Remember that an increase in M1 doesn't mean "more money for everyone"! It just means more reserves for banks.
I think the key thing here is to look at is increase of bank deposits (I.e. money for you and me). That is M2 MINUS central bank reserves and notes and coins in circulation. If you look at this you'll see that bank deposits have only increased modestly despite the large increase in M1. From this you can infer that the FED's "money printing" isn't really affecting Main Street very much. I.e. currently not causing much inflation.
What's happening? The FED is creating new reserves and using those to buy bonds. The reserves remain in financial institutions and should incentivise banks to lend - or at least that is the theory. Lending is how bank deposits (money for you and me) are created. The reserves which the FED creates to buy bonds (which are assets of commercial banks) doesn't end up in people's Bank accounts (which are liabilities of commercial banks). Instead, the reserves remain sloshing around in the banks.
My view is that money supply is endogenous. That is, new bank deposits are created when new loans are made. Currently, there is not a demand for loans so there won't be a huge increase in the M2 money supply as a result of these FED bond purchases. Perhaps demand might increase in the future, in which case the US will see inflation. I suspect once the economy recovers and inflation (as measured by the FED) increases then they'll start performing open market operations to sell the bonds they bought and thus remove the excess reserves from the financial system.
Edit: Indeed. M1's definition:
"M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.
I agree with this line of argument for the 2008 era quantitative easing! But my read is that M1 explicitly excludes bank reserves, so the M1 created can't be locked-up reserves, right?
Gosh, you are right (and I'm completely wrong). I've royally messed up my money definitions. What I meant by M1 was actually M0... Or the base money supply. It also seems that each country uses the same MX symbols but they mean different things in different countries. I've got the graphs on the FED website now and it seems that bank deposits have increased a shit load. Probably due to the recent "stimulus" measures.
It seems the FED did increase base money supply - it's balance sheet size went up by around 3 trillion dollars at the start of 2020 - and bank deposits have subsequently increased quite a lot (M1 and M2 gone up) and this is probably due to the stimulus measures because either way the money ends up in someone's bank account. I think also some of it is probably due to risk averse businesses maxing out their credit lines to get them through the lockdowns... so we'll see an increase in M1/M2 there as well.
So whilst the first part of my original comment was wrong because of the incorrect definitions and reasoning, I think the second part accidentally remains true, in that we should, in theory, start to see inflation increase and from that point you would expect the FED to start removing excess reserves from the system and tightening things up a bit.
Totally understandable! hah I did like three loops through the different definitions to straighten myself out before I got the confidence to reply back. Tricky and inconsistent definitions indeed.
I'd also like to celebrate that we can have learning exchanges like this on HN! That's awesome. Thanks for all the great things you've brought to the conversation rojeee!
Plus, nothing like that with a dose of zero-indexed irony :) Looks like CS isn't alone in the zero-indexed world.
Sorry about that! Yes, I agree, it's quite nice to be able to have such conversations.
If you want to learn more about the modern monetary system I would recommend doing Perry Mehrling's - "Economics of money and banking" course. It's on Cousera but some of the lecture notes are available here [0]. Thoroughly recommend it! Cheers
I'm posting this because I was shocked when I saw this graph. I hadn't previously appreciated just how much of an unprecedented explosion in the money supply there'd been this year.
In particular, it seems to quantify a lot of potential for long run inflation and a very expansionary monetary policy move required to prop up the economy during the pandemic. But I'm not an expert here; I'm hoping we can put our heads together. I'd be very curious to hear general discussion and insights into the dynamics. Let's go, community of systems thinkers :)
While the M1 measure of money shows the change most dramatically, other ways of looking at the same data (dollars printed, M2, MZM, etc.) seem to tell the same story. There have also been some news articles written, but I thought that for HN, we'd go directly to the numbers.
One of the angles that I haven't seen discussed yet is that an increase in the money supply is a reasonable response to a significant decrease in the velocity of money. With stores closed, services shuttered and experiences unavailable, people are holding onto money longer, and it's changing hands less. If money is changing hands less (lower velocity) you need more money in the system to enable the same amount of commerce.
Once the economy starts back up again, the fed could reduce the money supply in line with the increasing velocity.
Money velocity has fallen during the pandemic, but not significantly. Money velocity has been gradually falling anyway for quite a while. Goods purchases are off the charts right now, there aren't enough ships to haul the goods in and aren't enough ports for the ships to offload in.
Absolutely! Countering the deflationary pressures to keep price levels stable (and fixed contracts reasonable), would be another way of looking at it, I think. They're doing their job!
The question is, politically, can they be so responsible in contracting the money supply thereafter? Hopefully!
The fed doesn't gift money to anyone. To decrease money supply, all they have to do is reduce the amounts of reserves available to banks and sell back the bonds they have been buying feverishly and wait for any remaining loans to come due.
