Where the Money Is: Why Distribution Matters More Than the Money Supply

For decades, economists, investors, and policymakers have argued over how to measure “the money supply.” The traditional approach was to track aggregates like M1, M2, or M3—adding up cash, checking deposits, savings accounts, and other near-money instruments. The idea was simple: more money meant more spending, which meant higher growth and inflation.

But that world is gone. The relationship between monetary aggregates and inflation broke down in the 1980s and has never really returned. Policymakers themselves now admit that “money supply” is a slippery, almost meaningless concept. The Federal Reserve stopped publishing M3 in 2006, and though it still reports M2, it no longer uses it to guide policy.

Why? Because “money” isn’t a single thing—it’s a layered web of balance sheets, inside and outside the banking system, inside and outside the U.S., inside and outside the reach of regulators. And crucially: what really matters for the economy isn’t the total number of dollars in existence, but who holds them, in what form, and what they do with them.

M2 and Its Decline as a Guide

M2 includes cash, checking deposits, savings accounts, retail money-market funds, and a few other liquid assets. For a long time, it was considered the best gauge of “money available to spend.” In fact, Milton Friedman famously declared that “inflation is always and everywhere a monetary phenomenon” and built models around the growth of M2.

But since the 1980s, the correlation between M2 and inflation has collapsed. Financial innovation allowed money to flow into instruments outside M2: repurchase agreements, commercial paper, institutional money-market funds, and the entire shadow banking system. Dollars can migrate between layers so fluidly that M2 no longer captures the true supply of spendable liquidity.

Case in point: during the pandemic, M2 surged by over 40% in two years—the largest increase in history. Inflation did rise, but much of the M2 spike reflected forced savings from stimulus checks and business support, not a credit boom. The link was noisy, inconsistent, and misleading.

The Eurodollar Problem

If M2 is incomplete onshore, it completely ignores what happens offshore. The Eurodollar market—dollar-denominated deposits held in banks outside the U.S.—has existed since the 1950s. Today, it represents trillions of dollars of liquidity that the Federal Reserve cannot directly measure or control.

How big is it? Estimates vary. The Bank for International Settlements puts the offshore dollar market—banks’ cross-border dollar liabilities—at over $13 trillion. Broader definitions, including offshore repo and money-market instruments, put it far higher. And there is no master balance sheet: no regulator, not even the Fed, knows precisely how many Eurodollars exist, how many are being created, or how fast they are destroyed when loans are repaid or withdrawn.

This is critical: the U.S. dollar is the global reserve currency. Businesses in Asia, Europe, and Latin America borrow and lend in dollars. Central banks hold dollar reserves. Trade is invoiced in dollars. That means the true “money supply” isn’t just the Fed’s aggregates—it’s a global ecosystem of dollar claims, much of which sits outside U.S. borders.

Bank Money Creation

Even within the U.S., most money doesn’t come from the Fed—it comes from commercial banks. When a bank makes a loan, it creates a deposit out of thin air. That deposit is spendable “money.” When the loan is repaid, the money is destroyed.

This is how the majority of modern money is created: not by printing cash, but by credit creation. And again, we don’t have a precise tally of how many new dollars banks create or destroy each day. We can measure total bank credit and loans outstanding, but the flows are opaque and volatile.

Velocity: How Fast the Money Moves

Even if we could perfectly measure “the amount of money,” that still wouldn’t tell us the whole story. The classic equation of exchange, MV = PQ, says that the product of the money supply (M) and its velocity (V) equals nominal GDP (prices times output).

Velocity—the turnover rate of money—matters enormously. And velocity depends not only on psychology and confidence but also on who holds the money:

• A poor household that gets $1,000 will likely spend it immediately, raising velocity.
• A billionaire who gets $1,000 will park it in Treasury bills or an investment account, lowering velocity.
• A commercial bank with reserves at the Fed can’t spend them at all—they’re trapped in the plumbing of the financial system.

So money is not neutral. The same number of dollars can produce vastly different economic outcomes depending on whose hands they’re in.

Distribution: Why “Where the Money Is” Matters Most

This is the central point. The economy responds less to the quantity of money than to its distribution:

• In the hands of low-income households: high marginal propensity to consume → stronger demand → faster velocity → more impact on GDP and CPI inflation.
• In the hands of wealthy households or asset managers: low propensity to consume → money flows into stocks, bonds, real estate → asset-price inflation but muted consumer inflation.
• In the hands of governments: depends on spending choices. Transfers to households raise velocity; military or administrative waste may not. Productive investment can raise supply capacity, moderating inflation in the long run.
• In the hands of banks: if credit demand is low, reserves pile up uselessly, no matter how much QE the Fed conducts.

This explains why trillions in QE after 2008 did not produce broad consumer inflation: most of the money stayed in the financial system, boosting asset prices but not household consumption. By contrast, the pandemic stimulus—direct transfers to households—produced the fastest inflation surge in 40 years.

The U.S. vs. the Rest of the World

The U.S. Advantage

The U.S. issues the world’s reserve currency. That gives it an “exorbitant privilege”:

• It can run large deficits without triggering immediate crises, because the world wants dollar assets.
• Its Treasury market provides the safe collateral that lubricates the global financial system.
• The Fed acts as global lender of last resort, backstopping offshore dollar markets via swap lines.

This means the U.S. can create money with fewer immediate consequences. If velocity is low because wealth is concentrated, deficits and QE can pile up without sparking hyperinflation. The constraint is not “how much money” but where it flows and whether safe collateral is in short supply.

Everyone Else’s Constraint

Non-reserve economies don’t have this privilege. If Argentina, Turkey, or even a mid-sized developed country tries to expand its money supply aggressively:

• The exchange rate falls.
• Import prices rise.
• Inflation accelerates.
• External debt burdens (often in dollars) become heavier.

This is why most countries cannot print freely. They face the trilemma: you can’t have a fixed exchange rate, free capital flows, and independent monetary policy all at once. Only the U.S., with the dollar system, can bend those rules.

The Future: Collateral, Distribution, and Constraints

Looking forward, the key questions aren’t about M2 growth but about:

• Collateral availability: Are there enough T-bills and safe assets to support the shadow dollar system?
• Distributional channels: Do deficits and QE flow into households, banks, or asset markets? The outcomes are radically different.
• Global constraints: As long as the dollar dominates, U.S. policy decisions ripple worldwide. For non-reserve countries, policy space is limited by FX stability and external debt.

The lesson is stark: Money is not one big number. It’s a map of balance sheets. And it matters far more where it sits than how much there is.

Closing Thought

We live in a world where M2 is no longer a reliable compass, Eurodollars stretch beyond measurement, and velocity depends on distribution. For the U.S., this means macro policy is about collateral management and inequality as much as interest rates. For the rest of the world, it means the dollar system remains the cage that defines their choices.

The next time someone asks “how much money is there,” the better question is: Whose balance sheet is it on—and what are they going to do with it?