The M2 money supply has increased over 25% in 2020 but it isn’t impacting inflation. This tells me that all of that money that has been printed is just going to the rich and increasing income inequality.
Have you heard about the federal reserve printing money this year to prop up the stock market? Have you, seen the money printer goes brrrrrr meme? Heard people worrying about potential inflation?
Well, I did some research to see just whether all of this was a worry. I of course, knew about the stimulus. I had heard about the Fed getting $6T ready to lend out as needed in the middle of the crisis. Turns out they never needed to lend more than a few billion out. But nevertheless, Congress also passed the stimulus for $2.3T in the Spring. And there’s potentially more stimulus to come.
What impact is this all going to have? Should we worried about inflation? How do we protect our assets if inflation does come about? Especially, in this environment where all assets seem to be overinflated.
The M2 Money Supply
The Money Supply is measured in a few ways. Basically, the M1 money supply measures all money in circulation, M2 adds in savings deposits, CD’s and money market accounts. Typically, M2 is the metric economists focus on when looking at money supply, especially in relation to inflation.
Here’s a five-year snapshot of the M2 money supply of the United States from the St. Louis Federal Reserve.
Notice anything odd in 2020? Well, apparently the fed has been printing a few trillion dollars in 2020. It’s of course not unusual that they are printing money as every year the money supply increases.
However, there has been a greater than 25% increase in the money supply in 2020 alone. That is a massive spike.
Impact on Inflation?
Well, that is the curious thing. You would think that the money supply would have an impact on inflation correct? After all if you remember basic economics if the supply of something (in this case money) increases and demand doesn’t then prices will go up. Correct?
But inflation has not increased. Every month inflation is tracked and there has been no increase in inflation more than the typical approximately 2% a year.
Velocity of Money
The reason why is simple. Inflation only occurs if there is increased spending. The velocity of money is the term that economists use to track the circulation of money through the economy.
The question is not just how much money exists in the economy. But also, how fast that money is changing hands… i.e. being spent.
If all of that increase in the M2 money supply doesn’t end up in the hands of the people spending it and is just sitting in a bunch of companies and rich people’s bank accounts, then it will not cause inflation.
It’s pretty clear if you look at the CARES Act that this is the case. Here’s a breakdown of the $2.2T Bill.
- $300B for one time payments to Americans
- $260B for increased unemployment benefits
- $670B PPP loans to small businesses
- $500B to large corporations
- $340B to State and Local Governments
As, you can see about 25% or $560B from the one-time payment and increased unemployment benefits went directly to the people. The rest went to businesses and the government.
This was one of the few bipartisan bills that both Republicans and Democrats agreed on in 2020. The one thing they can agree on is let’s give out money to the rich?
I know the thought was that if you keep the small businesses and corporations funded then people won’t lose their job. Well two things wrong with that. One, why not just skip the pass through and help the people directly? And two, these businesses for the most part took the money and then closed and laid people off anyway.
It Gets Even Worse
So, remember what I was talking about with money supply and the velocity of money above. Well, eventually, that more than 25% increase in the money supply is going to start to get spent.
Right now, all of that money is why the stock market, real estate market, bitcoin, gold etc. are all hitting record highs. But eventually, people will sell some stock and take a vacation and buy some plane tickets and clothes, spend money at restaurants… or sell some gold and buy a vacation home, which they’ll spend money on gas for their car to go back and forth to, buy some furniture etc.
i.e. eventually this money will start to circulate. The velocity of money will pick up. And then at that point inflation will pick up.
Which means that not only did you not receive any of this fabulous socialism for the rich. But the little bit of money that you do have is going to be worth less.
You know typically, I’m not a tear it all down kind of guy. But they are really making it hard this year.