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 M1, M2, and M3. M1 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 M1, M2, M3, and L is available on the Internet 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 (www.federalreserve.gov/releases/h6/current).

The M1 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 M1 and also savings deposits in money markets and money market mutual funds held at brokerage firms. Other elements of the M2 calculation include some overnight ultra-liquid moneys that are in overseas banks, such as Eurodollar deposits. Whereas M1 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 Internet 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 (www.federalreserve.gov/releases/h6/current).

The third level of money in the markets is M3. The M3 consists of the cash products that large banks and business have on deposit. It includes CDs and other structured time deposits in both domestic and Eurodollars. The main purpose of the M3 calculation is the amount of money that is used system wide as a unit of account for that currency. The last measure of money supply is L. L refers to all of the other liquid cash-like equivalents including ultrashort-term commercial paper, T-bills, and other structured cash equivalent letters of credit, etc.