Why is anyone surprised that everything costs more when everyone has more money? I’ve seen my investment increase massively the last year and I don’t assume it’s because I’m a genius. The rich just got a lot richer.
Stop repeating this bullshit.
It's is a reporting artifact that doesn't mean what you think it means. $11.2T that wasn't previously reported in M1 was added to the definition in May 2020 due to regulatory changes prior to 2020. That money didn't poof out of thin air; it already existed prior to May 2020. The step change that happened in May 2020 has absolutely nothing to do with anything real... that massive discontinuity (which happened before the major stimulus spending, btw) is almost entirely attributable the definition of M1 changing. See https://news.ycombinator.com/item?id=28818494 for more discussion.
The money supply changes when the Fed decides to print money to acquire assets, which has nothing to do with congressional legislation.
Why, indeed. (More explicitly: I'm pretty clearly critiquing to an implicit conflation of the two, not positing one.)
> The money supply changes when the Fed decides to print money to acquire assets, which has nothing to do with congressional legislation.
Just to be pedantic since this whole thing 40% defies any presumption of reasonable numeracy... this is entirely irrelevant to the bat-shit insanity 40% claim.
If the Fed changed the statutory definition of M1 to now include $11 trillion that definition 100% existed previously but wasn't part of the formal statutory definition of M1. So M1 "increased" in one immediate massive instantaneous step change by exactly $11 trillion. Shocker! Again, not because anything real changed in the actual money supply. But because a bunch of money that definitely did already exist previously but wasn't part of a definition denoted by "M1" was added to the definition of "M1".
https://fred.stlouisfed.org/series/M2SL
Very obviously massive amount of money printing. Order of magnitude more than was ever done during the GFC.
Roughly 30% of the money supply printed in the span of 18 months. And they keep going, every day printing billions.
This was meant to be an emergency procedure to save the economy, and it made sense at the very initial stages. Now it just acts as a hyper accelerant towards wealth inequality.
Yet we have many cheering it on, talking about nominal wage gains, as people become poorer in real terms. Or because their stock portfolio/house is appreciating.
Unfortunately the Fed has fallen to both populism and political pressure. It's been obvious for months that the best risk adjusted policy was to begin tightening long ago.
I say risk adjusted, because if they're wrong about transitory inflation, they will have to hike suddenly and induce a recession. So we risk a recession and we gained what?
The economy is overheating right now, as is very obvious by retail sales being elevated 20% above baseline (resulting in shortages) and the widest gap between job openings and job seekers in history. The Fed is meant to smooth peaks and troughs in the business cycle, not pour gasoline on them.
It's a big reason that housing is having an epic, historic rally, through suppressed 10y yields which tend to lead to lower mortgage rates. If you look at the summary of Fed purchases, published monthly, they are buying bonds across all maturities, not just short term bonds as they've done in the past.
It makes closing the bottle again more difficult. The Fed is effectively monetizing the US Government deficit by buying ~60% of all new treasuries issued (bank buys bonds and sells to the Fed).
And a lot of it relates to psychology of the markets. They continue to pour gasoline and encourage risk taking at exactly the wrong time.
It's likely this money will eventually make its way into circulation... it depends on consumer credit patterns. But the money won't leave the supply until the purchased bonds fully mature, which can be up to 30 years.
So yes, QE needs to end, regardless of whether the money ends up locked away in a bank's balance sheet. I believe the Federal Reserve should enact the best risk adjusted policy, not the best policy for the immediate term, which is their new mantra.
The medium-long term risks to their current policy far outweigh the benefit at this point. Easy money policies always look more appealing from a short term perspective... always.
That's why when populism takes over the monetary system, you see these policies proliferate, often with disastrous consequences. Look at the currencies of many South American countries for evidence of this.
The FED balance sheet is also up by about 40% last year:
https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
And AFAIK the FED prints the money they buy their assets with.
