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Analysis of M1 & M2 Money Supply Over the Past Year and How it Relates to Bitcoin

Analysis of M1 & M2 Money Supply Over the Past Year and How it Relates to Bitcoin

The M1 money supply and its rapid growth has been a popular topic of discussion. Let's take a look at the M1 graph and dive deeper into what it means for Bitcoin:


According to the Fed, the M1 Money Stock increased by ~$14.384 trillion over the last year. Therefore you may think that the total money supply increased by ~$14.384 trillion, but this is not the case. To understand this, we must first define the M0, M1, and M2 money types.

  • M0 – Notes and coins in circulation (outside Federal Reserve Banks and the vaults of depository institutions) (currency)
  • M1 – The M0 plus traveler's checks of non-bank issuers, demand deposits, and other checkable deposits (OCDs)
  • M2 – The M1 plus savings deposits, time deposits less than $100,000, and money-market deposit accounts for individuals

We can see that by definition, the M0 Money Stock is included in the M1 Money Stock, which is in turn included in the M2 Money Stock. Let's go back to the graph, but this time we will add the M2:


Here we see the M2 Money Stock increased by only ~$4.196 trillion over the past year. If the M1 is included in the M2, how is it possible that an increase of ~$14.384 trillion is not reflected in the M2? The answer is: Money from the savings, time, and money-market deposits in the M2 can shift into the demand and checkable deposits in the M1. The savings, time and money-market deposits are not reflected in the M1, but are reflected in the M2. Therefore, when they shift into demand and checkable deposits, it causes the M1 to increase without affecting the M2. This may indicate that large money players are moving money out of savings and into more liquid accounts. We can try to visualize this by adding it to our graph:


Here we see new lines which I will explain. Belonging to M1 we have Total Checkable Deposits and Demand Deposits. Belonging to M2 we have Total Savings Deposits, Small Time Deposits, and Retail Money Funds. Some lines belonging to M2 should sharply turn down as the M1 Money Stock line shoots up. This would indicate money shifting. The lines for Retail Money Funds and Small Time Deposits don't appear to have caused the spike. However, when we look at the green line for Total Savings Deposits, something weird is happening. This line is labeled as DISCONTINUED and stops abruptly during the M1 spike in April 2020. I found this suspicious and started looking for the missing data. I stumbled across a YouTube video from December of 2020 with a Fed chart showing some of the missing data:


In this older chart, we see the line for Total Savings Deposits extends all the way into December 2020 and turns down sharply as the M1 Money Stock line shoots up. Why did the Fed remove this data in later charts? I do not have an answer for that question, but it does seem to explain the sudden rise in the M1 Money Stock.

So what does this all mean for Bitcoin? It means that just because the M1 Money Stock went up by ~$14.384 trillion, it does not mean that the Fed printed ~$14.384 trillion. Big money players are shifting from savings accounts to more liquid accounts. This shift could be an indication that big money no longer trusts savings accounts or they know about future savings regulations that we do not. This could be a flight away from USD and into hedge assets like gold and, you guessed it, Bitcoin. I am an amateur in macro economics. These are only my opinions and I look forward to reading comments from more educated users.

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