M1 Money Stock(fred.stlouisfed.org) |
M1 Money Stock(fred.stlouisfed.org) |
US domestic savings rates are near all-time highs. [2]
The money supply was expanded in order to offset the drop in velocity from Americans putting their money into savings accounts and into the stock market - risking a deflationary spiral. The Fed has tools available at its disposal to contract the supply should velocity go up in order to meet its goal of a steady 2% rate of inflation. [4] They have admitted it may be transiently higher than 2% as the economy re-opens but their goal is an average of 2%, not to avoid spikes. Spikes historically are normal and common.
[edit] A good way to conceptualize this is if the Fed printed a $1T coin and gave it to me, then I threw it into a vault and didn't spend it, would that impact the prices in the CPI basket? No, because the supply expanded and the velocity contracted commensurately. This is what's happening around America on a smaller scale as COVID spooked folks into saving. More about the relationship between supply and velocity and inflation here. [3]
The "inflation scare" people are talking about now isn't whether there's already secret inflation we're not talking about (although it does come up, it's more of a fringe idea). Rather, whether the Fed's tools to reduce supply are sufficient to offset a big increase in velocity now and moving forward.
[1] https://fred.stlouisfed.org/series/M1V
[2] https://fred.stlouisfed.org/series/PSAVERT
[3] https://seekingalpha.com/article/4411210-money-supply-myster...
For the record, on average across the US, house prices on a dollars per square foot basis have kept pace with inflation, as have wages. [1,2] Should they not have? Maybe, but that's a fiscal policy matter, not a monetary policy matter (i.e. take it up with Congress, not JPow).
Inflation is a forcing function to invest your idle capital as idle capital is worthless. GDP = Supply * Velocity. If you hold your capital, you're lowering the GDP.
Yes supply tends not to drop, the Fed prefers to allow the economy to "grow into" the supply, through increasing productivity, increasing population and through the 2% inflation target.
[1] https://fee.org/articles/new-homes-today-have-twice-the-squa...
[2] https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
[1] https://markets.businessinsider.com/news/stocks/stock-market...
[1]: https://en.wikipedia.org/wiki/Equation_of_exchange
[2]: https://www.economist.com/finance-and-economics/2020/11/21/w...
What do savings accounts pay in the USA? We are getting much less than inflation here in New Zealand. A regular savings account might get 0.25% at best, and just 0.90% pa return for a 3 year term deposit (which is an investment not a savings account but short term term deposits are commonly used as pseudo savings accounts in NZ).
As for putting money into the stock market, surely that money needs to be spent eventually or moved into bonds, so couldn't the government just stop selling bonds to force spending?
Right now, the best ones are at about 0.5% APY, maybe just a tiny bit higher. 3 year CDs are about 0.8% or so.
What do you think of the current fear of hyperinflation?
When you refer to the Fed's tools for reducing the money supply, do you mean the selling of financial assets?
Since the average person has money saved and this is not greatly effected by the financial markets, does it not stand to reason that the Fed has limited power to reduce inflation outside of said financial markets? I.e. the price of things people care about such as food, services and rent will continue to rise even as the Fed sells assets?
Correct me if I'm wrong folks, but my understanding is the Fed controls the money supply through adjusting fractional reserve lending rates, benchmark interest rates, and through selling purchased assets (mostly T-bills).
The US economy is largely debt-driven, and increasing reserve rates means fewer loans are available to create. Increasing interest rates means loans are less attractive. Selling back bonds means that cash leaves circulation.
In principle it is justified, the money supply is increasing endlessly. The problem is that this money doesn't flow, it's in some stagnating pond basically. You have to consider though, that although this an increase in the money supply, it is also a liability that has to be paid back eventually. When inflation doesn't materialize for a long period of time and then suddenly it goes up to a level above the target, but not in an unsustainable fashion, the Fed will be able to increase interest rates again.
