The important bit: "According to this ruling, if a bank suspends enforcement of the six-transfer limit on a savings deposit, the bank may report that account as a “transaction account” on its FR 2900 reports."
This is just a reclassification artifact. Savings accounts were M2 before, M1 now. No news here.
Definitely. The M2 supply grew by about $4T last year, from $15T to about $19T, it's a lot, but it's about one annual federal budget in normal years. $4T is like 20% of GDP, not nothing, but not hyper-inflationary.
The question is will M2 grow by 20% per year, or is this a one-off?
When that article was posted, M1 money supply for feb. 1 of this year was still listed as 6.8 trillion, a 70% increase vs. 1 year ago. Right now it's almost 3x as much. Although it does look like the graph in that article has been updated automatically as well.
M1 has become basically a meaningless category. The Fed blog post says that their April 24 change to Regulation D allows banks to remove the 6 tx/month limit on savings and money market accounts, which classifies them as M1. The growth in M1 since April has largely been banks changing their policies and their reporting strategies.
Sure enough, the rapid growth in M1 starts on April 24, and M1 is now about $1B less than M2 (roughly $18B vs. $19B). We should be looking at M2, which has grown by about 25% ($15-19T): still a big story, but nowhere near as dramatic as this graph.
> On the other hand, it’s not immediately clear what advantage there is from the bank’s perspective in relabeling savings accounts as transactions balances.
Does anyone have any insight into why banks would relabel their savings accounts?
> This suggests that the rapid acceleration in M1 since May 2020 is mainly from money moving out of the non-M1 components of M2 into M1, rather than reflecting any acceleration in the demand for transaction balances.
So, it the fed allowed banks to report client's accounts in a different way, so although there were not counted as M1 in the past, now they are considered M1?
(I've read this a couple of times I'm still not 100% sure I understand what's going on).
Look at it this way: M2 money supply includes M1 money supply. If you look at M2, you’d expect to see the same step-function increase because it includes M1, yet we don’t see it.
This step function is just an artifact of moving some things from M2 to M1, not because the government printed all of that money.
IMHO, M2 (also called "Broad Money") is a more pure indicator of money creation. Specifically the combination of M2 and M2 velocity.
Board money supply grew ~30%+ in 2020. The reason we probably didn't see more inflation is because M2 Velocity was down ~30%. If we see velocity start to pick up with M2 increasing, expect consumer price inflation.
Good link. It's rare that macro/monetary comes together with a good clear writing style. What she's doing is harder than it looks. Saved.
That said, as someone who studied economics circa 2005... I think confidence in monetary theories is in long term decline.
Money supply affects X. X causes Y. But... "money supply" is hard to define. Hence M1/M2 categories and other complexities. X & Y are also hard to define. Money supply sometimes causes Y without affecting X. Hence Alden's need to distinguish between private from corporate wealth or debt. Hence her list of non-monetary deflationary causes... each one of which may be more impactful than money supply... even if we could be confident in our understanding of money supply.
We're kind of at a place where there is no useful theory. There are some very broad, almost universal theories. Print enough money and inflation will happen eventually. But, these tell us almost nothing about the margins. At the margin, we don't even know how to quantify money printing, money supply... or even inflation.
I'm not saying we shouldn't listen to economists, just that we need to realize the shades of uncertainty at play. Alden seems to have her points of interest in all the right places. Inflation is not one thing, and that's relevant. Central bankers actually matter. Lots of "outside factors" affect inflation directly, without acting on the money market directly.
Last, speaking of definitions, there's a difference between what she is trying to do (macroeconomic theory for the purpose of asset speculation) and "academic" macro. Here definition of inflation doesn't need to correspond to actual inflation in prices that people pay for stuff. It just needs to correspond to investable asset inflation.
M2 money supply also includes M1 money supply. The reason we don’t see the same step function increase in M2 supply is that this chart is really just showing that some components of the money supply are now classified as M1 instead of just M2.
The HN editorialized headline is basically false. Look to M2 to understand what’s going on here, as stated in the above comment.
I don’t understand how that graph cannot represent some kind of crisis in the making. Is there really a way to walk back from this without blowing up the dollar?
So, the classic the hyperinflation events occurred because it happened to a currency in isolation.
What is new here is that you cant really see it because all major currencies are increasing their supply at similar rates.
So stocks, houses and apples increase in value rapidly as more money exists than there are things to buy, but the relative inflation of any economic union is completely masked.
Therefore the classic concern - speculators loosing confidence in the currency - isn't quite a classic concern.
They don't have an alternative as all major currencies are doing the same thing. To play that script they would need to be exiting fiat currencies, so watch for that.