> To execute quantitative easing, central banks increase the supply of money by buying government bonds and other securities. Increasing the supply of money lowers interest rates. When interest rates are lower, banks can lend with easier terms. Quantitive easing is typically implemented when interest rates are already near zero, because, at this point, central banks have fewer tools to influence economic growth.
Ok, the Fed doesn't "print" money, the mechanism is more convoluted than that. But it absolutely does inject money into the system, which is ultimately backed by "reserves" which are created out of nothing.
Every one of these bonds represents future borrowing (if rolling over the debt) or future tax revenue.
It's the secondary effects of buying these bonds that is stimulative. Lower treasury yields means investors seek higher yields elsewhere (e.g. in stocks, corporate bonds etc etc.). They buy those, driving up prices, which in turn drives down yields there too.
In any case, bond yields have been falling for decades, so if anything the GFC and COVID have just nudged things along. People are now questioning whether it's even worth owning investment grade bonds. People who want a hedge against the stock market are beginning to look at other asset classes. The wealthy are moving in to increasingly exotic and diversified asset classes. Things like forestry, commodities, private equity etc are now becoming accessible to the moderately well off and not just the super wealthy. Money managers are pushing ever more speculative investments to retail (crypto, ARK funds etc)
And spending that dollar causes the tax revenue to arise, which means all dollars and all bonds are the source of their own funding.
It's basic monetary maths. https://new-wayland.com/blog/why-tax-matches-spending/
However, currency is a medium of exchange that facilitates trade in place of barter. It's the oil in the engine, not the fuel. It's important to remember that transactions aren't just abstract financial events, they involve the exchange of time (labour) for some good or service. If you assume that all transactions in the economy ultimately deliver some fractional quantity of 'real wealth' (production of new goods and services, entertainment, knowledge, infrastructure etc), at some rate, then a similar geometric progression can be calculated for that.
The thing is that a lot of that wealth creation depends on things that don't scale with the money supply. Simply put, no matter how many trillions of $'s you create there's only one Apple to buy with them. Tax on the other hand scales perfectly since it's just another economic lever.
Low rates/yields are still a wealth inequality problem because bank deposits and, to a lesser extent, public equities are ways average people have been able to reallocate some of their idle funds to capture some of that value.
Right now it seems an excessive amount of money is flowing to the few with the big ideas, good or bad, in desperation to spur further growth and there's lots of discussion about the 'everything bubble' because most assets are inflated.
It’s always promises “Here’s a chicken, owe me one”
Until you get that clear, you’ll not realise that the monetary circuit and the real circuit are only inductively connected.
Money is the charger. Production is the toothbrush
Well, here is the kicker. The system is not the real economy, just a mechanism that lets banks borrow from each other to maintain sufficient reserves. If you want to inject money into the real economy you need to actually borrow money and do fiscal stimulus. If the government does the obvious and borrows for investments like education or infrastructure then the government not only has a liability (the debt) but also an asset (the infrastructure). If the government cuts taxes instead then it not only fails to create an asset equal to the debt it also diminishes the value of their most important asset. The ability to charge taxes.
Practically speaking there are two problems here. First, the economy has to have room for government spending and second the money actually has to be spent in a way that benefits the economy. If neither are true you get inflation.
I'd say the stimulus checks didn't really benefit the economy. The spending spree that so many people expected didn't happen. The unemployment benefits had the advantage that they are primarily given to people who have no income. I'm sure they contributed to inflation but the supply chains don't look great either. The explosion in energy prices cannot be explained by fiscal stimulus alone.
An asset swap of newly printed cash for bonds.
No offense, but sounds like you don't really understand how the Federal reserve operates.
And re: your link. Talking about wage growth in nominal terms is meaningless. Wage growth has lagged inflation all this year, aside from last month. But rents are up ~15% nationally YoY, while wages only up a few percent. This rent growth has not materialized in the CPI yet, that's coming down the pipeline.
So feel free to celebrate a nominally higher number while the poor get poorer.
