Why I Stopped Holding Cash
Lets discuss the new money supply entering the market, why M1 has seen such a big increase, and what this means for you – Enjoy! Add me on Instagram: GPStephan
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How this works:
First, we have the M0 Money Supply – This is PHYSICAL Cash Money that you have in your pocket, or the money I’m holding in my hand, or the money sitting in a bank vault.
Second, we have the M1 Money Supply – This represents a combination of money in checking accounts, and all physical cash mentioned in M0. This is money in checking accounts that could basically be converted to cash, or spent, at a moments notice.
After that, we have M2…this includes money sitting in savings accounts, money market funds, and other accounts that people hold on to with less than $100,000, but don’t use for day-to-day spending. This ALSO includes all of M1
And finally, we have M3…this covers investment accounts, retirement accounts, and other “long term holdings” that you wouldn’t necessarily spend instantly, but – you COULD get access to money if you needed to. And just like the others, M2 also includes all of M2.
First, there was a big shift of money moved from Savings Accounts and into Cash and Checking Accounts…or, to put it more appropriately…there was a big influx of M2 money supply moving into M1, where it could be more easily spent. The thinking is that this is AROUND the time where many mortgage forbearance plans were expiring, we weren’t sure if rental protections would be extended beyond December 31st, and end of year financial obligations may have caused a big move into the M1 Money Supply.
Second, this MIGHT have something to do with proposed tax plans on long term capital gains for those earning over $1 million per year. There have been quite a few proposals for an increase in tax rates and transfers, and because of that – many wealthy people have shown interest in locking in their profits, or cashing out by the end of the year to avoid a potentially HIGHER tax in the future.
Third, as people save more money and refuse to spend it – more money is going to end up in savings and cash, further inflating this amount you see here.
Or, in other words – OVERALL, YES – more money was introduced through the Trillion Dollar Cares Act, people had to save because there were fewer places to spend their money, low interest rates promoted more borrowing so people could have access to more money, the velocity of money dropped because that money wasn’t spent, and because of that – there was a large influx of money into SAVINGS AND CHECKING ACCOUNTS than we’ve seen during any other time in history. That’s why the money supply saw a HUGE initial increase.
Regardless, though – YES…a LOT of more money IS in circulation…a LOT of that was because people have fewer places to spend it, so they keep it in their accounts…and, until there’s sufficient demand – there’s not much concern for inflation. In the future, that might be a different story as stock and real estate prices continue to go up…but, at least now you know more about it, and how the supply of money affects you and your wallet.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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