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by Firecracker
1981 days ago
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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) 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? |
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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.