Introduction
The economy of most countries in the world is based on the exchange of money in the market. There are few states left that rely on exchanging goods, or barter economy. Currency, in its different forms, is a part of everyday life for many people as they use it to buy various goods and pay for services. Many people also have savings accounts and accounts they cannot use in everyday transactions. This essay will discuss the money supply, what constitutes it, and the current supply in the United States. It will also examine how the COVID-19 pandemic affected the M2 supply in the country.
Defining Money and Money Supply
Anyone who has ever purchased an item in a shop knows what money is. However, its definition is broader than that of currency used in stores. According to Arnold (2019), it can be defined as any good “that is widely accepted for purposes of exchange and the repayment of debt” (p. 301). Theoretically, anything can be considered a viable currency if everyone excepts it as such. Money plays many vital functions in society as it is a medium of exchange, a unit of account, and store value (Arnold, 2019). A country’s currency is used by the members of the public to purchase goods and pay for various services, making it the main medium of exchange. Exchanging currency for goods defines the money economy and separates it from the barter economy. In a barter economy, people must exchange goods they have or services they can provide to receive what they want instead of cash (Arnold, 2019). As money is considered the primary medium of exchange, it is also used to measure the value of things.
The money supply is another important term in the field of macroeconomics. There are two definitions used for this term, M1 and M2. The former is a narrow classification of the supply that includes currency held outside of banks, checkable deposits, and traveler’s checks (Arnold, 2019). Additionally, M1 accounts mostly for the transactional currency that people can use in their everyday purchases, for example, grocery shopping.
M2 is a broader term, and it includes the M1 supply combined with savings and small-denomination time deposits and market mutual funds (Arnold, 2019). It is an umbrella term for transactional currency and currency that cannot be used in everyday exchange for goods or services. Savings accounts and time deposits are interest-earning accounts that the clients cannot use to pay for services or purchased items (Arnold, 2019). Although the customers can withdraw the funds from the savings deposits without a penalty being imposed on them, banks prohibit such withdrawals from time deposits as they have a specific maturity date (Arnold, 2019). Some accounts, for instance, market mutual funds, also have withdrawing restrictions imposed on them by the banks (Arnold, 2019). Transactional currency can be transferred to saving accounts and accounts that clients of the bank cannot withdraw from, losing its transactional value. Although this capital cannot be used in everyday exchanges, it is still a part of the economy. Overall, the money supply can be defined as the total value of capital in a country’s economy at a given time.
The M2 Supply in the United States
M2 supply in the United States accounts for all the money that can be used in everyday transactions and is deposited in bank accounts. As of October 2020, the M2 supply is estimated at over $18 trillion (Ross, 2020). According to Ross (2020), it increased by $3.4 trillion from January to September of 2020. The overall growth of the M2 supply in the country in 2020 was unprecedented. According to Brusuelas (2020), the M2 growth in 2020 reached the rate of 23% per year, with a 22% growth in savings deposits. The COVID-19 pandemic contributed substantially to this sharp increase in the money supply in 2020. The pandemic and the lockdown measures put in place to prevent the spread of the virus significantly affected the economy on all levels. The M2 supply increased due to most businesses being closed and members of the public being unable to spend their income. Furthermore, people tend to limit their spending on non-essential items during a crisis (Brusuelas, 2020). Thus, the pandemic led to an increase in the money supply in the country.
The Effect of the COVID-19 Pandemic on the Money Supply in the United States
Despite an unprecedented increase in the money supply, its velocity dropped significantly. Velocity in economics can be defined as the rate at which currency is circulated in the economy (Cluver, 2020). According to Cluver (2020), in April of 2020, a third of the disposable income in the United States was deposited into savings accounts. A nearly 15% increase in personal income received in relief payments also contributed to more people saving their income and not spending it (Cluver, 2020). However, personal income showed a steady decline after April, with many people unable to work and receiving lower amounts of support payments (Cluver, 2020). This decline also affected the decrease in spending on various services and non-durable goods in April of 2020, with only a slight increase in June (Cluver, 2020). Overall, because of the pandemic, decreased income for many citizens of the country, and fewer opportunities to spend money, the M2 supply grew significantly.
The restrictions on businesses put in place due to the COVID-19 pandemic and the substantial increase in the supply can lead to a slight rise in inflation in the near future. According to Lawlor (2020), the 2020 financial year can be characterized by disruption in the supply chain, low economic growth, a decline in real yields, and a sharp increase in the M2 supply. Nevertheless, there is unlikely to be a rise in prices due to the low velocity (Lawlor, 2020). Cluver (2020) notes that in an environment with low velocity, the M2 supply cannot substantially impact inflation as the money circulates at a slower rate. There has been a 1% increase in prices in June of 2020, indicating a healthy rate for the environment with low velocity and increased M2 supply (Cluver, 2020). Overall, the money supply’s growth due to the COVID-19 pandemic is unlikely to affect inflation as long as it is accompanied by minimal velocity.
Conclusion
The country’s money supply accounts for the total value of capital in that country’s economy. The M2 supply in the United States was substantially affected by the restrictions put in place to stop the spread of the coronavirus. Although the significant increase in the money supply and low economic growth indicate that the country might experience inflation, low velocity ensures that the sudden expansion of the M2 cannot significantly affect increases in prices.
References
Arnold, R. A. (2019). Macroeconomics (13th ed.). Cengage.
Brusuelas, J. (2020). Savings, the money supply and inflation during a pandemic-induced recession. The Real Economy Blog. Web.
Cluver, M. (2020). Inflation, consumption and economic recovery. Global X ETFs. Web.
Lawlor, P. (2020). Can inflation take root without money velocity increasing? Seeking Alpha. Web.
Ross, J. (2020). Visualizing U.S. money supply vs. precious metal production so far. Visual Capitalist. Web.