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What is Broad Money?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 November 2016
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Broad money is considered to be the most inclusive means of gauging the state of the money supply in a given country or world market. Involving all sorts of financial information, broad money is considered to be the most comprehensive means of ascertaining the true financial condition of a nation or a market. An understanding of broad money can make a substantial impact on the decisions of investors to consider investments in the way of bonds and other securities that are relevant to that market.

There are a number of factors that go into the proper calculation of broad money. The calculation involves all forms of cash or coin that are held by the public in a given nation or market. Along with these physical currencies, broad money will also include any notes that are held by the public sector as well. This will involve the notes that are currently held by commercial banks, as well as organizations that operate in the non-institutional money market. Money that is found in cash management trusts, small time deposits, and overnight repos all factor into the final tally of broad money.

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There are essentially two classes or categories that are used to group the various financial assets that go into the calculation of broad money. The first category is referred to as M1. This category will include the balance in checking accounts, any recent deposits into a checking account, cash and coin that are in circulation, and any traveler’s checks that currently in circulation. M2 is a second category that includes a wide range of assets that can be considered liquid, in that they could easily be converted into cash with a great deal of ease. Together, these two categories of assets form the basis for an economic indicator that is considered a reliable means of forecasting changes in the rate of inflation within a given economy.

Understanding the state of broad money within a country or market is essential to the task of identifying opportunities to generate profits from investing. By serving as an indicator of the upcoming state of finances within the market, broad money helps an investor determine what type of risks are acceptable in both the short term and long term, and avoid situations where the element of risk is considered unacceptable due to projected economic conditions.

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