E.g. house prices can no longer rise because future funding is more expensive/scarce than present funding. People stop taking on more debt and they do one additional thing, they start pay their debts off. Things are heading into the exact opposite direction, as you are paying off your debts, the money supply contracts.
This is why the Fed doesn't want unconventional policy like helicopter money, because there is nothing that cancels out the increase in supply, the problem with debt and QE is that you need to be credit worthy or own assets so it is extremely regressive.
>I.e. the price of things people care about such as food, services and rent will continue to rise even as the Fed sells assets?
This actually has nothing to do with the Fed, rather it has to do with the fact that people are working and they are producing the things that you want to buy. If there is inflation in food this is a signal that companies should produce more food, so the real question becomes whether companies are able to expand production and whether they can do so fast enough to outpace inflation. Of course, beyond a certain level of inflation it becomes increasingly difficult to do this.
Simplified example: Think about it this way, you play an MMORPG and an AI can automatically generate items that people want to buy. People keep putting dollars into your game and those dollars are not consumed. You get a premium currency in the game and from a theoretical perspective it is effectively worthless, you can't buy groceries with it. However, you can buy in-game items. Now lets say you are a "central bank" in the MMO and just send everyone 1 million premium currency. The currency should be worthless now right? Actually, the AI can keep up with the production of new items, its relative value compared to items is still the same, you actually run into a completely different problem, too much money in bank accounts after people bought all the items they wanted. If new players join the game there might be enough money for everyone but it is not distributed equally and therefore they don't get any items.
See also M2 velocity:
[1] https://fredblog.stlouisfed.org/2020/09/the-feds-balance-she...
Is the Fed printing money? Yes. Is it dire? Unknown.
M2 is "M1 plus savings and time deposits, certificates of deposits, and money market funds".
Washington post has a good article talking about the cases for and against inflation rising [1]. This chart shows one case for inflation, cases against include supply chain problems, unemployment, and cautious households.
[1]https://www.washingtonpost.com/business/with-no-inflation-in...
It's not as bad as that graph makes it look.
Last April, all the money that was in savings and money market accounts seemingly got transferred to the m1.
"...the modification of Regulation D in late April has effectively rendered savings accounts almost indistinguishable from checking accounts from the perspective of depositors and banks. Accordingly, the composition of M2 between M1 and non-M1 components conveys little economic information."
https://fredblog.stlouisfed.org/2021/01/whats-behind-the-rec...
I agree that establishing a direct relationship between the Fed and individuals could be a better way to stimulate the economy than expanding the availability and demand for loans and buying bonds, but does it have to be done on the blockchain? Couldn't it simply be handed like any government account, and keyed to, for instance, your SSN? You can then transfer it via ACH/RTP or FedWire to your bank account.
I'm open to the idea that a CBDC could be an interesting innovation I'm just not entirely sure what the specific benefit would be here, and would be interested in your opinion.
Also, the Fed is very leery of destroying commercial banking in the US via postal banking or a direct CBDC - I'd expect (if we ever do go that way) for there to a hybrid model. Under that system, banks provide the services to support a digital dollar, while the Fed works through them.
As for "why blockchain" - there's no real reason if the Fed is going to do the work/be the source of trust.
https://greatdemocracyinitiative.org/document/central-bankin...
The market has remained irrational far longer than any of us can remain solvent. Eventually Coyote has to look down and fall... right?
I suppose I'd have to watch the Fed, which is holding interest rates at basically zero, and thus continuing to pump money into the asset markets. It's not causing CPI inflation because what goes into the asset markets isn't increasing demands for milk, and while it's weirding the real estate market, it's swamped by pandemic-based real estate weirdness.
Remember, when you get a mortgage to buy a house including land you will eventually have to pay the mortgage back and if you aren't doing so yourself, then your tenants have to do it and their income gains don't exceed CPI as of now (assuming no job switch). Even if you sell, you are speculating that someone else thinks that way and if no such person exists then the price of housing will go down.