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.
> 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).
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.
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.
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.
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.
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.
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%.
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.
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 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.
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 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.
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.
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.
[+] [-] rootusrootus|5 years ago|reply
[+] [-] jnwatson|5 years ago|reply
This is just a reclassification artifact. Savings accounts were M2 before, M1 now. No news here.
[+] [-] peregrine|5 years ago|reply
Sharing a link to a graph with minimal context, might as well be spam/misinformation.
[+] [-] PragmaticPulp|5 years ago|reply
> 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.
[+] [-] golergka|5 years ago|reply
(I've read this a couple of times I'm still not 100% sure I understand what's going on).
[+] [-] meritt|5 years ago|reply
M1 vs M2. The creation is still quite significant ($3T) but nothing whatsoever like the M1 chart implies.
[+] [-] hakesdev|5 years ago|reply
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.
M2: https://fred.stlouisfed.org/series/M2 M2 Velocity: https://fred.stlouisfed.org/series/M2V
Lyn Alden is very instructive on this topic: https://www.lynalden.com/money-printing/
[+] [-] ordinaryradical|5 years ago|reply
[+] [-] vmception|5 years ago|reply
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.
[+] [-] throw0101a|5 years ago|reply
* https://clintballinger.wordpress.com/2021/01/12/the-myth-of-...
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).
* https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
[+] [-] rmah|5 years ago|reply
[+] [-] aluminum96|5 years ago|reply
[+] [-] tryitnow|5 years ago|reply
This is largely a function of a re-categorization of certain types of accounts: https://fredblog.stlouisfed.org/2021/01/whats-behind-the-rec...
From what I can understand a lot of accounts that used to be categorized as M1 are now categorized as M2.
M1 is a component of M2. So to get a better understanding of the real impact we should look at how M2 has changed: https://fred.stlouisfed.org/series/M2NS
The increase in M2 is around 25%.
Still pretty substantial and it looks to be way beyond the historical norm, so I think we should be concerned.
But maybe we should re-calibrate our concern by an order of magnitude.
[+] [-] bryanlarsen|5 years ago|reply
[+] [-] BenoitEssiambre|5 years ago|reply
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.
[+] [-] CyberRabbi|5 years ago|reply
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.
[+] [-] nrmitchi|5 years ago|reply
They were printed in order to be spent and "stimulate" the economy, not make already rich people look richer on paper.
[+] [-] asmos7|5 years ago|reply
[+] [-] QuesnayJr|5 years ago|reply
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.
[+] [-] clint|5 years ago|reply
[+] [-] citilife|5 years ago|reply
This probably is a better graph: https://fred.stlouisfed.org/series/M1REAL
Essentially, showing the money supply adjusted by the consumer price index.
Also velocity is currently down dramatically:
https://fred.stlouisfed.org/series/M1V
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.
[+] [-] gzu|5 years ago|reply
[+] [-] orange_joe|5 years ago|reply
[1] https://fred.stlouisfed.org/series/CDSP
[2] https://fred.stlouisfed.org/series/PSAVERT
[+] [-] isoskeles|5 years ago|reply
[+] [-] bondarchuk|5 years ago|reply
[+] [-] mediaman|5 years ago|reply
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%.
https://fred.stlouisfed.org/graph/?g=BlLz
[+] [-] endisneigh|5 years ago|reply
[+] [-] aluminum96|5 years ago|reply
[+] [-] derriz|5 years ago|reply
[+] [-] eloff|5 years ago|reply
[+] [-] epa|5 years ago|reply
[+] [-] iandanforth|5 years ago|reply
Even if there is hysteresis in the system under what economic theory does the discrepancy between supply and price not correct itself?
[+] [-] thebean11|5 years ago|reply
[+] [-] jorblumesea|5 years ago|reply
Real inflation has been tame over the past 15 years for precisely this reason.
[+] [-] PragmaticPulp|5 years ago|reply
> 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.
[+] [-] throw0101a|5 years ago|reply
* https://en.wikipedia.org/wiki/Money_supply#Link_with_inflati...
It is also related to (at least) the velocity of money:
* https://en.wikipedia.org/wiki/Velocity_of_money
Which has been declining in the US for a decade or two, and which has dropped off a cliff since the pandemic started:
* https://fred.stlouisfed.org/series/M2V
Further: "inflation" can mean many things. A rate of 20% would be very annoying, but a rate of (say) 5% would be manageable.
Runaway inflation is more generally caused by a political system that has collapsed ((civil) wars) or mismanaged (Zimbabwe).
[+] [-] ralusek|5 years ago|reply
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.
[+] [-] bob33212|5 years ago|reply
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.
[+] [-] hanniabu|5 years ago|reply
It is, just look at equities and real estate prices. This shows that the current definition of inflation is inaccurate.
[+] [-] bluedevil2k|5 years ago|reply
[+] [-] rafale|5 years ago|reply
[+] [-] jchook|5 years ago|reply
M2 has risen 33% since Sept 2019.
[+] [-] janaagaard|5 years ago|reply
[+] [-] howmayiannoyyou|5 years ago|reply
see: https://fred.stlouisfed.org/series/M2V
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.
see: https://fred.stlouisfed.org/series/EXCSRESNS
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.
see: https://tradingeconomics.com/china/capital-flows
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.
see: https://fred.stlouisfed.org/series/GDTCBW
tl;dr ... Money supply is one sensational chapter in a complex and less emergent story.
[+] [-] sudhirj|5 years ago|reply
[+] [-] h2odragon|5 years ago|reply
[+] [-] christiansakai|5 years ago|reply
Please correct my line of reasoning here.
[+] [-] zoba|5 years ago|reply
[+] [-] anewaccount2021|5 years ago|reply
[deleted]
[+] [-] cryptica|5 years ago|reply
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.