Now the government can gift money, but they must either use tax revenues and/or borrow by selling treasury bills - which can be to the public or the fed can buy them - but in either case, they must be paid back.
On the other hand, inflation is great for shafting the labor class, so at least we're going to put most of the pain on the people who are least capable of retaliating against the government; and they'll blame the rich anyways.
> Previously, the Fed said its definition of price stability was to aim for 2 percent inflation, as measured by the Personal Consumption Expenditures price index. It described that goal as “symmetric,” suggesting that it was equally concerned about inflation falling below or above that target.
>In the new version of the statement, the Fed says it “will likely aim to achieve inflation moderately above 2 percent for some time” after periods of persistently low inflation. Fed Chair Jerome Powell called this strategy “a flexible form of average inflation targeting”—which Fed officials are calling FAIT—in an August 2020 speech at the Fed’s Jackson Hole conference.
>Average inflation targeting implies that when inflation undershoots the target for a time, then the FOMC will direct monetary policy to push inflation above the target for some time to compensate. With this new approach, the Fed hopes to anchor the expectations of financial markets and others that it can and will do what’s needed to get and maintain inflation at 2 percent on average over time.
Keep in mind that “inflation” as defined by the fed doesn’t count food, energy and asset prices. Who can live a day without eating food, using energy for driving or powering appliances and finally paying for a place to live.
Basically I paid $76 at KFC the other day to feed 6 people. Inflation is here already but it doesn’t show up in the fed numbers.
Definitely a good factor to know about, but there's also been a huge surge in things like Monetary Base (currency in circulation+reserves) [0]. Looks to me like there's a lot of (effectively) money printing behind this, not just an artifact of M1's definition?
Wouldn't that be more likely just a large increase in reserves? We know reserves are higher. There also seems to be a shortage of currency in circulation due to COVID affecting the ability to print new bills as old bills come in.
tldr, they think a large portion of the growth is due to a regulation change in April that is causing banks to report savings accounts and other similar accounts in a category that is counted as M1. Graphs indicate that M2 growth is more steady, even though M1 is a component of M2. Which indicates that it is basically just being redistributed from M2 to M1.
Continuing the analogy: Those coins used to be pure precious metals but whenever a king needed to coin more moneys than precious metals he could afford, he would engage in "money creation" by turning up the percentage of some non-precious metal.
That is a very interesting question that I have never seen a satisfactory answer to. I suspect there is some broad-based misinterpretation of the Paradox of Thrift [0].
If everyone has enough that they don't need to work any more, then the economy will start signalling to people to stop producing resources because they aren't needed (by lowering prices and reducing production). Rather than making the obvious connection that most people have what they need and lower prices will free up resources for people with very limited means, the mainstream thought seems to list towards savings & retirement being an adversary that must be defeated because the GDP might drop.
Basically if people stop working because they don't have anything they want to work for, economic output will drop in a way that can only be described as good. My interpretation is economists & government aren't ready for that idea so have declared an ongoing war against retirement (and - by extension - savings).
The reason we prefer inflation is because there is a history of wild swings going from boom to bust. We do not level out at a spot where people have “enough” and retire but instead the economy swings into deep recession and people can’t feed themselves and go homeless.
Around the early 1900s we discovered that with careful application of stimulus we can even out these cycles and soften their impact - an innovation that has dramatically reduced human suffering over the past 100 years.
1) People still can't feed themselves and go homeless, countries that have inflationary policy sill generally have well developed welfare policy. It also isn't obvious that purposefully increasing the price of food and housing is helping, the bar of evidence for such an unintuitive claim is higher than "it's just obvious, trust me".
2) There was a different monetary system in the early 1900s. The lessons learned about it might not apply to a fiat system. Lending, credit & and the nature of money all work differently now.
3) If the problem was wild swings, then the lessons to be learned were in how to moderate the booms. There needs to be a bit more explanation about how increasing the money supply does that, and whether it dampens the booms more than it helps the busts. Smoothing the cycle is a mistake if it lowers trend growth.
4) Lack of evidence cited. "we discovered" is handwaving the important part. I suspect that is like "discovering" means in the political sense where politicians lie about something obvious as cover for a policy that they want.
5) Ignoring technological innovation and all the oil that has been used over the last 100 years. It is likely that the dramatic reduction in human suffering is totally unrelated to inflation policy.
We actually had a rare experiment to revalidate this in the 2008 recession. The US went with money printing and inflation while the EU chose austerity. The result was the EU suffered a prolonged and deep multi-year recession while the US had one of the longest growth periods in its history.
Economics as a field has lots of issues with respect to lack of validation. But this is one of its major successes and is repeatedly backed by empirical evidence.
