If we want to take control of our financial lives and live free, it’s crucial to separate the signal from the noise. Two topics that have been generating a lot of buzz recently are the M2 money supply and de-dollarization. But beyond the sensational headlines, how much do we truly understand these topics?
In this Friday episode of Fiscally Savage, Dylan discusses the M2 money supply and the factors that influence its growth rate, the centrality of the U.S. dollar in world affairs, and why the U.S. dollar will likely continue to dominate the global stage.
- [00:55] What is the M2 money supply?
- [04:05] Factors that drive M2 money supply growth
- [06:14] How the M2 money supply decreases
- [09:24] What is the de-dollarization of the global economy?
- [13:21] How the U.S. dollar became the world’s reserve currency
- [18:52] Why the U.S. dollar will likely continue to dominate the global stage
- [23:00] Why we shouldn’t be afraid of the recent news about the M2 money supply and de-dollarization
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[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.
[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. Happy Friday, everybody. If you’re new here on Fiscally Savage, on our Friday shows, we take one thing in the news and try to go a bit deeper. And this week has been utterly amazing in so many different ways with a lot of news coming out, most of which I have no desire to touch with a 10-foot pole. But this is after all a financial podcast, and so we’re gonna talk about some money stuff today, specifically two concepts that have been floating around, particularly on YouTube — the first being the M2 money supply and the next one being de-dollarization, whatever the hell that’s supposed to mean. But we’re gonna unpack both those today on today’s show.
[00:00:55] Let’s start with the simple one, which is the M2 money supply. I have talked at length on the show about inflation and the multiple causes for inflation. One of the things that you’re taught when you go into an economics class is that as money supply increases, inflation increases. The problem that people have is that this intuitively makes sense to us because inflation is too many dollars chasing too few goods. So it would make sense that if I print money and throw it into the economy, prices are going to rise in order to try to capture that new money circulating around. It’s kind of the idea that prices are set so they can extract the maximum amount of currency out of everybody who buys them, which of course kind of sounds a little evil. But then again, all commerce is a little bit evil. But the point that we’re getting to here though is that there is a question of just how much an increase in the money supply would actually cause inflation because inflation is not a single issue phenomenon. Yes, money supply has a role to play in it but of course also things like global supply chains, pandemics, supply and demand, greed — all play into this.
[00:02:04] As I’ve illustrated on the show before, you can have a can of beans that is at your local grocery store, and you show up one day and it’s a dollar, and then the next day you show up and it’s $2. Well, that’s an inflation rate of a hundred percent for canned beans at your local grocery store. And then, you go to the owners of the grocery store and say, “Hey, dude. What the fuck?” And what they say then to you is, well, “Our costs went up.” So there’s a couple of different things. Number one: their costs might have gone up and maybe they went up about 50 cents. So about half of that increase is due to increased cost. But one phenomenon we see in the economy quite a bit is that when people start increasing that, they realize, well, I can blame it on this other thing, so I’ll just take an extra 50%, which we see. Also, if you have that can of beans and beans just had a really bad year in the agricultural sector, they’re gonna be more scarce, which means they might actually in fact be more expensive. The metal that goes in the can, the liners, the oil prices for all the trucks that bring them all around — all of those things factor into the price. And as I’ve talked about when it comes to system thinking before, any link in that chain being damaged is going to have a negative effect on prices from a consumer standpoint. That is to say, prices would go up.
[00:03:19] And so, the money supply in the economy is one part of this picture, but it’s not the total picture. So I wanna make that very clear when we start talking about it because one of the things that we’re gonna talk about today is the M2 money supply decreasing. Because during the early days of the pandemic, it was all in the news about how the M2 money supply is exploding and, you know, 50% of all dollars ever printed have been printed in the last 24 months and blah, blah, blah, blah, blah. And everybody was showing these hockey stick graphs that were produced by the United States Federal Reserve Bank, showing the money supply as all of the different COVID stimuluses that were passed under the Trump administration and then one under the Biden administration went into effect, causing a lot of money to enter into the economy.
