It used to be easy to know the amount of money circulating in the US economy: look into the US money supply. Today, it’s not that straightforward anymore. It is also difficult to measure the effects of the Federal Reserve monetary policies as well as those of the other central banks as well. In the 1980s, it was easy to understand the explanations of Milton Friedman on how inflation and economic fluctuations are affected by money supply. But it’s different today.

The reason why it’s too difficult to learn about the effects of money supply is that banks altered their way of doing business. It became difficult to monitor the movements of money. In the 1960s, bank deposits like savings, time, and checking make up 95% of the credit market of credit unions, savings and loan associations, and commercial banks. In the 1990s, such deposits only make up 72% of the said credit market. In 2007, the percentage dwindled to 55%. When the financial crisis began in 2008, there was a significant rise in the percentage primarily because people no longer want to risk their hard-earned cash.

It is also interesting to note that there are non-banking institutions which have started lending and borrowing which were once the domains of banks. According to Deloitte, the estimated amount of this shadow-banking system is about $10 trillion while the Financial Stability Board estimated it to be about $24 trillion in 2010. The measurement is only available after 3 months of each quarter. With the latest move by the Federal Reserve to buy bonds plus the financial-stress index which includes bank stock market prices, options prices, and credit spreads, the US economy may be seeing a better tomorrow for the next months.

Along with the moves to control the monetary policy, the stock market has also reached a new high in about 5 years. However, investors are not really jumping into the bandwagon. The primary reason is that they are afraid that they won’t generate profit from the attempt. Some investors would want to wait until next year or when the presidential election is over. Some investors may also be waiting for some bills to be passed by Congress. However, according to Nicole Seghetti of The Motley Fool, there are only 2 reasons why people shouldn’t try investing in the stock market. One, they have no money. Two, they can’t leave the money for a long time in the stock market.

So, how do you know if you have the money for the stock market? Normally, you must have saved many months of living expenses in a savings account. You must also have saved for any short term financial goal or for emergencies. If you’ve saved for both living expenses and emergencies and you still have excess money then it’s time to invest the excess in the stock market. If you have any midterm or long-term financial goals, you must invest in the stock market because no other investment schemes will be able to outpace inflation in a period of time.

With the encouraging development in the monetary policy, investors shouldn’t be afraid investing in the stock market. Outside forces may be able to pull down the stock market temporarily but it will eventually right itself. What matters most is that investors have the money which they can leave in the stock market for a long time.

Florence

Florence

A freelance writer with two college degrees in Mathematics and Accounting, and 13 years experience in IT software development and implementation.

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