Personally, I'd rather advocate against inflationary policies that harm the poor the most.
Unfortunately people who are ignorant of finance cheer on policies due to nominal increases, while the wealth gap grows ever wider.
What the hell is printed cash? QE just means banks get bank reserves which a have become a claim against the treasury bonds. Whether you own the bonds directly or indirectly via central bank reserves doesn't matter at all. Imagine the fed issues a new currency called the treasury dollars. All you can do with treasury dollars is buy treasury bonds from the fed. That's what QE does except with bank reserves which can also be used to lend out money to businesses and consumers.
Really, QE is a nothing burger. It doesn't make consumers, businesses or governments more likely to borrow. It should be stopped because it is completely ineffective. All it really does is tighten the treasury bond market which means technical buyers (money market, insurance and pension funds) who really need the bonds will bid for increasingly lower yields on the bonds. You know that is a huge surprise, the idea behind QE was that people start selling their government bonds and buy higher yielding bonds from corporations. That didn't happen as much as the Fed wanted.
That makes me, an existing home “owner” more likely to refinance, possibly with cash-out and makes many new borrowers willing/able to borrow more money than if the risk-free rate was 5% higher.
I think QE does increase borrowing; it’s not clear to me that it does it for a net good.
But the TLDR is that it distorts the activity in the treasury markets, reducing treasury yields, and encourages risk taking/juices asset valuations. And they buy 30y treasuries, so you really think in the span of 30 years this money won't get lent out?
The Fed played no small part in housing rallying 30-40% nationally in the span of 18 months. Does this seem normal or natural to you? What about the youth that want to own some day? We are multiple standard deviations above the 100yr inflation adjusted mean for housing, well above the 2008 bubble peak now.
This is called pulling forward 10 years worth of gains/value to the present, IE a generational transfer of wealth from the young (non-asset owners) to the old (asset owners). For this reason alone, the policy is a total disaster. People claim to care about wealth inequality, but cheer excessively easy money policies on at every turn.
The obvious other reason it's a disaster is because of moral hazard and risk taking that can lead to more epic declines than a smoothed business cycle. The Fed played a big part in the psychology around the dotcom and 2008 bubble, for example. Read up on the Greenspan Put. Earlier action from them could have prevented these.
The Fed buys 60% of all newly issued treasuries. This is almost banana republic levels of monetization of the debt.
Yes, the government pays interest on this debt just the same, but they have a buyer willing to pay any price without concern to fair value.
From my perspective outside the USA, a dollar note is just a perpetual bond with 0% interest rate.
Never a good idea to accuse others of not understanding something.
The subject at hand is, is the Federal reserve printing money and increasing the money supply?
The answer is yes. Calling cash an asset and thus defining printing money as an asset swap is an irrelevant distinction to make.
OP Implies the Fed is not increasing money supply, which is wrong.
Trade credit increases the money supply.
There is no distinction between any of it. It’s all credit in a unit of account
But you know the Fed has many levers to control this, such as fed funds rate, bank reserve ratios? It's part of their job to optimize these levers. Yet they choose to create moral hazard and unaffordable housing through excessively easy policy (supply chain disruptions anyone?)
Demand has been artificially distorted far beyond baseline, is the core of the supply chain issues. If you looked at the actual economic data and retail sales, personal income numbers.
Expansion of the money supply is not some magical thing that just happens in a totally free market fashion. If it were free market, the cost to borrow would be much higher, thus lower effective money supply, I assure you.
The distortion of long term treasury rates is much worse than their distortions of short term rates.
That's why they're so afraid to end QE. They know, if subjected to free market forces, long term treasury yields will spike and cause valuations to tank. Personally I think the Fed should stop focusing on the market. That's not their job
https://www.bankofengland.co.uk/quarterly- bulletin/2014/q1/money-creation-in-the-modern-economy
As someone else said earlier in the thread most of the money created is by commercial banks when someone take out a loan.
https://historyofyesterday.com/the-oldest-debts-in-history-2...
