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Financial Literacy: Understanding Money Printing

The financial literacy point we would most like people to take from our research is that saving and growing wealth are not the same thing.

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Over the past century the US money supply grew at about 6.56% a year, and savings that earned the 3.4% historical average lost about 95% of their purchasing power even with every penny of interest left in.

The overview explains why compounding is necessary but not enough on its own: it has to happen at a rate above the growth in money. Assets that cleared that bar, such as the S&P 500 with dividends reinvested, did so by reinvesting their income for decades without withdrawals.

  • 3.4% Average savings return Savers lost about 95% of their purchasing power over 100 years.
  • 6.56% Average yearly M2 growth The hurdle rate an investment had to beat to keep its share of the money pool.
  • 11,570x S&P 500 total return since 1928 With every dividend reinvested, about 24 times what M2 did.

Articles on Financial Literacy

1 article from our research on this topic.

Plain-English definitions

Key terms for financial literacy

CAGR
Compound annual growth rate: the steady yearly rate that would turn the starting value into the ending value over the period.
M2 money supply
The Federal Reserve’s measure of cash, current accounts and easily accessible savings in the US. We use it to see how quickly new money is being created.
Total return
Price growth plus every dividend, rent payment or coupon put back into the investment, as opposed to price alone.
Nominal vs real
Nominal figures are the dollar amounts you see. Real figures adjust them for something else, which in this research is the growth in M2.
FAQ

Questions about financial literacy

Answers drawn from the figures in our research. Educational only, not financial advice.

Why does compounding interest not protect savings?

Because the rate matters as much as the compounding. Money printing compounded at around 6.56% a year over the century, and savings compounding at 3.4% simply lose more slowly. The overview’s phrase for it is that compounding is necessary but not sufficient, and the arithmetic over 100 years leaves the saver with about 5% of their original purchasing power.

What is the most useful number to understand?

We would pick the 6.56% average growth rate of US M2, because once you compare things with it, a lot of familiar advice looks different. Gold, property on price and savings accounts all fell short of it over the last century, and the assets that beat it were the ones that compounded their income above it for a long time.

Sources

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