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> The Fed has committed to lend or buy [up to] $8 trillion in financial assets The M2 money supply[1] is currently $16T. If the Fed creates $8T in new money, d

> The Fed has committed to lend or buy [up to] $8 trillion in financial assets The M2 money supply[1] is currently $16T. If the Fed creates $8T in new money, does that mean that the M2 grows to $24T and therefore the purchasing power of U.S. dollars will be 2/3 of what it used to be? If your nest egg is mostly in cash right now, what should you do? [1] https://www.federalreserve.gov/releases/h6/current/ https://www.federalreserve.gov/releases/h6/current/

gridlockd 6y ago
Putting the money on the balance sheet by itself does not affect prices, only the expectation that it will be spent - along with the expectation that even more money will be created. Now the question is, what will that money be spent on? It's not the stuff that's in the CPI, therefore the average consumer will not immediately lose purchasing power, at least for domestic goods. This is why we have seen massive asset price inflation but very little inflation in terms of CPI. It's politically convenient, people don't really notice it unless they want to buy a house. If they have a stock portfolio, they're happy about the paper profits. > If your nest egg is mostly in cash right now, what should you do? The following is not financial advice: If you're 100% cash, you should diversify. Asset prices are bound to stay inflated, the value of the dollar (and other currencies) in terms of assets is bound to go lower. You should look at rising stock prices within an economic crisis as an indicator of cash losing value. Also consider that pretty much all governments are now creating money, so there's no safe-haven currency. Could the market turn again, could you buy at a lower price yet? Absolutely. If that happens, are the governments going to create even more money to stop the slide? Most likely.
wegs 6y ago
Yes it does. Value is being destroyed by the lock-down. Nest eggs are drying up. There's a lot Congress could do to stem the bleeding from a flood to a trickle, but it's not doing it. I don't think there's much individuals can do to protect themselves; folks on Wall St. are looking for the same sorts of places to stash their wealth, with much bigger teams. If someone finds a safe place, the value goes up as people buy it up. That's the point of index funds. In an ideal case, everything would lose value at about the same speed -- cash and stocks -- so a $100 index fund is still worth $100 (with obvious winners and losers within). That's inflation, but it distorts things less. Inflation hurts people with savings, but helps people with debt. There's way too much debt in the system right now, which is causing structural harm as people can't keep up with payments (be that airplane leases, mortgages, student loans, or otherwise). A little inflation right now is healthy. If your nest egg is cash, and that's worth 2/3, that's still a lot better for you than if it doesn't inflate, but the US economy collapses. So I'd accept the inflation. But there are smarter policies we could put in place if we hadn't elected politicians who were qualified, rather than ones who acted relateable. Next year doesn't look better: it's Biden v. Trump at the federal level, and likewise down the line. We needed a Warren or a Bloomberg -- someone who isn't dumb.
- lonelappde 6y ago
  Inflation is a giveaway to people who took money and were expected to return it. It hurts people who do real work for wages.
  - wegs 6y ago
    Inflation doesn't hurt people who do real work for wages. It helps people who have debt. It hurts people who have cash savings. It's neutral for people who live paycheck-to-paycheck. But on the whole, that summary misses most of the explanation. Inflation has less to do with individuals than with the whole way business finance works, and the whole way that monetary policy works.
sparkie 6y ago
> and therefore the purchasing power of U.S. dollars will be 2/3 of what it used to be? Pretty much, yes. The price of goods are going to skyrocket over the next 6-18 months. > If your nest egg is mostly in cash right now, what should you do? If only there were a currency which nobody could arbitrarily devalue by increasing the supply. The case for Bitcoin right now is bullish.
DrAwdeOccarim 6y ago
I'm a layman when it comes to economics, so take my opinion with a grain of salt. The way I think about it is, when the Fed "creates" like this, who actually gets it? Well, it's the person who holds the asset the Fed will buy. Those assets (like bonds) are held primarily by the wealthy. The wealthy already have enough money to do the things they want and most of the time it's about watching the number in the account go up. What I mean is, it seems like there are two economies. The economy where the wealthy* buy things. Things like art, yachts, houses in coastal cities, stocks, bonds, fancy education, fine collectables, fancy cars, fancy clothes. And the economy where the normal people buy their normal things like TVs, cell phones, commercial air travel, food, normal clothes. So when the wealthy* get money for their assets from the Fed, they aren't really buying the same things normal people are buying. So inflation so far has not crept into normal things. It has crept into wealthy* people things, a lot. Of course there is bleed-over, like housing and education and medicine, where inflation is showing up because the wealthy* and the normal people compete for the same resources or similar types of resources. So when you're talking about purchasing power, are you referring to living a normal life or a wealthy* life? If it's the former, the current CPI seems like not a big problem.
- alexpetralia 6y ago
  Yes, though this also affects many people who have retirement accounts and pensions. The difference is primarily between those who derive their income from capital (the financial economy) and those who derive it mostly from labor (the real economy).
  - sideshowb 6y ago
    Yeah, this. Can't speak for the US but in the UK most of the middle class (at a guess around 50% of the population) has at least some* of their retirement savings in pension funds which rely on capital growth to fulfill their intended purpose. *most of the rest being in house prices to which the same applies in part.
  - DrAwdeOccarim 6y ago
    I kind of agree, but again me ≠ economist. I've found value in looking at the median reitrement account value of Americans. I say median, because the wealthy* skew the mean and so it's not valuable. https://dqydj.com/retirement-savings-by-age-united-states/ https://dqydj.com/retirement-savings-by-age-united-states/ So this tells us the average person who is retired or approaching retirement, has about $40,000 of retirement savings. If that went down to $20,000 (50% drop in total market) would that change their normal person lifestyle a lot? I would say no, because CPI is pretty low and prices are pretty low for things normal people buy. It shows the inflation in asset prices seem to be detached from reality.
jdc 6y ago
does that mean that the M2 grows to $24T and therefore the purchasing power of U.S. dollars will be 2/3 of what it used to be? Not necessarily - especially if people are hoarding cash! See Sal Khan's video, Deflation despite increases in money supply. https://www.khanacademy.org/economics-finance-domain/macroeconomics/macro-long-run-consequences-of-stabilization-policies/macro-money-growth-and-inflation/v/deflation-despite-increases-in-money-supply https://www.khanacademy.org/economics-finance-domain/macroec...
- gcb0 6y ago
  This is the best economic answer to the question of why dollar doesn't had inflation like other currencies that increase supply. much better than the "the rich will only inflate art prices" that is currently on top of this one. But also ignores the military power. Which plays a huge part on why the dollar is always so strong, regardless of how much is printed. When Saddam decided to sell oil in euro, or Venezuela decided to accept gold, the US was ready to bring democracy and peace. On a free market you can't shut down a bakery if they decide to buy flour from your competitor.
stereolambda 6y ago
On a small, non-investment scale I'm now a little more inclined to spend for pleasure or acquiring skills (hopefully they're useful and might be an investment themselves). Normally I'm more of a compulsive capital saver, but right now who knows what will happen to value of money in the future. The divorce of stock market and the economy on the ground is another thing with trajectory that's hard to predict. I expect later outcomes in the world to be "interesting" in some way. Recently I've read about 1929 and some say that initially stocks crashed while the economy was still mostly fine. It was a very prolonged process and on the way people had very little idea what's happening. From the perspective of early 1930s, any prices from late 1929 that briefly seemed "bottom" to contemporaries were still very much peak. I wonder if older economies, like pre-Revolutionary Europe with aristocrats and peasants, could legit provide a better model of these parallel movements. Maybe not, since everyone was more anchored to grain.
coryfklein 6y ago
Lyn Alden did a fantastic in-depth explanation of this [1]. Monetary devaluation is a part of it, but inflation and deflation can work together at the same time in interesting ways. [1] https://www.lynalden.com/great-depression/ https://www.lynalden.com/great-depression/