To repay the loan at country level, those holding the equal and opposite savings have to spend the money to create the tax flow that pays off the loan.
Since people tend to want to save over time, that doesn't happen.
https://www.aei.org/carpe-diem/chart-of-the-day-or-century-3...
There are a long list of reasons why, but the rent factor in CPI is likely to produce a few percent gain on it's own, given it's weighting in the measure.
(CPI lags market)
Compared to 2 years ago, the S&P 500 is up 51%, and the CPI is up 6.8%.
Compared to 3 years ago, the S&P 500 is up 63%, and the CPI is up 8.7%.
etc. Even if you think the CPI is somewhat underestimating inflation, it's clear that stock prices have been rising much faster than the value of the dollar is falling.
US Consumer Price Index is also showing less inflation than most people would experience themselves. http://www.shadowstats.com/alternate_data/inflation-charts show the both the new and the old CPI inflation numbers.
If price of beef increase a lot and people instead eat chicken the beef counts for less in the CPI. There is also a modifier if the the product have improved, ie the TV is a lot better than the earlier one.
There is no evidence of hyperinflation as of now, but we certainly have an inflation hype.
The items I buy in the supermarket are same price as before. My rent is the same as before. Gasoline is up, but I barely use any of it now when I work from home.
And, more importantly, it's merely... up. Still well below 2014 highs. There's a real concern that the wildcat producers won't come online this time. But on the other hand a huge shift to electrification hitting demand at exactly the point where you would've been counting on even sleepy wildcat for supply to come back online (sustained $100/barrel or so).
Do you have a citation for that claim? I can't find anything like what you're stating. If you're talking about the huge increase in the M1 money supply, that "increase" comes from a regulatory change that took place in April of 2020 that now includes savings accounts in the M1 measurement (thus bringing it closer in line with M2).
See: https://fredblog.stlouisfed.org/2021/05/savings-are-now-more...
If you're talking about actual printed Federal Reserve notes, that's also not the case. See:
https://www.federalreserve.gov/paymentsystems/coin_currency_...
and
https://www.federalreserve.gov/paymentsystems/coin_data.htm#...
As for:
* > Why is anyone surprised that everything costs more when everyone has more money?*
Everything doesn't cost more because "everyone has more money". If anything, recent wage increases have finally allowed some Americans to catch up to the massive increases in housing, education, etc.
As for prices going up, that's due to massive, ongoing supply chain constraints. No monetary policy is going to change that. You can read all about it in various articles linked to here on HN. If you need more evidence, look at the price of gold over the past year:
https://www.kitco.com/scripts/hist_charts/yearly_graphs.plx?...
Gold, a common inflation hedge, is down over six and a half percent since this time last year. In fact, it peaked around August 5th/6th, 2020 at $2,067.15 and has been trending downward since. Other commodity prices, which were depressed in 2020 due to COVID-19 suppressing demand, have now swung the other way and are definitely higher than they were a few years ago. However, most of them are still below their ~2014 peaks.
That said, it looks like there may be some relief on the supply chain front. There was a meeting at the White House a few days back between the President and "shipping companies, mega-retailers and unions" to deal with ongoing supply issues. It now looks like some backed-up West Coast ports will now operate 24/7. We still have a dearth of truckers due to the 2019 US transportation and manufacturing recession (see: https://www.businessinsider.com/why-trucking-industry-slowdo... ) and subsequent overall slowdown during 2020 due to COVID-19, but things are slowly improving.
We might see the supply chain issues easing soon. Container shipping rates may have already peaked (see: https://www.bloomberg.com/news/newsletters/2021-10-11/supply... ) and with increased port operating times, we'll hopefully see a reduction in transportation costs which, as of right now, are a major part of price increases.
Then there's the whole semiconductor manufacturing pipeline bottleneck but, as more chipfabs are being constructed worldwide, that should provide relief for those of us hankering after GPUs, CPUs, and whatnot, and should help automakers move inventory.