The Shocking Rise of the M1 Money Stock

I follow inflation closely. I follow the Federal Reserve’s monetary inflation by following its balance sheet. The Fed’s balance sheet exploded from 2008 to 2014. It has exploded again since March 2020, and it continues to go higher.

I also follow consumer price inflation data. I think it is understated, but it is still useful for looking at trends. It also tells us what the financial powers-that-be are thinking, particularly the Fed. If the CPI starts rising consistently at 5% or more per annum, then this will be significant. So far, it has not done this.

After the Fed started so-called quantitative easing (QE) in the fall of 2008, we have not seen massive increases in consumer prices. Stocks, which don’t get measured in the CPI, may be the one major exception. Real estate is also booming in many areas, but that is a more recent phenomenon.

One of the major reasons that prices did not explode with the Fed’s balance sheet is because much of the newly created money went into excess reserves at the banks. The Fed’s base money was not largely used for fractional-reserve lending.

When banks lend out money with fractional reserves, it effectively puts more money out there in circulation. If you deposit $10,000 into your bank checking account and the bank loans out $9,000 of it, then you still have access to your $10,000 while someone else is using $9,000 of it.

Excess reserve requirements were eliminated in March 2020, which got little attention. While it hasn’t seemed to have had much impact yet, we don’t know what impacts it will have in the future.

I have not typically paid as much attention to the Fed’s charts on money stock. There are charts for M1 and M2. I haven’t always found them to be reliable or in any way predictive of what’s to come. Still, I don’t think they are irrelevant.

I am not going to go into the details of what makes up M1 and M2. When I go to the charts, they say they are discontinued. I don’t know what they will look like in a couple of months and whether they will be updated.

When I recently saw a chart of M1, I was shocked. I know what the Fed’s balance sheet looks like. I have followed that very closely for the last year, so I know the unprecedented monetary inflation taking place.

Still, we haven’t seen prices rise a lot according to the CPI numbers. I definitely pay more for chicken at the grocery store than I did a year ago. However, it is not like I am paying double the amount for groceries. The rise in my food bill is nowhere near the rise in the Fed’s balance sheet.

When things just kind of hum along, it is easy to get complacent. There was an unprecedented rise in the base money supply after 2008. Many people warned of severe price inflation, but it never really happened, at least for most things. Even if you think the CPI numbers are understated, they aren’t understated that much. We certainly haven’t been experiencing anything close to 10% annual price inflation, as a few hysterics claim. If we had actually had 10% per annum price increases since 2008, then prices would be three to four times higher than what they were then. This is not the case.

But just because the last period of massive monetary inflation (2008 to 2014) did not result in massive price inflation, it doesn’t mean that we are immune to it now.

Again, I am cautious in how much importance I put on government charts, especially the money stock. I know there are many factors at play, including the velocity of money (the demand for money).

Looking at the M1 chart though is scary. It did not spike up after 2008. The rate of increase may have picked up, but there was never a major spike.

In 2011, the M1 money stock crossed the $2 trillion mark. It crossed the $4 trillion mark in 2020. So it took almost 9 years to double. Ironically, it crossed that $4 trillion mark right around February 2020 and again at the beginning of March 2020, so it makes an easy starting point from when the hysteria began.

In February 2021, the M1 money stock passed the $18 trillion mark. It has slightly retreated from there as of this writing. It actually looks like a hockey stick.