But the macro trend is worldwide speculators pounding against the dam for negative interest rates in the US. Thats the season finale for now and cliffhanger, with no real prediction on the next season’s contents.
>So stocks, houses and apples increase in value rapidly as more money exists than there are things to buy, but the relative inflation of any economic union is completely masked.
Wages/work notably excluded so hardly masked as has been the case to anyone looking at the share of taxable income over the past 40 years
Considering that cryptocurrencies are still treated more like high risk speculative bets than currencies, it seems like gold would be the main beneficiary of an across-the-board collapse of confidence in fiat currency?
The price of gold has gone up a bit during the crisis, but nothing close to the increase in M1. So it would seem that markets are indeed sticking with fiat currencies in spite of the huge supply expansion...
I agree that asset inflation is an inevitable consequence of money supply expansion. I just don’t see any indication that we’re headed toward a fiat collapse.
Markets might not be choosing fiat currency for a store of value, but they’re still apparently choosing it for a medium of exchange.
They're not "choosing" it, it's literally their only option. If I want to trade my ETH to GME shares, I have to convert it to USD in between.
What this will do is erode faith in the USD. If demand for cryptos, for example, stays the same, but suddenly everyone has more $$$ to throw around, crypto will keep skyrocketing in value while the USD buys less and less of the things people actually need. At that point there will be runaway demand for crypto because people will start "believing" it's more stable than the USD.
Yeah, that’s my point: it’s the only option, except maybe for gold. And gold is only going up a little. So how could fiat currency be collapsing?
Crypto may be seen as an alternative in the future, but right now it’s all over the map. No one is using it for their savings account (or checking account, for that matter).
Back when the Covid crisis kicked off I (with minimal knowledge) speculated with friends that stuff would get weird economically because all the countries (developed economies) in the world are going to do similar things to counter this so we may not see obvious sides effects we would typically see. Sounds similar to what you’ve said above?
kind of, the only thing you are missing is that macroeconomic trend is in play no matter what the catalyst turned out to be
the yield curve flattening was a big headline long before and seen as a bearish sign, its not important that COVID spooked everyone to selloff and its not interesting that Congress and the Fed stepped in because of that.
All the monetary policy and the fiscal policy decisions were written in advance and just placed on Congress’s desk when they were scrambling for a solution. 5,000 page bills werent just made overnight.
the entire game is to put your losses on the balance sheet of the biggest whale in the market (a sovereign with no consequence) and keep all the profits for yourself, and reaching a place in society where that is practical. there is no andrew jackson to dismantle the central bank for the specific reason he dismantled the first one. so the outcome is always predictable, the cause and effect is easy to understand. the mechanism that all central banks (except china’s) use to flood the market with cash is by purchasing an ever expanding universe of bonds, with pushes the bond price up and interest rates of those bonds down.
If US treasuries go steeply negative enough (and the spread remains as tight or gets tighter) then yes, banks will pay you interest, while you still pay principle.
Lenders so far stay in the market because they actively trade the debt object even if they lose the business of earning interest. (With debt, the price of the contract increases as interest rates go down)
But yes, for now the central bank and legislative actions far outweigh my uber drivers and unemployed dates talking about daytrading, as more money is going to hit the market. US Congress is going to create/distribute $2 trillion more dollars and the US Federal Reserve is still purchasing corporate bonds, creating new money in every transaction. Babies better be daytrading on abacuses.
As a linked-to IMF paper observes (Benes and Michael Kumhof 2012, p. 12):
> To be fair, there have of course been historical episodes where government-issued currencies collapsed amid high inflation. But the lessons from these episodes are so obvious, and so unrelated to the fact that monetary control was exercised by the government, that they need not concern us here. These lessons are: First, do not put a convicted murderer and gambler, or similar characters, in charge of your monetary system(the 1717-1720 John Law episode in France). Second, do not start a war, and if you do, donot lose it (wars, especially lost ones, can destroy any currency, irrespective of whether monetary control is exercised by the government or by private parties).
There was a change in regulations in May 2020 which changed how banks classified some deposit accounts which effectively changes how the Fed defined M1 money. IIRC, it was related to what sorts of liquid deposits were counted as M1 vs not M1. Either way, IMO, the more important number to watch is M2 money.
Yes, the M1 now includes some components that were previously only counted in M2:
> This suggests that the rapid acceleration in M1 since May 2020 is mainly from money moving out of the non-M1 components of M2 into M1, rather than reflecting any acceleration in the demand for transaction balances.
The chart looks shocking without context, but it’s also very misleading without the context.
