The M1 (money supply) is all the paper and coin currency sitting in wallets and bank vaults +plus+
all the electronic money sitting in checking and savings accounts. (official definition below.)
it expands because
the Fed decides to print money (literally print money, not a bad thing or a good thing, just a literal thing) and uses it to buy bonds, MBS etc. from people, corporations etc who have been holding them for some period of time. (Quantitative easing)
The Fed printed up quite a bit during the COVID era.
For now suffice it to say if it is not a bad thing, if it “doesn’t matter” then why was it not done during the 80s recession? during the dot.com/9-11 recession? during the 2008 banking crisis?
Nope. It’s some kind of bad thing.
How bad? what’s gonna happen? Well that’s guesswork. But if it were a nice safe thing to do, it would have been done before.
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Official definition (spacing added):
"M1 consists of
(1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions;
(2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and
(3) other checkable deposits (OCDs), consisting of negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, share draft accounts at credit unions, and demand deposits at thrift institutions. M1 (WM1NS) | FRED | St. Louis Fed
Oh, okay well maybe it was a risk . . . and the risk paid off, and now the problem is over, right?
Maybe the Fed should have done it before they just suddenlygot brae enough to try this risky thing and “ya know waht? we should been doing this all along.” right.
Well very quitely, just before Thanksgiving the the Federal Reserve reported a $19.9 BILLION operating loss in Q3 2024 up from $16.9 billion in Q2.
This marks the 8th consecutive quarter of operating losses for the central bank.
Despite now owning more bonds and MBS tha ever, despite earning more interest from those bonds and MBS than ever the Fed is losing money nad has been lsoing money non-stop since the COVID bailouts.
I expect you will hear a lot about this (and related matters)
oooh . . . in about 52 days
I’ve always found it kind of funny how money is only worth what it’s worth because we all say it is. Let everyone say “eh this ain’t worth jack” and suddenly it would be useless.
Well every dollar (or nickel or penny) ever issued, was at one time worth a bond paying x%.
In the old days central banks would buy gold and issue currency.
Today central banks buy bonds (and, unfortunately MBS) and issue currency.
So, you are correct to avoid saying “money is worth nothing, backed by nothing” that sort of rhetoric from my fellow cons is unhelpful.
Money is worth bonds, but what those bonds pay is subject to an ever-changing rate and the rate is set by the central bank so, you’re right. We don’t know what it is worth becasue it is worth whatever the Fed decides its worth.
Right now it is worth face value plus 4.28% per year.
The Fed’s big balance sheet (remember it bought all those bonds and such during COVID) earned it
$37.958b last quarter, that’s a lot more than usual.
But what was even more unusual was that it paid-out even more,
It paid out a whopping $58b on overnight reserves and things like overnight reserves.
The fed never does this. Okay, never did this until COVID and now it can’t stop doing it.
If you think the banks are in trouble (I do) you can call it “a very quiet bank bailout.”
If you think the banks are NOT in trouble yous can call it “Corporate welfare. Free money for banks for no reason.”
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The only thing you can’t call it is “business as usual.”
It is not a normal thing.
One thing economists know for certain is that when people sell their bonds (or anything else) they buy things.
Since the economy is measured by how much buying is going on, many economists, the Fed decided, during the COVID shutdowns, to print money and buy things.
Since the bond sellers then buy things “the economy is healthy.” Whether such and economy is truly healthy or just “healthy on paper” seems to depend on whether you are a liberal (Keynesian) or a conservative (3 other schools), but that is what the Fed did and that is why we did it.
Today even arch-liberal economists, like Paul Krugman admits “We overdid it. We printed too much.”
It’s the same way with the Fox body Mustang market. They are only valuable because we believe they are valuable. They aren’t rare cars; they made millions of the damn things from 1979 until 1993. Although it is getting hard to find clean ones. I found a clean 93 model exactly with what I want. GT hatchback, 302, 5-speed, unmolested red exterior with black leather interior. I’m kind of shopping around for one because I never had one but loved them as a kid and I want to get something I can keep for a long time as an extra vehicle and then gift to my son when he starts driving. Needs to be a classic with stupid exhaust on it since he will probably be going to high school with a bunch of kids that drive silent electric cars. Nah bro, he needs an American V8 that screams vulgar noises when you mash on the throttle.
That’s the one good thing about living in the south is that I could actually keep one of those in good condition here since they don’t salt our roads.
I think you might be misinterpreting interest on reserve balance payments. The Fed has paid interest on reserves since 2009(ish) and uses IORB to create the reservation price for banks to lend. When the Fed cuts the rate they pay on IORB, it reduces the FFR (and of course the whole yield curve, as you know).
When the Fed “raises interest rates” it means they have to pay more interest on reserves (and vice-versa). This isn’t a covid-era change, it’s the new monetary management system in a world of ample reserves.
To be clear, I might be entirely misinterpreting what you wrote.
To be fair, gold is only worth what it’s worth as a unit of monetary exchange because we say it is. It can’t be eaten or lived in. Our ancestors only valued it because it was shiny and they all agreed to standardize on it (well most people did; the Spanish were weird in that they standardized on silver instead and by extension the Americas as a whole because their empire was so huge; notably in the future United States Spanish silver dollars were the primary unit of money until we made our own money system after the Revolution).
In the modern era it does have inherent worth since many electrical contacts in small devices use gold plated contact since its a useful conductor in certain situations where the resistance of said contact is important. So it is inherently useful now. But that’s a recent thing. That inherent value didn’t exist for most of history. We valued it solely because everybody valued it and that dates back to our ancient ancestors who liked shiny things.
The Fed has a “profit” in part and a “profit” out part.
“Profit” in part:
(Free money for banks and bond investors)
Quantitative easing. The free market says “I don’t want your stinking bonds those things are too risky.” Fed says “Free markets are stupid. Central planners are smart. I will print money and use it to buy bonds.”
The “profit” in part is that the Fed collects interest on those bonds.
“Profit” out part:
(Also free money for banks)
Raising the Fed Funds rate.
Free market consumers and business want to save money. They want to keep it in banks and other places and don’t want to borrow anymore. So, the banks can’t lend money to anything that is safe etc… The Fed says “Free markets are stupid. Central plannrs are smart. If the free market won’t pay you big bucks for your overnight holdings I will. Here! Have some more free money.”
Thing 1) The Fed prints money and buys bonds (quantitative easing). It earns interest (“profit”) on the money those bonds pay.
**Thing 2)**The Fed pays interest to banks for holding their cash on the side and not lending it out. (Fed Funds rate.)
Typically the Thing 1 and Thing 2 run roughly in balance. Typically the Fed makes a small “profit” which it returns to the Treasury. Right now they are not in balance and have not been for quite a while. Like cancer, it’s not the size of the lump that kills you, but the lump is definitely a bad sign.
I don’t actually agree with your interpretation of the Fed policy moves. By establishing a price floor on overnight holdings the Fed is simply managing the money supply. In a fiat currency regime this is no different in outcomes than the fed buying and selling in open market operations. It just provides a stable base instead of relying on daily operations.
IORB isn’t QE. It’s akin to the money you get paid on your savings account. It simply establishes the floor - I don’t think I hear consumers saying “I don’t trust the markets so I’ll park money in a savings account because I know better than the stupid market”
