Friday, January 25, 2013

Money Supply Update

From time to time, I like to check out the current state of the US Money supply and try to get a sense on whether inflation will be coming around the corner.  In my own personal opinion, inflation is the far worse of the economic problems.  Some may argue that unemployment is bad, but the way I see it is that unemployment sucks for a few, but inflation sucks for all as it can turn your salary and savings to nothing. 
Here’s the link to the Federal Reserve money supply release. 
The only difference between M1 and M2 money supply is that M2 includes savings and Time deposits.  M2 generally has a more complete view on the total amount of cash circulating in the economy.  Now before we look at this data too much, it’s important to realize that like any other commodity, money has a supply (obviously), but also a demand.  Anytime that supply is more than demand, you start seeing inflation.  The Federal Reserve does a good job at monitoring this, but they only have so many tools, so it’s often important to understand inflation on your own (or at least the threat of inflation).
A quick scan of the numbers shows that from January to December of 2012, the M2 money supply grew by over 7%, at least double the inflation rate.  When we look back from January 2011 to December 2012, M2 grew by 18%!  Now, these aren’t catastrophic numbers and the reason why we haven’t seen too much inflation is that the week global economy has increased the demand in stable US treasury bonds, so the demand is still high. 
That said, it’s always good to protect your portfolio and at least hedge against inflationary risk.  For that, I recommend TIPS (Treasury Inflation Protected Securities).  As the inflation rate increases, so does your return, so your after-inflation rate return is always constant.  It’s a nice way to round out a portfolio.
Fun Fact: I actually had the chance to visit the Federal Reserve and sit in Bernanke's seat.  I also got a bag of shredded $20 bills as a souvenir!  How cool is that!
Wonderful Moment of the Day: Weather starting to return from a deep freeze.

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