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Money Creation: 70% in the Last 12mo (Fed, M1, $)

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Re: Money Creation: 70% in the Last 12mo (Fed, M1, $)

#31

Post by Firecracker »

secabeen wrote: post #10
Firecracker wrote: post #2

Hey HN Friends, 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…

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 com…

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!

Re: Money Creation: 70% in the Last 12mo (Fed, M1, $)

#32

Post by Firecracker »

colejohnson66 wrote: post #12
nabla9 wrote: post #9

Earlier quoted context omitted.

There is difference. King wanted the value of money stay stable or increase. Fed wants to reach 2% average inflation target but it keeps failing.

Can someone ELI5 why we want inflation?

Three reasons often given:

(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.

Re: Money Creation: 70% in the Last 12mo (Fed, M1, $)

#33

Post by rojeee »

Firecracker wrote: post #29
rojeee wrote: post #27

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 infe…

Doesn't M1 exclude bank reserves? 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) acco…

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.

Re: Money Creation: 70% in the Last 12mo (Fed, M1, $)

#35

Post by Firecracker »

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.

Re: Money Creation: 70% in the Last 12mo (Fed, M1, $)

#36

Post by Firecracker »

rojeee wrote: post #33
Firecracker wrote: post #29

Earlier quoted context omitted.

Doesn't M1 exclude bank reserves? 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) acco…

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.…

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.

Re: Money Creation: 70% in the Last 12mo (Fed, M1, $)

#37

Post by rojeee »

Firecracker wrote: post #36
rojeee wrote: post #33

Earlier quoted context omitted.

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.…

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…

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

[0] https://www.naturalmoney.org/moneyandbanking-01.html

Re: Money Creation: 70% in the Last 12mo (Fed, M1, $)

#38

Post by nly »

colejohnson66 wrote: post #12
nabla9 wrote: post #9

Earlier quoted context omitted.

There is difference. King wanted the value of money stay stable or increase. Fed wants to reach 2% average inflation target but it keeps failing.

Can someone ELI5 why we want inflation?

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.

[0] https://ticdata.treasury.gov/Publish/mfh.txt

[1] https://www.treasury.gov/resource-center/data-chart-center/i...

Re: Money Creation: 70% in the Last 12mo (Fed, M1, $)

#40

Post by simonh »

Firecracker wrote: post #35

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.

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