I think that the change to M2 is expected to be much flatter, since banks have walked back lending. Whether it's that much flatter, I would be surprised.
The standard mechanism for controlling inflation is to increase interest rates. Interest rates are currently at essentially zero, so it seems to me that this is a complete non-issue. If inflation starts to become problematic the fed will increase interest rates and we'll return to a more "normal" economic state.
This ignores all of the evidence that raising interest rates slows economic activity. In our currently economically weakened state raising interest rates would likely crush the economy into a depression.
Which is probably the reason we don't currently have core inflation. If we had inflation then it would be evidence the economy is overheated, so cooling the economy would be appropriate at that time.
No, debt levels are too high. Raise rates and you crush borrowers who are already saturated with debt and cannot absorb variable rates rising. The Fed is trapped.
I mean, this is totally reversible and is mostly caused by hitting the zero lower bound. Consider that money is put into circulation by the fed buying safe assets. They can sell these assets to reverse this.
Not that there isn't any danger. Even better would have been if the Fed was ok going into negative rates (like the ECB did a few years ago). They wouldn't have had to create so much money. People, businesses and banks are just hording government money instead of private assets because it offers above market returns of 0% while marginal safe assets on the private markets have had negative returns (on a risk adjusted, liquidity adjusted basis). With sufficiently negative Fed rates more in line with the markets, people would have kept their assets instead of hoarding government paper and the Fed wouldn't have needed to print so much.
Changes in the money supply don’t alone cause crisis. There might be some transient non-linear effects to certain sectors of the economy, which can be dangerous, but if done slow enough usually aren’t. In steady state money supply (and inflation) matters very little to how the economy functions.
What matters more is the functional status / size of the economy. If the economy ceases to function then you should be alarmed. Of course the economy has been damaged during the past year but to what extent is not still fully known and is not easily gleanable from changes in the money supply.
Politicians go very wrong with this when they assume that pumping the money supply has a causal effect on the economy. At small scales it can but generally it doesn’t. You can throw millions of dollars at a pig, it will never be able write software for FAANG.
Well they were printed mostly to stop rich people from defaulting on loans, keep companies alive for the and keep them paying their workers etc. So the fed may have very well succeeded there (we don't have the counterfactual, no fed intervention would have likely been not good though). Possibly it was overkill and taxation -> wealth transfer to poorer people makes sense though.
All depends. We increased the supply of money creating downward pressure on the purchasing power of the dollar e.g. inflation but those effects are being countered by decreased consumer demand keeping prices low and less job opportunities again leading to decreased demand for consumer goods. Most likely want to see heavy inflation till we get back to a more "normal" way of life. Keep in mind some inflation is healthy, roughly 3%.
There isn’t decreased demand for basic goods like food, so there is no countering effect in those markets. Sure the cost of flat screens and nikes may be stable.
The Fed prints money and uses it to buy bonds. It can reverse this by selling the bonds, and destroying the money. (Of course, most of this "money" exists electronically.)
The bonds themselves pay interest to the Fed (which will take money out of circulation). Even if the Fed does nothing, the whole thing will reverse itself when the bond reaches maturity, and the principal is paid to the Fed.
> Take it from the rich people who have primarily hoarded all that money
That's not how any of this works. Rich people generally have much less of their assets as cash or cash-equivalent than poor people. They also in general have much more debt than poor people, both in absolute values and as proportion of their net worth. (Simply because they are able to take more debt, and with the neverending low interest rates, taking more debt and investing it is basically free money.)
Aside from primary home ownership, do wealthy individuals generally borrow money in order to invest it? My financial advisors have never suggested such a strategy.
No but it makes it more affordable, which increases spending, which improves the economy, which combats inflation. Or maybe we should continue the "trickle down economy" that has worked so, so well.
If giving it causes the economy to slow down it could have very hazardous effects. The challenge for lawmakers is how do we aid people in need without causing too much harm to the economy.
Exactly. If the rich are happy to leave it in a bank account gathering dust, it doesn't affect prices. But when everyone is actively bidding for scarce assets, we get inflation.
No, they just have it in gold, stocks, real estate, art, etc... all of which probably doesn't gather much dust--maybe the gold, but if you can afford art, you can probably afford someone to clean it.
I also agree that they have debt for that as well. No reason not to use debt to gain real assets when the fiat debt loses value regularly.
What does all this mean? If / When velocity picks up we're in for a hell of a ride. Inflation is going to be steep, UNLESS they pull money out of the market. Which is quite possible.
No one is paying bills right now due to COVID relief. Q4 alone saw $32B of missed student loan, $7B in missed rent and $14B of missed mortgage payments. Pent up roaring 20's demand and hyperinflation?