[00:04:05] But one of the things to understand is that the M2 money supply is physical currency — everything that’s in checkings account, savings account, and other liquid assets like money market accounts. When you have a period of expansionary monetary policy, central banks can increase the money supply by buying US government bonds that then they hold as a reserve. Now, when you look at Silicon Valley Bank, which is collapsing due to rising interest rates making their government bonds significantly less, this also happens to the Fed. One of the things that you saw a couple of weeks ago was people panicking about the Fed’s balance sheet because they bought a bunch of US government bonds. But how does that increase the money supply? If I buy a bond, how am I increasing the money supply? Well, because when I hold those bonds as reserves and banks then use them as their underlying assets to keep their operations going, what they then do is they lend that out. When the bank lends out the money, they do it by crediting the borrower’s account. That is to say they put money in the borrower’s account, and that increases the money supply because now the money shows up twice — once in the purchase of the US government bonds and then the second in the lending out in that other person’s account. That is to say that the money ends up getting counted twice. That is one of the factors in which the money supply actually continues to increase.
[00:05:26] Increase in deposits also have this effect. So let’s say that you got yourself a stimi check and you didn’t need it so you put it into the bank as a deposit. That’s going to increase the money supply. It’s interesting to note though that if you had done something like, you know, gone to the store and spent it, less of that money would end up at the money supply because of all the different ways in which it could exit the economy. It could exit the economy by being sent overseas. For example, if you bought something from a US company that’s actually domiciled in Ireland, your dollar might flow to Ireland and stay there and be now trapped overseas, which would not be counted in the US money supply. Other things that will pull stuff out of circulation are things like taxes because now, you know, the government had the money going out. But with taxes, you have the money coming back in.
[00:06:14] So these are ways in which you can have the money supply increasing when you’re having this. But now how does it decrease? Well, the exact opposite starts to happen. So when people are saying, my God, the M2 money supply is decreasing faster than it has since the 1920s. Oh my God, run for the hills. Don’t run for the hills. There’s not a whole lot up there, and the people who do live up there are not really all that friendly, so just let’s stay listening to my podcast. What’s actually going on right now is that we have an increase in interest rates, which is causing banks to lend less. You might think that banks want to be lending more in a period of higher interest rates ’cause of course wouldn’t they make more money? Well, sometimes but not always. Because remember they’re holding US government bonds whose value is decreasing. But also, banks have to borrow money to lend to you in the first place. And so their cost of borrowing that money to then lend out for something like a car loan has also increased, which is cut into their profit margin. You, the consumer, might decide to just limp your Toyota Corolla along a little bit further because right now you’re looking at their interest rate and saying, “I just don’t wanna pay that.” So then, your refusal to not take that loan causes the money to become trapped in the bank, which means that the money supply then does not increase. And it goes this whole way across the chain.
[00:07:33] So what’s happening is instead of an expansionary monetary policy, which we had over the entirety of the COVID pandemic — although some people would really argue strenuously and probably be correct to say we’ve had an expansionary monetary policy since like 2008. But right now, what we have is a contractionary monetary policy, where we’re raising interest rates to be able to try to get more money out of this. We’re selling government securities, so the central bank is no longer holding onto them. They’re selling them off to a commercial bank, so it’s decreasing the reserves held by the banks. And of course we’re raising revenue requirements, causing more money to be staying in the banks rather than going into other people’s accounts in the form of loans. That’s what’s going on. It’s all the things that the Fed are doing to fight inflation does in fact have in effect on the money supply.
