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Monetary Policy and the Value of Your Money

Monetary policy matters to investors in our research mainly through one number, how fast the US money supply grows.

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Over the last century it averaged 6.56% a year, and the series overview argues that much of what looks like market history, from bubbles and crashes to recessions, lines up with changes in that rate.

One finding we keep coming back to is about savings. In every decade of the last century the rate on safe savings sat below M2 growth, and the overview suggests this appears structural, since a savings rate above money growth would make government debt very hard to service.

  • 6.56% Average yearly M2 growth The hurdle rate an investment had to beat to keep its share of the money pool.
  • 3.4% Average savings return Savers lost about 95% of their purchasing power over 100 years.
  • $4.8tn COVID money printing M2 grew at an annualised 19% during 2020 and 2021.

Articles on Monetary Policy

1 article from our research on this topic.

Plain-English definitions

Key terms for monetary policy

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.
Quantitative easing
Central bank buying of bonds with newly created money, used heavily after 2008 and again in 2020. It adds directly to the money supply.
The 6.56% rule 6.56% a year
The average annual growth of US M2 over the last century. Assets compounding faster gained ground, slower ones lost it. More about The 6.56% rule
Monetary dilution
The loss in each dollar’s share of the total money pool as new money is created, whatever happens to shop prices.
FAQ

Questions about monetary policy

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

How does monetary policy affect my savings?

In our data it comes through the gap between interest rates and money growth. We used the 3-month T-bill as a stand-in for the best safe savings rate in Part II, and it averaged 3.17% a year against 6.66% growth in M2, so $1 saved in 1926 with all its interest reinvested was worth 4.3 cents in M2 terms by 2025.

At the long-run savings average of 3.4% against the 6.56% hurdle, savers lost about 95% of their purchasing power over 100 years. The gap widens when central banks print faster, as in 2020 and 2021, when $4.8 trillion of new money took M2 up at an annualised 19% while US interest rates sat close to zero.

Are recessions caused by monetary policy?

We wouldn’t go that far. What the overview found is that every major recession of the last century coincided with a slowdown in M2 growth and every recovery with an acceleration, which is a strong pattern over 100 years, though the overview stops short of proving cause.

Part II adds two recent cases, the long bull run after 2009, which came with quantitative easing, and the 2020 bounce. Indexed to January 2019, M2 rose 1.52x and the S&P 500 2.6x, so we read a good part of that rebound as prices adjusting to new money.

Sources

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