From what I understand debt as a percentage of disposible income has gone down during the pandemic. [1]. personal savings rates have also increased significantly[2]. I think people are underestimating the benefits of the pandemic assistance (particularly in the form of increased unemployment insurance)
The fear is that excessive money creation would create inflation. However, there's no sign of that happening any time soon. Given all the other massive massive shocks to the system, it doesn't seem that 350% was too much.
> The fear is that excessive money creation would create inflation. However, there's no sign of that happening any time soon.
Wouldn't it be more accurate to say that it accelerates inflation. Inflation doesn't happen in fits and spurts, it's on going and has been happening well beyond my entire life.
> Wouldn't it be more accurate to say that it accelerates inflation. Inflation doesn't happen in fits and spurts, it's on going and has been happening well beyond my entire life.
Amen. I'm so tired of hearing "X might cause inflation" as if I haven't dealt with inflation for my entire life. Finding a non-bias source for "True Inflation" (aka, not the government who benefits from lower inflation because it directly impacts GDP) is hard but even using the government's numbers inflation is just shy of 100% (92.1%) since I was born, I will be 30 years old next month. That's ridiculous.
From what I read, it sounded like a lot of the money was printed but fell into areas of the economy where it didnt get distributed. i.e large corporations
It seems to me that investing in REITs and TIPS, and taking out huge fixed-rate loans now (where possible) on necessary capital assets or borrowing cash to invest would be a wise investment strategy.
Indeed, there has never been a better time to take out long term fixed-rate loans. In several years when inflation kicks in these loans will be much easier to pay off in future dollars.
REITs, maybe not so much. Stocks in growth companies are still a better bet right now.
There's something funny going on with the title of the other post - the chart in the link shows it jumping from 4000 to 16000 in April/May of 2020. So there hasn't been a sudden increase in the last month.
But I don't know what any of this means, so I'll let more knowledgeable others weigh in
The St. Louis Fed has additional detail on this misleading statistic.
There are several measures of money supply, but two count for the most in this discussion. The poster chooses M1. This is all transaction deposit accounts: i.e., your checking account.
M2 includes M1, but adds savings accounts and money market funds. These are very similar to checking accounts, but used to have limits on the number of checks you could write each month. Banks had to have reserves for M1, but not for M2.
That limit on the number of checks per month was eliminated in 2020. Banks were essentially free to classify accounts as either transaction accounts (M1) or money market/savings accounts (M2). Most all the banks have lots of excess reserves, so it doesn't really matter which one they choose.
So where is M2? Contrary to the excitable headline in this post, M2, which includes M1 and is a better overall indicator of cash sitting around, is up by about 25%. Still a significant number, but nothing like 344%.
Can anyone explain what would practically happen if the "Money stock" went back to last year's levels 6 months from now abruptly? Can that happen? If not, what's the implication of the increase? Assuming it's bad, how can an average person protect themselves from the negative effects? Should we be buying stock in stable Chinese companies? Bitcoin?
For that to happen would require banks to call in massive amounts of loans suddenly - most loans are not structured in a way that would allow the banks to do that - the repayment schedule is fixed or provides discretion to the borrower rarely to the lender.
The Fed does not create money. Banks create (expand) money by lending. The fed has purchased corporate bonds and swapped them for more liquid securities (treasury securities/M1). The Fed wants you to think there is inflation, so you get scared and "lock in" your pricing on homes/cars/etc. This activity stimulates the economy.
That all depends on what you mean by "money". And this is the root of the problem for people not neck deep in the financial system in evaluating metrics about the financial system. This is why there are different numbers for different definitions of "money". M0, MB, M1 M2, etc. Each measures how much "money" there is in the system, but for different definitions of "money".
BTW, when the fed lends to banks or purchases bonds, they do, in fact, create money. Just not M0. Depending on where the sellers put the money, you will see an increase in MB, M1 or M2.
How does this not equate directly to inflation? That is, if the law of supply and demand is real, how does this not immediately decrease the value of each dollar that I hold? Looking at this chart makes me feel 3x poorer.
Even if there is hysteresis in the system under what economic theory does the discrepancy between supply and price not correct itself?
It's because much of this money doesn't end up in the pockets of the average person to spend. One of the unintended consequences of QE is uneven distribution. Bill Gates makes 100k more, what does he do? Probably buys more equities. Average person gets 20k, that money is used to buy essentials, service debt, buy things.
Real inflation has been tame over the past 15 years for precisely this reason.
