What M1 Can Tell US About Today’s Inflation

The graph above is the M1 money supply for the U.S. Dollar. M1 is the measure of the most liquid money supply, the quantity of all demand deposits (like checking accounts) denominated in a currency and all physical denominations of the currency held outside banks.

This data set nicely puts the recent expansion in the supply of Dollars into perspective. Do you remember the loose monetary policy when Ben Bernake, Janet Yellen, and Jerome Powell chaired the Federal Reserve during the Obama and Trump administrations, (the first three years of the Trump administration to be precise)? That is represented by the slightly steeper slope from 2010 to 2020 than the decades before, which caused the M1 money supply to double in ten years.

Then came March 2020 when the graph goes vertical. Good, old-fashioned quantitative easing had nothing on Fed monetary policy during the first couple months of the SARS-COV-2 outbreak in the United States when M1 tripled. Then, in May 2020, the vertical rise tapers off to an annualized growth rate of 45%, significantly steeper than the 50 years before COVID-19.

I’m not sure how many people understand how significant it is that the quantity of cash tripled in just two months in 2020 and is now growing at a rate that will do that every three years. When trying to explain away the inflation we find ourselves in, people who think the money supply doesn’t matter need to stare at that vertical line and ask themselves if we have experienced short-term supply chain disruptions of equal magnitude.

Inflation doves should also look at real wages. I get the impression that their indifference toward price stability comes from an assumption that inflation just hurts the wealthy while the average worker benefits from the economic stimulus of monetary expansion. Last year, average hourly wages did grow by a significant 4.7% in 2021, which had a very tight labor market, but in the same year, inflation was 6.8%. So average real wages declined by 2.1% despite the highly enhanced bargaining position of labor. Certain basic realities about macroeconomics cannot be wished away.

Eric Shierman lives in Salem and is the author of We were winning when I was there.