Finance Tip Friday #57: Why the Money Supply is Going Down

Money money money!

How effective has the Federal Reserve been at fighting inflation and reducing its balance sheet (a process known as QT or quantitative tightening)? While most people, including those of us in the healthcare industry, don’t really think that deeply about the economy, it can invariably have more of an impact on our finances and business than we think. And fortunately, things seem to be taking a positive turn.

We can tell this by looking at something called the M2 money supply. For those of you who don’t know, the M2 money supply is the collective of all the money in circulation in the U.S. such as cash, checking deposits, and easily convertible near money. This figure is watched by economists and the last five years of data can be seen at this link. Check it out.

Notice how in 2020 the graph rose dramatically? This was in response to the COVID pandemic. The Federal Reserve started buying up assets (i.e., QE or quantitative easing) in a desperate effort to keep the economy afloat and businesses from going under. While that worked, it also created a huge problem – contributing to inflation! They basically pumped TRILLIONS of dollars into the economy… and people wonder why stuff is more expensive now…

Fast forward to 2022. To help curb inflation, the Fed had to reverse this process and start eliminating some of its balance sheet. This is why from the middle of 2022 onward the graph starts to trend downward. While it may be the federal funds rate that gets all the headlines every time the Fed meets, this process of QT has also been going on in the background and contributing to the fight.

While the markets generally react negatively to QT, it’s something that eventually needs to happen and why this reduction of the M2 money supply could be a good thing. As businesses start to become less reliant on the government for support, they will do a better job of standing on their own two feet and not be so reliant on debt or “easy money.” However, it more so foreshadows that the stock market could be poised to make a comeback in 2023, but then again no one knows. The market has been up over the past couple months in response to inflation going down so it could be safe to assume it will make a come backin 2023…

Will this happen? Of course, no one really knows. But if there’s one thing we can do, it’s to keep on building our portfolios and dollar cost average while we wait to find out! If you truly want to break free from the rat race, then you need to put that money you are making through your business to work! One easy way to do that is to simply dollar cost average your money into a variety of investments in the stock market.

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