The inflation rate causes rich people to get richer since they have assets and the poor get pushed further and further from being able to own assets.
> Real inflation has been tame over the past 15 years for precisely this reason.
I don't like this use of `Real inflation.` Maybe nominal inflation as viewed by the poor. Real inflation should include the ability of poor/middle class to buy assets as well.
The M1 money supply now includes components that were previously only counted in M2:
> This suggests that the rapid acceleration in M1 since May 2020 is mainly from money moving out of the non-M1 components of M2 into M1, rather than reflecting any acceleration in the demand for transaction balances.
Look to M2 for a better understanding. I’m not sure why this graph was posted without context.
It does. Real estate in many places has nearly doubled. Stocks are up to ridiculous heights. As is crypto. Silver doubled. All during a pandemic.
There are only a handful of businesses which actually grew in value (purely online, Amazon, etc) during the pandemic, as well as some genuine increase in real estate value due to pandemic shuffling, but my take is that everything else is inflation. If you have seen your stocks rocket up in the last 12 months, you're seeing a graph of what you would have lost had you held cash.
The thing is that it's not inflation that will necessarily translate immediately to consumer goods, because the markets for consumer goods are not as quick to respond, as well as the fact that much of this inflation went directly to the very wealthy, whose access to funds hardly impacts the price of consumer goods to begin with.
It does, your dollars in 2019 could buy an average house, those dollars in 2025 will only buy a lower end house.
This is nothing new though. A new car cost $800 in 1940. So if you held all your money in cash you missed out on buying a new car. Now all you can buy is a new bike.
If there’s more stuff to buy, then prices wouldn’t change for the existing stuff. Additionally, if most of the additional money isn’t spent, only saved, it wouldn’t spark inflation.
when comparing all equities pricing metrics to interest rates, they are not nearly as overvalued
its like there is one information source where everyone just yells about P/E ratios from the 1980s, and then there is this other unknown wealthier group (or just the aggregate market) that is using P/E/YIELDS and completely calm
If USD sits idle as FX reserves at the Bank of China in Apple's balance sheet, its inflationary impact is minimal. Same applies to excess reserves at banks.
Similarly, capital controls in certain countries further serve to reduce USD velocity, and increase the prices of instruments (eg. BTC) and assets (eg. Copper) that have some ability to circumvent capital controls.
That said, CoV19 hit the global supply chain hard and there are inflationary pressures across a number of categories due to production declines. Short term inflation is a real possibility, reinforced by the lag between an increase in purchasing demand and supply capacity growth.
The Fed can soak up excess liquidity and the 344% can be cut in half without much fuss. The USGOV can withstand a temporary increase in rates because it is also sitting on a unprecedented cash reserves.
Buy land, and invest in the means to defend and hold it. Don't worry about followers yet; get good water, good food storage, and good defenses in place first. There will be plenty of recruits ready to work for food when you need them.
I'm just thinking with the unemployment high as of it is now, this would be no problem? When our situation gets back to normal then this would be a problem.
A popular post on r/wallstreetbets[1] summarizes Michael Burry’s thesis that CPI (consumer price index) is unaffected as long as inflation isn’t directly impacting consumers of the bag of goods that make up CPI. When there are fewer jobs, these consumers aren’t able to influence the prices of these goods (because they aren’t being paid inflated wages), and the metric commonly used to evaluate inflation is unchanged.
With unemployment, the velocity of money decrease. Non essential goods like tech is deflationary over time, but food and rent is not. The rich few can absorb costs whether it is food, rent or tech, but the poor and unemployed mass can only absorb so much, and they will use it for rent and food, but not other non essential goods. Therefore no inflation. i.e, grocery price might increase but an iPad will still cost the same.
Higher Unemployment = More people chasing fewer jobs = salary should fall
Lower Unemployment = More jobs chasing fewer people = salary should rise
If the cost of labor does not rise due as it absorbs the previously unemployed workers in to the labor force, it blunts the inflation effect for goods and services as those costs don't get passed on to the consumer
When I see this, I think communism is inevitable. So much injustice has been done. How can the system possibly self-correct in a fair way without some radical intervention?
The only way to make it fair would be to abolish property rights and allow people to make arbitrary claims against any property.
Maybe cryptocurrency groups will be able to claim ownership of property based on the size of their groups. There needs to be some kind of fluidity of ownership to counter the injustice of having given asset holders so much free cash.
Just printing more money is not going to make it fairer; it will do the opposite because asset holders are just using it to buy up all assets.
Most jobs today involve people getting paid to support the interests of asset holders, not to deliver value to society. Human potential is being wasted on such a large scale, it's criminal.