[00:08:22] It’s worth noting that that will help alleviate that portion of inflation’s equation in the short and possibly the long term. But it does nothing for the other issues around it. Supply chains have healed in a pretty dramatic way, although there are still certain parts and components that take forever and a day to get here. And prices have gone up. And even if the costs and inputs are going down, those prices are not coming down, and this is why we see corporate profits being at a 50-year high at the same time inflation’s at a 40-year high. These things are in fact all connected. But the bottom line here is is that the M2 money supply falling is neither a good nor a bad sign. It’s just like saying, oh, I flipped a light switch and the lights turned on. It’s pretty normal and pretty expected. The problem is is that the media has an agenda, and that agenda is to make money. And so a sensational headline about the M2 money supply, this esoteric economic measurement, will get people to click on it so they can sell you ads.
[00:09:24] Which brings me to my second point: the de-dollarization of the global economy. Now, what people are talking about here is that the BRICS nations — and BRICS is Brazil, Russia, India, China, and South Africa. These are developing or emerging economies and they’re called BRICS because obviously that’s the acronym. And we’ve been talking about these BRICS nations or these developing markets since the early 2000s. Those economies, because they’re starting from such a low point in economic development, have this massive potential for growth, which is one of the reasons that you’ve seen countries like China and India have had this explosive growth for the better part of 20 years. Those nations are also very sensitive to global markets because they’re dependent on so many inputs. For example, despite China’s massive size, it is completely dependent on oil tankers coming out of the Middle East to supply it with the fuel it needs for its economy in the same way that other countries like Japan are entirely dependent on food imports in order to keep their population with a full belly. So it’s in the BRICS nations’ best interest to in fact try to play as big as they can on the stage.
[00:10:36] The problem is despite their high economic growth rates, they’re still fueled in a large part by foreign investment. In our current era, what we have and what we see is Russia has invaded Ukraine. I am not touching the reasons for why Russia might have invaded Ukraine with a 10-foot pole, but suffice it to say that the Western response basically by the NATO nations was to cut Russia out of the global trade system. Russia knew this was what was gonna happen when they invaded Ukraine, and so it was ready for it and has proven their economy is more resilient than we gave them credit for. But China looked at that and said, “Hm. That doesn’t seem like a great thing, and we are in fact far more dependent on exports than Russia is.” That is to say that Russia, what they’re exporting is mostly natural gas and fertilizer components. This is one of the reasons that food prices have gone up. But in China, it’s the manufacturing part of things. And so for them, the inputs to production are gonna be significantly more important than the inputs to production for Russia, which is basically a hole in the ground where natural gas comes out.
[00:11:41] So what China has been doing — and China of course is this emerging economy. It’s the number two economy in the world. It is hoping that at some point it’s gonna overtake the US although there are a myriad of reasons why they might not — they have decided that they’re gonna try to secure an ability to function without US dollars. And so the BRICS nations have announced that they’re exploring creating a common currency that they can then use and all they’re trading with each other would then be in their local currencies, thus cutting the dollar out of the equation. This is why people say, oh my God, the economy is going to de-dollarize and this is gonna be this terrible economic Armageddon. But — and of course there’s a “but” here, right? — at the end of the day, the US dollar is a cornerstone of the current global economy. There’s a huge difference between smaller players on the economic stage getting together and saying, “Hey, you wanna make a few set select trades in our own currency because, well, it would be better for us?” And in the case of China, “Hey, would you help me insulate myself from economic Armageddon if I do something like, you know, invade Taiwan and force them back into the Chinese fold?” And that’s really what’s going on here is that China’s trying to insulate itself so that it doesn’t have the same threat of economic isolation that Russia’s currently dealing with with its war.
[00:13:07] And so the question that you should be asking yourself is, how much of a threat to the US dollar dominance is this, number one. Number two, if you’re not familiar, what is US dollar dominance? And number three, what can we do about it?
[00:13:21] So let’s start with number two first because I did these out of order. What is US dollar dominance? In the aftermath of World War II, the US dollar became the medium of exchange for all global transactions, and it’s of course not completely like a hundred percent of global transactions, but it was the currency that everyone used to transact for goods and services, and it also became a reserve currency. That is to say that when nations had the ability to save, they would hold on and stockpile US dollars.
