Bankers and economists have made counting the money supply a challenge. Money is defined as a tiered construct of increasingly obscure means of issuing debt or credit. M0 is called the monetary base and it is the money that is on deposit at the Fed plus cash currency. M1 is called liquid money and it adds the deposits of bank customers. (M0 and M1 are also called narrow money .) M2 is called near-liquid money , and it adds savings accounts, the assets of retail money funds, and the assets created by small certificates of deposit. M3 adds long-term deposits plus the money created by institutional money funds, foreign dollar deposits and other arcane financial instruments. M4 includes all the rest of redeemable financial assets being used as money. It is also called MZM for money with zero maturity , or shadow money as it includes assets that are not subject to regulatory oversight. Together M2, M3, and M4 are also called broad money. This continuum is like IOU money; then IOU an IOU; then IOU an IOU for an IOU money, etc.
Everything up through M3 is clearly being used as money. M4 is in the shadows so it’s difficult to fully understand how it functions. The full count of the supply should at least include M3. However, in 2006, the Fed decided it didn’t need to count M3. I suspect, the numbers were just getting so big, it was too scary to continue to publish. Up until they stopped publishing this figure, M3 ran roughly one third more than M2. So, it is reasonable to assume that the true money supply is at least one third more than what is officially reported. Given rapid growth rates in the shadow banking sector, off balance sheets and out of sight, the total money supply may be considerably higher.
According to the International Monetary Fund (IMF), shadow banks have been doing over 50 percent of total lending by all banks. They may be lending money they already have or they may be creating new money by their lending. They are in the shadows, so we do not know. But shadow banking appears to be on a curve with an exponentially growing rate of growth.40 Shadow banking refers to the basic and money creation activities of banks that deal in the creation and exchange of shadow money. They are not required to report with the same clarity of general banks, so the shadow also refers to the realm in which they do business.
The Federal Reserve says in 1913, the banking system had $3.2 billion in the money supply. In December of 2017, the Fed reported a money supply of $13,918 billion – an average annual growth rate of 8.4 percent over 104 years. There have been some differences in the way the money supply is counted over time, but these numbers are likely reasonable approximations of M2. From 2016 to 2017 the total M2 money supply increased by $625 billion.41 42 Adding another third to this $14 trillion is roughly $18.5 trillion in the money supply. Adding the shadow banking money creation adds an unknown amount. Here’s another perspective to check our assumption that the money supply is at least $18.5 trillion.
Remember by assets, banks mean the IOUs (and a few real property assets) that they have taken from the public in exchange for their own IOUs (Federal Reserve Notes – our money). Bank assets should be roughly equal to our money supply (less their equity). Does that check out?
As of September 2017, Federal Deposit Insurance Corporation (FDIC)-insured banks held assets of $16.2 trillion43 and the central Fed another $4.5 trillion.44 Most of those assets are IOUs from the public or government for which the banks exchanged their own IOUs (Federal Reserve notes) – a total of over $20 trillion in assets on the books.
Roughly 11 percent of the banks’ booked assets are equity – things they own outright, which may include real property, their own stock, or stock in other companies.45 The central Fed’s equity is roughly one percent of their assets.46 Subtract this equity from the $20.7 trillion
and you have another indicator of the size of the money supply – about $18.4 trillion. The Fed reports the M2 money supply at $14 trillion.47 Adding another third to $14 trillion is roughly $18.5 trillion.
Our supposition appears to hold. The total amount of money that has been created by the private banking sector is at least $18.5 trillion. If the IMF is correct, and shadow money is equal in amount to M2, then the total money in the system may be close to $30 trillion. Ignoring from one third to half the money supply is a recipe for bad decisions.