M1 and the Right Thing To Do
Updated: Mar 21
This blog is to do with how people of faith can respond to the climate change dilemmas that we face. Yet climate change is itself part of a bigger picture — the overall Age of Limits that we are entering. The sketch shows some of the elements that make up the Age of Limits — they all interact with one another in ways that are often difficult to understand or even identify.
One of the elements is economics, which brings us to the actions of the Federal Reserve in recent months. The Fed directs the economy through the manner in which it supplies money to the economy. One of its levers, the parameter M1, controls the liquid portion of the money supply. It includes currency in circulation and demand deposits, such as the money in a checking account.
The following chart shows the value of M1 for the last forty years or so.
It can be seen that the Fed gradually increased the amount of money starting in the 1970s. There was a pronounced increase in 2008/09 in response to the recession that occurred at that time. M1 then continued to increase much more quickly than it had in the past. But what happened in the year 2020 is totally unprecedented. The line went vertical — straight up. In the same 40 year period of time the government’s tax receipts increased modestly, but at nothing like the same rate as M1. At the time of writing, the U.S. Congress is close to authorizing another stimulus package, which means that the M1 line will continue to climb almost vertically as we enter the new year.
To a non-economist, this increase in money supply, without a corresponding increase in taxation and true economic productivity, seems like a looming disaster. If there is too much money chasing too few goods then can reasonably expect the money to lose value, i.e., we will have inflation. However, these numbers put us in uncharted territory, so no one really knows. But the situation is worrisome.
Which makes me wonder as to how people of faith should respond to the calls that we should provide financial assistance to the millions of people who have been badly hurt by the pandemic: the newly unemployed, those who cannot make the next rent or mortgage payment, and small business owners who were already operating with razor-thin margins. Of course, we would like to help these people. But if that means that M1 continues its vertical climb, who is going to pay the piper? There is no free lunch — someone, somewhere will have to pay for the stimulus money, or else the value of the money will be inflated.
It is possible that some of the stimulus money will, in fact, stimulate the economy, put more people back to work, thus increasing tax revenues. But it seems doubtful that those payments will come close to matching the growth of M1. We need to recognize that the payments we make now will have to be paid back by someone, somewhere.
We all want to help those who need help, but what’s the cost? None of this is easy.