[00:13:52] One of the interesting things that came out of the Iraq war was the headlines about Saddam Hussein’s palace in Iraq having just rooms full of hundred-dollar bills. Well, why did they do that? Because the American currency was stable and dependable, and if they ever had to buy goods from another nation, they might not take the Iraqi currency but they certainly would take the US currency. And a lot of nations do this. North Korea is famous for having the ability to try to get foreign currency because nobody on the global stage really takes their currency. And this ability to have so much of global trade in dollars is what gives the United States its unique position in the world. So that is US dollar dominance. And because of that — that position as a reserve currency — it’s one of the reasons we’re able to print as much money as we do. So the question is, if the BRICS nations were to actually come together and create their own currency, well, how much of an impact would this have? Well, let’s just stop and think about this idea of what the upstarts would have to overcome in order to dethrone the current king.
[00:15:00] Okay. So let’s talk about what is dollar dominance. Dollar dominance is the US dollar’s position as a medium of exchange and a global currency. One of the things that came out of the Iraq war was that Saddam Hussein in his presidential palace had rooms full of a hundred-dollar bills. Why? Because hundred-dollar bill will spend in almost any economy in the world because so much of the economy is denominated in US dollars. And what Saddam Hussein was doing there was he was creating a strategic currency reserve that his country could use then to buy goods and services globally by being able to settle them in US dollars. So when you’re looking at countries across the entire world that are trying to engage in international trade, they all have foreign currency reserves that they’re using to settle those trades. And the question is if we took all of those foreign currency reserves and put them in a big pile, how much money would be denominated in US dollars? The answer is 58%. That’s right. If we took all the foreign currency reserves for the entire globe and put them in a big pile, 58% of every one of those is a hundred-dollar bill. What that means is that these countries are holding US dollars in order to facilitate their trade on the international markets.
[00:16:24] And to put it in perspective, if you look at something like the Chinese Yuan, which is the denomination of Chinese currency, if we look at it and say, well, how many — what is the percentage in that big pile of cash that’s actually Yuan? And the answer is is about 2.5%, which is also the same number as the numbers of loonies and toonies that Canada has in that pile. That’s right. Chinese reserve currencies are held in about the same proportion as Canada’s are. And so like no shade to my brothers and sisters in the north. But like let’s face it. The loonies and toonies are really great currency, but they’re not exactly major players on the global stage.
[00:17:04] Well, let’s just switch gears here for a second and ask ourselves, what percentage of global trade is actually settled in US dollars? And so if you go back and you look at it as of it stands right now, even if you include all of the BRICS transactions, even that, you know, and assume they would no longer be settled in US dollars, even if you assume that China completely switches over to using its own currency to purchase oil from Saudi Arabia and gas from Russia — even when you assume that the US dollar still accounts for 45% of all settlements for international trade globally. 45%. Another 33% is settled in Euros. So if you’re just doing a little back-of-the-napkin math, almost 78% of total international trade is conducted in Western currencies. The Chinese government, the Chinese Yuan, barely shows up here. It’s again down in the 2%. But that’s not even really getting into the most important part of what establishes dollar dominance in the world. Because at the end of the day, global trades need stocks. They’re pretty cool. But bonds — that is, the global debt market — that is where the true action really happens. As of 2021, the totality of the global bond market was approximately $128 trillion. That’s a lot of money. And so when you look at that, you realize that, oh, yes. Our modern economic systems actually run on debt. That is how they function. When you get right down to it, the bond market will tell you far more about how the economy’s doing than the stock market ever could.
