[Firecracker]

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 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.

Thanks for taking a look!

[secabeen]

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.

[jjeaff]

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.

https://fredblog.stlouisfed.org/?s=velocity

[Firecracker]

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!

[cft]

Also how will it extract the money already created from circulation? I find that extremely implausible.

[jjeaff]

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.

[dnautics]

"the fed could reduce the money supply"

What is your proposed mechanism for this?

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.

[thekyle]

I believe the idea is to raise interest rates so people will hoard more money reducing the supply in circulation.

[dnautics]

That won't reduce the supply, it will slow the expansion of supply, unless bankruptcies go into a chain reaction.

[nabla9]

Fed finally changed the long held monetary policy.

What do changes in the Fed’s longer-run goals and monetary strategy statement mean? https://www.brookings.edu/blog/up-front/2020/09/02/what-do-c...

> 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.

[paulmendoza]

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.

[dragonwriter]

> Keep in mind that “inflation” as defined by the fed

There is no such thing; the Fed doesn't define or measure inflation.

> doesn’t count food, energy and asset prices.

The primary inflation measures from the BLS (the various forms of the CPI) do include the first two things; they don't include 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.

The cost of having a place to live (rent, including imputed rent) is, like food and energy, included in CPI.

[refurb]

Keep in mind that “inflation” as defined by the fed doesn’t count food, energy and asset prices.

Yes, inflation does count all those things. At least if you regard housing as an asset (inflation of implied rent).

I mean the definition is public. Not like anyone is hiding anything.

https://www.bls.gov/opub/hom/cpi/