> ...the US had one of the longest growth periods in its history...
How are we measuring this? Because from 2007 -> 2019 US nominal GDP is up 50% and the M2 was up 102%. I don't think this argument that keeping price inflation contained to assets rather than consumer goods justifies calling it a period of growth. Someone is collecting all this money and it doesn't look like it is people who earn wages.
The US debt/GDP ratios have also crossed lines where there isn't even room to pretend they are going to come down again voluntarily. US debt to GDP is out of control.
The US doesn't look like it is coming out of a long period of growth. If that were true it is surprising how much trouble it is having covering its bills, and giving money to already wealthy asset owners isn't helping.
Because if you're the US Government and you owe China a trillion dollars[0] you want those dollars to be worth as little as possible when it comes time to pay. This is why real treasury yields (yields adjusted for inflation) are negative[1].
The US runs a ~$300bn/year trade deficit with China, and historically the Chinese have been counteracting this by buying US debt and foreign assets.
But ~$21T of the total ~$28T of public debt is held domestically, so if the government wants that debt to be worth as little as possible when it pays it off, US individuals and institutions will be harmed much more than China or other foreign holders.
(1) Gives an incentive to deploy money. "Use it or lose it." This stimulates investment and consumption.
(2) Some prices are "sticky down," like wages; people respond much better to nominal wage increases than pay cuts. Inflation lets these prices be adjusted down more easily if needs be.
(3) Stealth tax, not only on the holders of dollar-denominated wealth but also because inflation (a) pushes people into higher tax brackets and (b) creates more taxable "capital gains". If you're a politician, it's nice to be able to pass repeated tax cuts, even as government expenditures continue to grow as a fraction of GDP.
All that said, relatively stable price levels are important. Without them, contracts get tricky, particularly around inventory or agreements into the future.
It lets you raise revenue by slowly devaluing the wages of the lower class. It's so difficult to notice that they blame the rich instead of the government. It's a perfect strategy.
most of the money in circulation is actually debt, or promises to pay for things like cars, phones, or anything you take out in credit. Since most of the world's money supply is debt between individuals and corporations, their needs to be a healthy supply of credit. The credit supply must exceed the demand from debt - so to speak. Inflation generally means there is more credit available in the system.
Saving is bad because it slows down the economy. We need people spending their dollars. So a little inflations is like grease keeps the economic gears moving.
Saving is not bad because "it slows the economy". Savings is bad in the views of governments and central banks because it removes their power over money. There is no meaningful practical diference between the fed printing money, and people using their savings in the event of a crisis, but only in the first case does the fed and government have control over it.
Not an expert, but imho this is because the money they are creating is not trickling down to the hands of consumers (hence low consumer inflation). OTOH we are seeing significant asset price inflation (stocks, housing, startup valuations, etc), which is a signal of where the created money is actually flowing. By now, I don’t think this ought to be a radical insight.
Looks like the bitcoin comment got killed, but I want to revive an interesting point at the heart of it:
Big monetary swings like this do bolster the case for it as an inflation-resistant value store...like gold (or stocks), both of which have risen quite a bit this year.
Ive come to regard gold as super-bitcoin. In theory they could be considered similar as value stores and hedges against the economy, but BTC is just way too volatile and unreliable.
Maybe in a generation or two things will be different, but at that point do we need both? Right now I'd say gold is much safer, but long term BTC is much more convenient. The comparison reinforces y opinion that BTC, despite it's relative ease of transaction, is more like an asset than it is like money.
If you want to see, can click the gear in the upper right on the site. Then format. Then check the log box. No URL scheme, unfortunately, or I'd link it for ya.
I think the key thing here is to look at is increase of bank deposits (I.e. money for you and me). That is M2 MINUS central bank reserves and notes and coins in circulation. If you look at this you'll see that bank deposits have only increased modestly despite the large increase in M1. From this you can infer that the FED's "money printing" isn't really affecting Main Street very much. I.e. currently not causing much inflation.
What's happening? The FED is creating new reserves and using those to buy bonds. The reserves remain in financial institutions and should incentivise banks to lend - or at least that is the theory. Lending is how bank deposits (money for you and me) are created. The reserves which the FED creates to buy bonds (which are assets of commercial banks) doesn't end up in people's Bank accounts (which are liabilities of commercial banks). Instead, the reserves remain sloshing around in the banks.
My view is that money supply is endogenous. That is, new bank deposits are created when new loans are made. Currently, there is not a demand for loans so there won't be a huge increase in the M2 money supply as a result of these FED bond purchases. Perhaps demand might increase in the future, in which case the US will see inflation. I suspect once the economy recovers and inflation (as measured by the FED) increases then they'll start performing open market operations to sell the bonds they bought and thus remove the excess reserves from the financial system.