Page 32 - Ultimate Guide to Currency Trading

What Is Money and How Much Is There?

Money can be defined as an object or unit of measure that can be used to pay for goods received or
services rendered. In this way, money can be the paper bills that you use to pay for your double shot
espresso, and it can also be the electronic balance in your currency brokerage account that you use to
buy positions in the FX market. This type of money is backed by the ability of its issuing government to
raise taxes and pay its bills. When you are buying a currency, you are buying a commitment from the
issuing government that the money is sound, and that the finances of the government are such that it
has now and will have in the future the ability to find sources of capital to pay its day-to-day and long-
term debts. This commitment is why a government with a strong balance sheet, a strong and united
political environment, and a strong taxable workforce (or other source of funds) will issue a currency
that will be perceived as sound. Strong economies mean the ability of a government to pay its bills
without the issuance of more money today (altering the money supply) to pay yesterday's debt.

The value of currencies will depend somewhat on the amount of money supply in the system.
Money supply is divided into three basic parts, called Ml, M2, and M3. Ml is the amount of the money
supply owned by the public and held in the bank, including savings accounts and checking accounts. It
also includes traveler's checks and the amount of actual paper and coin currency in circulation.

A listing of the amounts of M4, M2, M3, and L is available on the Inter-net and also is
published in the Wall Street Journal once a month. You can go the Federal Reserve

website to get the latest figures called Money Stock Measures
Essential
(www.federalreserve.gov/releases/h6/current).

The Ml money supply is usually the amount of money that can actually be used to buy
something with, and to pay bills. It is the amount of money that can be used for an exchange of goods
and services.

The M2 includes the amounts of money that are in Ml and also savings deposits in money
markets and money market mutual funds held at brokerage firms. Other elements of the M2
calculation include some over-night ultra-liquid moneys that are in overseas banks, such as Eurodollar
deposits. Whereas MI includes the amount of money that is intended to be used to pay for goods and
services, M2 is the measure of how much money is in the system that can be used as a store of value.

A listing of the amounts of M1, M2, M3, and L is available on the Inter-net and also is
published in the Wall Street Journal once a month. You can go the Federal Reserve
website to get the latest figures called Money Stock Measures
Essential (www.fecleralreserve.gov/releases/h6/current).