A rose by any other name would crash the economy
Photo by Nathan Dumlao on Unsplash
‘Welcome back Governor, congratulations on the re-election!’ Some low-level lackey exclaims as you pass.
“Couldn’t have done it without your fine work.” You plaster on your finest politician grin as you try maintaining eye-contact with the poor. Sports jacket and cargo shorts? Whoever hired this man should be fired.
You shut the door to your office and sigh. Despite a narrow margin, you did it. Using every dirty trick, bribe and promise under the sun, you managed to get re-elected governor. And what did it cost?
A few beachfront condominiums promised to some influential Soviet gentlemen, an embarrassing TikTok dance campaign to entice to the Gen Z voters and… oh yeah, a promise to solve the states burgeoning homelessness crisis.
Little did you know at the time but homeless tents have started to span entire suburbs of the inner cities, blocking all paths and really lowering the resale value of the apartment complexes.
But there is one problem. The state has no money to fix this crisis.
Well… correction. They do have several million set aside to combat the crisis, but you recently made some ill-informed bets on the horses and you need to ‘reallocate funding to restructure debt obligations aiming to realign current illiquidity concerns and achieve short to medium term financial stability’. Ok you’re going to pilfer the dough, but that first answer sounded far more governmental and impressive, right?
You straighten your tie in the mirror and open the laptop on your desk, doing a quick check of your own name in Google. Disappointed by the low search results, you turn your attention back to the problem of homelessness. How can you make several thousand homeless tents and people disappear? You know how to make money disappear, but people are a little trickier.
Or are they?
“Get my public relations team in here!” you below to the lackey in the shorts. You have an idea.
Within the hour, one sentence is scrawled across the office chalkboard. Your magnum opus.
“Rehousing initiative: Ultra portable, low-income accommodation solutions for transitory, fiscally unencumbered voters.”
With one small change you are going to solve homelessness and rehouse every person living on the streets, and you wont need to spend a penny to do so!
You change legal classification of ‘house’ to include ‘ultra-portable, low income’ dwellings like… tents.
Now, ‘tents’ aren’t lining the city streets, there are newly erected ‘tent-like houses’.
Instead of homeless people pan-handling for change, there are unconventional new homeowners… well they are still pan-handling for change for now but that’s only because you haven’t thought of a better classification for panhandling to reassure the average voter that something is being done. ‘Small-scale charitable donation campaigns’ maybe?
A genius move, if you do say so yourself. Homelessness is now nonexistent and homeownership levels have quadrupled. There will be parades in the streets in your honor, you think to yourself… just so long as they don’t parade near any of those ultra-portable alternative accommodation dwellings…
…Do you see this graph?
It’s a pretty boring graph, for the most part. That is until it gets to 2020. Then woah mama does it get interesting.
See this is a historical graph of the supply of M1 money printed by the Central Bank of America, the Federal Reserve. In May 2020, for some reason the M1 money supply shot up dramatically, almost like someone printed billions and billions of dollars almost overnight. I bet you can think of some kind of important event that was kicking off around May 2020, right?
So, a reckless Central Bank tried to print their way out an economic crisis risking hyperinflation? Pretty compelling story. It’s a shame its not true.
But I’m getting ahead of myself… What’s an M1?
Well, central banks talk about money a lot. Money is basically every second or third word out of their mouths. So much so, in fact, that even they find the term ‘money’ a bit confusing and vague.
So, they split up the definition of money to help breakdown what they are talking about.
M0, M1, and M2.
(Note: in Australia we use a similar system, but the Reserve Bank of Australia calls ours M1, M3 and Broad money… because the number 2 has been outlawed on every day except Anzac Day.)
M0 money is any money that has been printed or minted by a government. Open your wallet right now and look inside, you have a $20 note, 2 twenty cent pieces, and a five-cent piece that is old and dusty and hiding behind a half-used Coffee bean stamp card. This would all be considered M0 money, and by this definition, your total monetary worth would be $20.45.
M0 also includes central bank deposits, which are special things that only get transferred between banks and central banks, basically as an IOU. You can look in your wallet as much as you want but you wont find anything because your body is a temple and not a financial intermediary so let’s stick with the M0 =$20.45.
Next is M1 money. This is includes everything in M0 AND any demand deposits. Open that wallet of yours again. You could use that debit card to pull out $500 from your bank account, available to you right now. So, that $500 plus the $20.45 means that your M1 value would be $520.45.
M2 includes everything in M0 AND M1 AND any fixed savings accounts you might have. Open that wallet again. Technically you have $20,000 in a fixed term savings account with your bank which is rightfully yours, but in order to get a better interest rate on your money, you would need to go talk to a banker to change things around and move it out of your savings account and it would be a whole ordeal… I don’t know why you opened the wallet, the money wasn’t in there.
That would mean your M2 value would be $20,520.45.
Now for the 18 trillion dollar question, why does any of this matter? A rose by any other name and all that jazz. Who cares?
Well, banks have to deal with different regulations depending on if the money they are dealing with is considered M1 or M2.
Did you ever think it was odd that banks put a limit on the number of times you can withdraw from a savings account in the past? Did you notice that they don’t do that as much anymore?
That wasn’t them being jerks… well it wasn’t the only reason… It was regulations from the Federal reserve regarding M2 money. M1 money doesn’t have the same issues.
During Bat cough season, known as early 2020, the Fed recognized that during a pandemic, people need access to their money and so they changed the definition of M1 money.
So, when the Federal reserve increased the M1 money supply, they either printed more physical cash, increased the amount of money available in demand deposits, or did something new.
Before May 2020, M1 money included checkable deposits. After May 2020, the definition changed to include liquid deposits.
With that one little word change, much of the money in M2 became reclassified as M1. Because of that change M1 more than doubled. Instead of having to breakout the money printers in order to get everyone easier access to money, the just changed an annoyingly vague word.
They didn’t build new houses, they just reclassified the tents.
I GUESS YOU COULD SAY THEY WERE PAST-TENTS IN THE PAST TENSE!
Sure, there has been printing of dollars, because there always is, but not to the extent that that graph suggests. Not to the hysterical, wheelbarrows full of cash in the streets levels that the internet is worried about.
Sometimes finance is exciting and impressive and frightening, but despite all the memes and the fear surrounding hyperinflation, sometimes its just a bunch of money nerds playing with big fancy words.
Originally published at https://quantitativepleasing.substack.com on September 28, 2021.
