The story goes something like: In the last few years, the Federal Reserve printed up to 80% of all bills that were ever in circulation. While Austrian economists have long recognized the superfluousness of central banking and understand the benefits of a decentralized monetary system, it’s important not to give in to false ideas, even if they appear to support honest ones.
It starts by recognizing the existence of various money supply measures. Perhaps the most shocking is the M1 chart:
In April 2020, the M1 figure stood at $4.79 trillion, then it skyrocketed to $16.24 trillion the following month. To clarify, this surge was primarily a result of the Fed’s revised definition of the money supply, without restating the prior amount before May 2020.
This topic was discussed in the article: Why Prices Have Gone Up, published last year. In a Technical Q & A, the Fed explains:
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.
Meaning, from May 2020 (M1 of $16.24 trillion) to its peak in March 2022 (M1 of $20.66 trillion), the balance sheet grew by approximately $4.42 trillion, representing a growth of nearly 30%. While this may appear significant, it is still far from 80%.
On the same Q & A, the Fed includes a graph illustrating the changes to the M1 money supply, specifically highlighting the revision made in May 2020:
With no revision made to the M2 money supply, it provides a clearer interpretation. Taking the March 2022 peak of $21.70 trillion and going back to February 2020, to coincide with the beginning of the official recession, we have an initial starting point of $15.45 trillion. This two-year period represents an extraordinary increase in the money supply of around 40%. See below:
It may also cause confusion when the term “printed” is used to describe the money supply. The Fed or commercial banks do not physically print dollar bills. Instead, the money supply is increased through the creation of credit (debt), and the production of notes and coins is handled by the Treasury.
Looking at the currency in circulation, which reached its highest point last month at $2.32 trillion, and comparing it to February 2020, when it stood at $1.80 trillion, we see a growth rate of approximately 30%.
In the last several years there has been a significant increase in the money supply. While it’s far from the 80% figure seen on social media, it still appears to be substantial. It’s also important to remember, there is no optimal or ideal amount of money that should be created, and this highlights the inherent flaws of an unsustainable monetary system that has long since drifted away from sound economics.
A few days ago, Frank Shostak reminded us:
Because the present monetary system is fundamentally unstable, there cannot be a “correct” money supply growth rate … Whether the central bank injects money in accordance with economic activity or fixes the money supply growth rate, it continuously destabilizes the system.
However, it ultimately traces back to the Fed. During the same period from 2020 to 2022, the Fed’s balance sheet expanded from approximately $4 trillion to nearly $9 trillion. However, this is $9 trillion too much, and unless the Federal Reserve is completely abolished or prevented from interfering in the free market, we will continue to experience the roller coaster ride known as the boom-and-bust cycle.
The noteworthy headline should read that during the previous recession, the Fed doubled its balance sheet, and if a similar approach is taken in the upcoming recession, then the current high prices of today would pale in comparison to the price inflation that would inevitably follow.
