Every day, it seems like we hear about someone new reaching billionaire status or news breaks that a major company is significantly increasing its payouts — looking at you, TikTok. Sometimes, it feels like commercial banks and the government can just generate actual money out of thin air.
So how much money is in the world today? That’s a tough question to answer because “money” is a broad term. For example, there’s a big difference between physical cash that’s in bank vaults and spending money that’s readily available. It gets even more complicated when you consider bonds and similar assets. With that in mind, here’s a closer look at the world’s money and what that means for everyday consumers like you.
Understanding Money Categories
To truly grasp how much money exists, you have to understand the three categories that make up all of the money in the world. The money supply is commonly divided into three main levels — M0, M1, and M2. Each level represents a broader and more inclusive layer of “money” in the economy.
M0: Physical Currency Basics
M0 represents the narrowest category in the money supply. It includes all the cash and all the coins that circulate in an economy. It is the most liquid form of money used for everyday transactions between individuals, businesses, and governments. This distinction is important because liquidity is a vital metric in any economy.
M0’s availability directly impacts how quickly people can make purchases or pay debts, affecting the economy’s overall fluidity.
However, M0 is limited in scope, as it doesn’t include money held in checking accounts or any other bank accounts (i.e., savings, retirement, etc.).
A central bank can control M0 by adjusting how much physical money it issues. By issuing less physical currency, entities like the Federal Reserve can reduce M0 to influence inflation and consumer behavior.
M1: Immediate Spending Money
M1 builds upon M0 by adding accessible funds and assets that can be used to make purchases. Along with physical currency, M1 includes demand deposits, such as funds held in checking accounts, which people can quickly use for transactions without restrictions.
M1 is often seen as the most immediate measure of the money supply for daily consumer and business spending. Think of it as all the money that people have easy access to, including what’s in their savings accounts and their checking account bank balance.
Changes in M1 can affect interest rates, economic growth, and consumer spending. The M1 money supply was estimated to be $48.9 trillion in late 2022.
M2: Broad Money Supply
The M2 money supply, sometimes referred to as “broad money,” includes most global wealth, including that held by entities like the European Central Bank, physical currency, and more. It encompasses M1 and additional assets that aren’t as liquid but can still be converted into cash relatively easily.
Since M2 reflects money that may be used for future investments, it’s an important metric for policymakers to gauge economic stability. Changes in M2 influence interest rates and broader economic growth trends, directly affecting inflation and savings behavior.
Note that some countries also track what they call M3 or the Broader money supply, but the US did away with the metric in the early 2000s.
What About Crypto?
If you’ve been following the Bitcoin craze, you are probably wondering, “Where does crypto fit into all of this?” As of right now, it doesn’t. Cryptocurrency isn’t currently included in M1 or M2 calculations, but several proposed law changes could change the way we account for crypto in the total global money supply.
It’s probably a good thing that cryptocurrency doesn’t affect M1 or M2 calculations yet. That’s because crypto valuations are extremely volatile and they generally don’t measure up with real cash value. While fiat currency can also go up and down in value, most currencies are relatively stable (i.e., the USD or euro).
Think of it this way — if crypto value suddenly shot up, that would mean the money supply increases along with it. On the other hand, a sudden drop in the value of a major cryptocurrency like Bitcoin could drastically reduce the world currency total.
Why These Distinctions Matter
Each type of money represents varying levels of accessibility and influence on economic growth and inflation. While M0 and M1 reflect money that can be instantly spent, M2 captures long-term financial health and stability, making it a powerful economic metric.
The 2020 Money Supply Explosion
Before 2020, the global money supply was relatively stable, with steady growth to support gradual economic expansion. However, the global events that began in early 2020 set off a chain reaction that led to unprecedented increases in the money supply.
Prior to 2020, central banks like the US Federal Reserve generally maintained conservative monetary policies to prevent excessive inflation. Interest rates were relatively low, and the economy was stable, with controlled increases in the money supply.
From January 3, 2000, to March 2, 2024, the Federal Reserve System reports that the US M2 has grown from $4.7 trillion to $20.8 trillion. The biggest jump in M2 occurred from February 2020 to June 2020, increasing from $15.3 trillion to $18 trillion. The chart below shows the huge spike in M2 during that span.
So what happened? In response to the economic fallout from the COVID-19 pandemic, governments and central banks worldwide embarked on massive quantitative easing (QE) programs, injecting trillions of dollars into their economies to maintain stability and support job markets amid lockdowns.
The Federal Reserve doubled its balance sheet by purchasing vast amounts of bonds and securities, dramatically increasing the money supply.
This QE strategy led to a surge in M2, which grew by a huge margin between 2019 and 2021.
The impacts of this policy shift weren’t limited to the US; other major economies, including the European Union, Japan, and the United Kingdom, implemented similar measures.
