What is the Money Supply?
The money supply is the total amount of money that is circulating in economy. It’s also known as the M2 money supply.
Key Components of M2 Money Supply
– Cash
– Checking Accounts
– Saving Accounts
– Money Market Funds
It’s essentially any money that can be converted to cash quickly and be used to spend.
Historical Growth of Money Supply (Post-Gold Standard)
This chart displays the increase in money supply per year from the ending of the gold standard to today.
Also, I included the CAGR of the money supply per decade, as well as the CAGR of the money supply from 1972.
Analyzing the CAGR: The Rate of Currency Debasement
The most important number to look at is the total CAGR of the money supply. It’s a measurement of much the money supply has increased per year since 1972.
The CAGR of the money supply from 1972 to 2024 is 6.63%.
This means that the dollar is losing 6.63% of its value each year.
This is why average Americans are struggling. The United States Dollar is losing value faster than wages can keep up. AND this doesn’t account for the rate of inflation of good and services.
The “Raise” Trap: Nominal vs. Real Wages
Imagine you make $100,000 and get a 3% raise each year to keep up with inflation. Sounds like a deal!
However, the money supply gets a raise of 6.63% per year.
Here’s what that looks like over the long run.
Case Study: $100k Salary vs. 6.63% Monetary Inflation
If you started a job with a salary of $100,000 with a 3% raise each year, your nominal salary increases each year. It’s normal to think the amount of money you’re making is increasing.
However, when taking into account the increase in money supply, your real salary decreases each year.
Why Consumer Inflation (CPI) Doesn’t Tell the Whole Story
Don’t forget this also doesn’t account for consumer inflation. A 3% raise each year sounds good, but what if inflation is above 3%? Your raise is now falling behind inflation AND dollar debasement.
This also assumes that you get a 3% raise each year. Companies might give a raise lower than 3% or no raise at all.
Of course, people have the opportunity to change jobs to more money. However, that depends on economic conditions. If the economy is struggling then there may not be enough available jobs open.
Why Monetary Expansion is a Feature, Not a Bug
We live in a capitalist world. That world relies on constant growth. If the economy isn’t growing that means we are in a recession.
Constant growth requires more and more dollars to be pumped into the system. More money to buy goods and services. More profits for companies to make.
This is how the system was designed.