[00:18:52] And so my question would be, if the dollar is going to lose its dominance, I would expect to see the global debt market be denominated in something not dollars. And unfortunately, for the people on YouTube with their amazing thumbnails, talking about how the dollar is gonna just go poof and we’re gonna have economic Armageddon, 70% of the global bond market is denominated in US dollars. And that percentage has been increasing since 2008. And when you buy a bond, you’re buying something that will last over time. They can be denominated in — they’re denominated in dollars, and they go for 10, 20, 30 years. And so if we were really seeing the de-dollarization of the economy, I would expect to see the bond market and how global debt is denominated be switching and decreasing in percentage away from US dollars. But we don’t see that. All of this is to say is that de-dollarization is a really big, scary word because the media has an agenda and that agenda is to make money and nothing sells like fear and outrage. Unfortunately, the underlying data shows a pretty strong case for continued dollar dominance on the global stage.
[00:20:18] And for those people who will say, well, the dollar’s not backed by anything, this is where it gets really weird because you are right. We don’t live on a gold standard. And if you wanted to ask yourself what the true currency of global trade is, it’s probably influence and power or the ability to project that power. And it turns out that there’s just nothing like projecting power with a multi-billion dollar aircraft carrier whose personal air force dwarves the total air forces of most countries. That’s right, ladies and gentlemen. I might rag on the amount of military spending and I might be upset at the fact that 58 cents out of every dollar I pay in income taxes goes to the United States military. But one of the things that that military spending buys me is dominance on the global stage backed not by the full faith and credit of the United States government, but by the full firepower of the United States Armed Forces. That’s a lot of influence to pedal around in the US economy, and I gotta tell you, ladies and gentlemen, I’m a little bit bullish when it comes to that type of thing.
[00:21:25] So when we really get right down to it, the other part that comes out of this is that people will talk about, well, you know, we should audit the Fed and the Fed is not transparent and they just print a bunch of money and they’re interventionist and they get in the economy and they’re not real free market bankers. They’re manipulating everything. And to a certain extent, that’s true. But the other player on the stage is China. Like China’s saying, like, oh, we should all be using the Yuan because you can totally trust us, right? And of course, if the US Federal Reserve is interventionist, then China’s interventionist tendencies are in a complete league of their own. Because there is nobody who is more interventionist and less transparent than the Chinese central banking system. Anything that the Federal Reserve might have done that is spooky or scary or untoward or unethical, it pales in comparison to how the Chinese run their affairs. And so if we’re looking at the faith in a currency to be stable and transparent and you had to choose between the United States and China, which one would you choose and have faith in? And I think that even the most ardent bomb-throwers in the United States Congress would be willing to put their money on the United States versus China in terms of transparency and non-interventionism if those were the only two choices. And let’s face it. There isn’t another player on the stage here.
[00:23:00] So at the end of the day, what’s your takeaway for you? Number one, I think the biggest takeaway here is I just spent several minutes explaining two very complicated economic things in as simple terms as I possibly could. And, you know, for those of you are listening, you’re gonna listen to the polished version of this. And full apologies to my editors because, man, I stumbled over a lot of words today. But at the end of the day, it’s not gonna have that big of an influence in your life. So why did I talk about it? I talked about it because it made its way into the news because it sounds scary. Because like so many things that you see on YouTube, the internet, or things coming through podcasts and cellphones, every one of those people is jockeying for your attention — one of the things that is most valuable to you. And they do it and they capture it and they sell it by printing things and putting thumbnails that are sensational, that cause a fear and emotional response. Because at the end of the day, money’s emotional and so is everything else. The headline here is it’s 2023. We have the stupidest game of chicken in the world, the debt ceiling debacle in the US Congress coming. And of course 2024 is — and I hate to say it — an election year. And everyone’s gearing up right now. It behooves us if we want to actually take control of our lives and live free to start separating the signal from the noise. So many of these articles are just noise, and they might be interesting to someone like me who loves to get in the details and read and research a lot. But at the end of the day, ladies and gentlemen, it’s just noise. It’s interesting to look at, and that’s about the end of it. So if there’s a takeaway, you can take the M2 money supply and the idea of de-dollarization and just put them into a cardboard box labeled “Things I don’t need to worry about for this weekend” and go out and have a fantastic Friday evening, Saturday, and Sunday. And I will see you all on Tuesday.
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