This global infusion of liquidity allowed the stock market to rebound but it also caused tremendous inflation that nearly everyone continues to feel years later. The rapid increase in money supply outpaced economic growth and created colossal inflationary pressures.
Money Supply and Inflation: The Connection
When more money enters the economy without a corresponding increase in goods and services, the purchasing power of each unit (i.e., the USD) declines.
Think of it as too much money chasing too few goods. There’s a lot of money to spend but not enough supply to keep up. According to the laws of supply and demand, this environment drives up prices.
A rise in M2, which reflects both cash and accessible funds, can lead to higher spending, but the price increase means each dollar buys a little less than it did before (inflation).
The chart below provides a glimpse into the chaos. The Federal Reserve uses the federal funds target range (dark and light blue lines on the chart) to guide short-term interest rates and influence banks’ borrowing costs.
By manipulating this variable, the Federal Reserve impacts the money supply indirectly, as lower rates can expand M2 and vice versa.
At the beginning of 2020, the red line (monetary base) increases drastically. M2 also increases at a rapid pace. The Fed set its target range upper and lower limits very low, which led to an increase in spending but also caused inflation.
What Is Cost Push Inflation?
Cost-push inflation occurs when the prices of goods and services rise due to increased costs of production. Key factors driving cost-push inflation include:
- Rising wages
- Increased material costs
- Supply chain disruptions
For example, if oil prices surge, transportation and manufacturing costs also rise. Businesses will need to increase their prices to maintain profit margins.
Since all physical goods have to be transported to retail stores or directly to consumers (i.e., the ecommerce model), rising fuel prices will have a trickle-down effect that increases shipping and delivery costs, some of which are passed onto consumers.
Cost-push inflation has been a major factor in shaping the current economic state of the United States.
A combination of increased government spending, Fed manipulations of M2, and disruptions to supply chains (a driver of cost-push inflation) has led to stagnant consumer spending and huge inflation across the board. For example, rental inflation is up to 25% in some areas.
Admittedly, cost-push inflation and government spending aren’t entirely to blame. There are also reports of price gouging and rent-fixing, which demonstrates that unscrupulous people will take advantage of the existing inflation crises.
Corporate Pricing and Inflation
A unique aspect of recent inflation has been its effect on corporate pricing strategies. As costs rise, many companies adjust their pricing, sometimes going beyond cost recovery to enhance profit margins.
Industries like food, energy, and retail have seen varied pricing strategies. While some sectors, such as food production, usually pass along genuine cost increases, other industries may take advantage of these opportunities to generate additional profits. Quite a few food production brands are guilty of this at times.
Why and When Do Companies Pass Costs to Consumers?
Most price increases are out of necessity. If a company’s costs rise, it has to push these expenses onto consumers, or else its profit margins will shrink. The problem occurs when companies raise prices beyond the increase in input costs and keep them that way (or raise them further), even after the economy stabilizes.
Let’s say a major milk producer realizes its profit margins are negatively impacted by high inflation. To keep pace, the company needs to increase the retail price of a gallon of milk by $0.50. However, the company might decide to increase the retail price by $0.75.
The initial $0.50 increase offsets inflation rates, and the additional $0.25 increase translates to extra profits for the company.
A 25 or 50-cent increase in the price of a single item may not seem like a big deal. In reality, it isn’t. The problem occurs when most retail goods manufacturers employ this same strategy simultaneously.
Let’s say you typically purchase 50 items on your weekly grocery trip. Manufacturers need to increase the cost of those items by an average of 50 cents each, but all of them decide to make a little extra profit and raise prices by an average of $1 each.
If you purchase the same 50 items every week, these increases raise your monthly grocery expenses by $200.
One of the most obvious examples of this kind of strategy is Cal Maine Foods, the largest egg producer in the US. The company, which produces about 20% of the entire country’s egg market, had its profit margins soar over 718% in a single quarter after more than doubling the price of its eggs, far above the increase in cost.
The Ethical Concerns About Corporate Price Increases
One of the biggest concerns about corporate price increases during inflation is price gouging. This practice involves exploiting inflation as an opportunity to charge more. This has sparked debate over corporate responsibility, especially in essential goods sectors, as consumers can’t go without items like basic foods and toiletries.
There are also concerns about so-called “dark money,” which could not only affect corporate pricing and inflation but potentially influence our democracy. Dark money usually refers to any undisclosed corporate spending designed to influence elections.
The concern is that corporations that engage in unscrupulous price gouging may use some of their extra profits to unduly influence elections and public policies.
How the Global Money Supply Impacts You
Understanding the global money supply chain and its complex implications will help you make more informed decisions as a consumer. Knowing what causes inflation is vital for both understanding the economy and making the best choice for you in the voting booth.
Shifts in global markets and sharp increases in inflation can have a major impact on your everyday life, including how much you pay for groceries, what interest rates you qualify for, and how much disposable income you have.
Keep the above insights in mind to make informed financial decisions and protect your financial well-being amid a changing economic landscape.