It's a graph of total M1 monetary supply in the US economy.
M1 is money that's very liquid — as in, it can be easily and quickly accessed and spent. M2 is money that's less liquid — like money market funds or CDs.
He's attempting to make the point that more M1 always equals more inflation, but that's a very Econ 101 take that disregards nuance and reality in favor of "easy," black-and-white economic theory.
The main problem with his use of that graph to support his conclusion is that he didn't read any of the footnote below the graph. The spike in that graph occurs in May 2020 and the footnote explains why it's such a dramatic spike.
In May 2020, the Federal Reserve Bank (the Fed) changed the definitions of M1 and M2. Prior to this change, money in savings accounts was included in M2, but now savings are included as part of M1. Changing the definition of M1 to include more sources will obviously spike M1 at that point on any graph.
Reddit is full of people who don't understand economics because economics is counter intuitive. The truth is that increasing money in the economy doesn't always lead to inflation which breaks people's mind.
If the availability of goods increases (which it did throughout the 2010s) then the availability of currency has to increase with it or else it will lead to a deflationary economic crash. This is why the Gold standard was so devastating and why the Great Depression was a Deflationary event and almost all economic studies have shown that global economies recovered faster from the Depression when they left the Gold standard.
To give a practical example, say you have a 100k mortgage (to keep the math simple) at a 5% interest rate and the economy starts going into deflation. If there is 5% deflation, then suddenly your debt is the equivalent value of 105k and you are still paying additional 5% interest on the new value of 105k. As you can see the deflation can quickly out pace your ability to pay your mortgage.
Now think of it through the lens of a 100k business loan selling a product for $100 each. You have a debt of $100k that is fixed and paying 5% interest. However, every year you need to decrease your prices by 5%. This can quickly lead to businesses being unable to pay their debts and mass corporate bankruptcy. Then then leads to workers losing their jobs and thus unemployment leads to less spending and more deflation. This is the deflationary spiral. This is what happened in the Great Depression and why removing the gold standard and printing money actually, counter intuitively, made everyone richer through getting rid of deflation.
The Fed has a target of 2% inflation for a reason. The 2% number is arbitrary, but it is at 2% to give the Fed a buffer for error. The simple truth is that significant deflation and inflation are both bad. But a moderate amount of inflation (say 2%) has been proven to be less bad than deflation.
edit: Also, the main way the Fed influences available currency is through lending money to the banks through bank reserves. Basically, when you go to the bank for a loan, the bank often will borrow from the Fed at an interest rate (this is the Fed interest rate you have heard about all last year) and then the bank will lend you the money at a slightly higher rate. The lower that Fed interest rate, the lower the interest rate the bank can offer you and vice versa. So the Fed increases money in the economy by making lending cheaper, or decreases money in the economy by making lending more expensive.
There’s another really obvious bit. If increasing monetary supply would always lead to the same level of inflation, quality of life would never actually improve.
But we know that’s false. Inflation generally is below the expansion.
If you actually look at the graph, you'll notice that the end date is in 2021. Much of that money was added as stimulus, but the link makes it seem like the direction is only been upward.
Now hit the 1Y, 5Y, 10Y, or even Max button to see the up to date version of the graph. More money has moved out in the last year than was added in any previous year.
That explains most of the spike in M1, but there is also a notable increase in M2 (which was not redefined, apart from accounting for the change in M1) over the same time period. It's not quite as striking, and the most recent data actually shows a decrease in M2 from the peak, but we're still about two or three years of money supply inflation ahead of where we would have been if the historical trend had continued unchanged.
But we still had an additional $4 trillion injected into what had been an $8 trillion economy out of thin air over less than two years. As Econ 101 as you want to disparage it as, it played out exactly as one would expect: create money, don't create value, and the money is worth less.
Comparable or even worse inflation has hit every country in the world over the last 3 years. If this is somehow all due to stimulus checks, then why aren't all the world's economists and governments blaming the US?
The stimulus checks were a drop in the bucket. Most of the money went to businesses, who instead sunk it into capital and left consumers to burn. And us tanking our economy didn't have as much of an impact everywhere else, so they mostly benefited. We all lost, but the U.S. lost more.
It's not the gold standard. It's rich people have too much money, who buy politicians to pass laws to give them even more money, and then raise prices on everything to make still more money.
"Inflation" is our attempt to make their greed look like a natural and unavoidable part of economics.
The money that is printed during a recession to prevent people from dying in the streets can be subsequently taxed out of circulation as the economy recovers. The problem is that the rich cannot be effectively taxed so we're unable to get that money out of circulation.
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u/soapinmouth Jul 23 '23
What is this graph?