I understand that the demand increased for dollar in the past couple of years but still, with the recent 40% increase in its supply I would’ve expected some sort of a drop in value.
In: 0
The idea that the supply of dollars increased 40% in 2020 is wrong. (Although it did increase substantially.)
The data comes from the St Louis Fed, and it does show a massive increase in (iirc) March-May 2020. However when you see something strange like this you should question whether it’s really showing what you think.
And if you look into the detail – which isn’t exactly hidden away, it’s straight after the graph – you’ll see that it’s not actually a load of new dollars being created, it’s a change in what is counted within the “M1” supply.
There are different measures of “money”. M1 is the most “liquid” – basically meaning it can be spent easily and quickly. What the fed did was start counting a load of dollars in savings accounts as M1 money rather than M2 money. If you looked at the M2 money supply you’d see it going down by the same amount.
These kinds of savings accounts used to come with conditions like requiring notice before withdrawing money. However things have changed so it’s easier and quicker to withdraw money, making these accounts more “liquid”. This, in fact, does increase inflation (it increases the “velocity of circulation” – how fast money moves around the economy) – but it’s not something that happened all of a sudden in 2020 (and also it’s not something the government did).
Latest Answers