Covid has broken and distorted a great number of things – businesses, industries, supply chains, hopes, dreams, and even many people’s capacity for reason.
Large businesses and the people who work for them have thrived (e.g. Amazon, Microsoft, Facebook.) Small businesses (and the people who work for them) have struggled and many have failed (restaurants, small retailers, etc…)
Now many demand higher wages to offset the risk (and hassles) of working with the public. Shipping backlogs are causing unprecedented delays and reduced supply. People flush with cash and booming investment portfolios are willing to pay more for everything from used cars to housing.
Increased production costs. Reduced supply. Excess cash. And behind it all – governments printing literally trillions of dollars.
It’s like the perfect storm for inflation.
It’s a good story anyway.
If you are an online person at all, you have probably seen inflation in the number of people concerned about inflation in recent months. In particular, great concern about the amount of money that the Fed is printing.
“Hyperinflation is coming! This is not normal! The US is going the way of Zimbabwe!!!!”
Cue, the meme: Money Printer Go Brrrr
Behind a lot of these not-unreasonable totally normal people trying to
get you to buy Bitcoin raise inflation awareness is one chart, M1 Money Stock
If I had a dollar for every time I’ve seen this chart since the nearly infinite increase in the supply of US dollars (* etc) in May 2020, I would have about 85 Zimbabwe cents .
But since I don’t want to be The Boy Who Cried Hyperinflation, I figured it would be worth taking 5 minutes to understand if the Fed really did print 13 trillion dollars in just a few months. Like, half of all GDP?
And wouldn’t you know it, no, no they didn’t.
What actually happened?
A change in accounting rules.
M1 is mostly liquid currency – bills, coins, and checking accounts. Banks are required to keep reserves on hand for all of this.
M2 is another measure of money in the economy which includes money market accounts and savings account. The main difference between a checking and savings account is that the latter has a limit of 6 monthly withdrawals. Banks are NOT required to keep reserves for these funds because you are “saving” not “spending.” (And they even get to lend against these.)
Then last year when things were dark and the future uncertain, placing roadblocks in the way of people spending their savings seemed problematic so the Fed changed the rules. The monthly withdrawal restrictions on savings account were suspended, making them function like a checking account. They were now fully liquid and thus included in the M1 measurement.
The interim final rule allows depository institutions immediately to suspend enforcement of the six transfer limit and to allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits at a time when financial events associated with the coronavirus pandemic have made such access more urgent.
What would we expect to happen with this change? Don’t ask me, ask the Fed:
Recognizing savings deposits as a transaction account as of May 2020 will cause a series break in the M1 monetary aggregate. Beginning with the May 2020 observation, M1 will increase by the size of the industry total of savings deposits, which amounted to approximately $11.2 trillion. M2 will remain unchanged.
So anyway, the Fed (actually the Treasury) isn’t printing as much money as people think.
But what about inflation from other sources – supply side, demand side, etc…
Here is what the CBO projects – modest inflation for the next 10 years with wage growth exceeding price growth.
Much of the inflation that is moving through the system now should be transitory.
Covid -> lockdowns / demand drops -> production drops / supply decreases -> Vaccines & return towards normalcy -> increased demand -> prices rise due to lack of supply -> production increases -> Prices drop
See lumber as an example.
There will be exceptions, of course – rents are currently down in big cities, but housing prices in vacation areas (etc) are through the roof. The ability of many people to work from home long-term combined with a fundamental shift in how people value their non-work time (combined with inability to build to meet demand) probably mean higher prices in these areas are here to stay.
The Fed isn’t printing as much money as many think. Inflation should be mild and transitory. Your mileage may vary.