As we go about our financial lives, earning paychecks and spending our income, I think many of us neglect to consider the idea of a broad money supply, whether that be an important fact to consider or not, when we think about our finances. There is in fact, at any given day in time, a structural measure of a total supply of the amount of dollars (or any currency) in circulation. Typically, this money supply is growing, and is controlled by somewhat of a complex nature of a monetary system that is built in layers.
While considering this thought might affect our behavior, there are macro incentives to consider with it as well. One may be able to measure the financial health of a national system in comparison to another by taking different metrics of money or finances relative to other metrics, perhaps in ways that are not commonly thought about here, and compare them across national economies. I think we get sucked into thinking about our own immediate environment and not thinking about the big picture, especially with the way we are living our lives. Here are a few perspectives that come to mind, driven by thought and could be looked at through data.
National Consumption to Income Ratio
As a basic example, the U.S. is thought of as a rich, developed nation. Incomes are typically higher here, but are the prices of goods more as well? If an average U.S. citizen’s typical monthly consumption of a basket of goods equates to, let’s say, 90% of their net income in the U.S., is that really healthy nationally? That savings ratio is most definitely not accurate, but where I am going with this is that, let’s say income in a different developing nation (Nation Y) is less than the U.S., but citizens of Nation Y save 30% of their income instead on average. People in Nation Y save more of their money as a percentage of their income than those in the U.S., per this hypothetical example. Despite the fact that economies typically are incentivized to have their consumers spend their money, individuals might be better off from a financial standpoint in Nation Y as goods cost less there, even though their incomes are less.
National Inventories to Broad Money Supply
Have you ever walked through a retailer, large or small, and wondered, is there enough spending to purchase all these goods? There is an accumulation of inventory across all businesses, which ranges based on their ability and strategy to manage their supply chains. From a macro standpoint, a measurement of total national inventories compared to the broad money supply might provide varying value. Could a rise in inventory/broad money ratio signal a slowdown in macro consumption? Or the ability for central banks to lower their Fed Funds rate and build more spending power through an increase in the money supply?
How could a national inventory to broad money supply ratio be significant across different nations? Maybe this metric could show potential possibility of investment to a foreign country, demonstrated by the ability for businesses to grow based on their own broad money supplies. Different broad money supplies, if being managed well, may again trickle into the spending power of the nation, and could demonstrate how businesses are keeping up with economic change. There are probably many other factors that should go into an analysis like this, but maybe this is a separate data point to be considered.
Financial Markets to Broad Money Supply
How does growth of the money supply ultimately effect changes in valuations in financial markets, like the stock market? Over the long run, ratios of stock market valuations to broad money supply might show the success that monetary system management is ultimately having on the outcome of the valuation and growth of the businesses that lie within that capital system. If an equity market is ultimately growing at a much higher rate than the broad money supply, is this a potential indicator of bubble-like activity with an economy that is not able to sustain such equity valuations through their own monetary system?
First Thoughts Closing
The basic point here is that maybe there could be more consideration and awareness around the idea that there is a broader supply of money that exists. From the individual perspective, maybe this would evolve the common thinking of individuals from the financial side and how we think about our money in a good or bad fashion. Or maybe it wouldn’t! From an economic analysis standpoint, maybe there are different and insightful ways to consider how evolving monetary policy management can be viewed.
Other ways I’d like to think about broad money supplies across nations and what it is effecting:
- National Incomes to Broad Money Supply
- Inflation Rate to Broad Money Supply
- Personal/Consumer Debt to Broad Money Supply
- National Well-Being scores compared to Broad Money Supply (Is personal well-being the ultimate economic measurement?)
There are likely hundreds of ways to interchange data and think about the relativity of money supplies between different national economies that could lead to a national health score of some sorts. I think my first thoughts here are on the basic spectrum.
One last thought – how does interrelated financial systems of nations ultimately affect the strategy behind monetary policy (central bank activity) and the game-theory of the central banks themselves, across allied and competing economies? Game theory of central banks is something that would be wild to have insight into!
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