is savings and not actually spent. Debt isn’t counted in the money supply but it’s a major component of what consumers actually spend. The Fed follows 555 economic data series with tag: Consumer Credit. A rapid growth in consumer credit after the Covid pandemic has slowed in the past few months.
The money supply and consumer credit data both show that a rapid increase has slowed. However, Personal Consumption Expenditures are still growing strongly. Real (inflation-adjusted) Personal Consumption Expenditures have resumed the same growth rate as pre-2020.
There is no sign of a slowdown in Real PCE as occurred during the recessions associated with the 2008 financial crisis and Covid. Previous (non-crisis) recessions had a slight slowdown in PCE growth.
The money supply, debt growth and PCE do not show recessionary signals.
Wendy