gridlockd 6y ago

Putting the money on the balance sheet by itself does not affect prices, only the expectation that it will be spent - along with the expectation that even more money will be created. Now the question is, what will that money be spent on? It's not the stuff that's in the CPI, therefore the average consumer will not immediately lose purchasing power, at least for domestic goods. This is why we have seen massive asset price inflation but very little inflation in terms of CPI. It's politically convenient, people don't really notice it unless they want to buy a house. If they have a stock portfolio, they're happy about the paper profits. > If your nest egg is mostly in cash right now, what should you do? The following is not financial advice: If you're 100% cash, you should diversify. Asset prices are bound to stay inflated, the value of the dollar (and other currencies) in terms of assets is bound to go lower. You should look at rising stock prices within an economic crisis as an indicator of cash losing value. Also consider that pretty much all governments are now creating money, so there's no safe-haven currency. Could the market turn again, could you buy at a lower price yet? Absolutely. If that happens, are the governments going to create even more money to stop the slide? Most likely.

wegs 6y ago

Yes it does. Value is being destroyed by the lock-down. Nest eggs are drying up. There's a lot Congress could do to stem the bleeding from a flood to a trickle, but it's not doing it. I don't think there's much individuals can do to protect themselves; folks on Wall St. are looking for the same sorts of places to stash their wealth, with much bigger teams. If someone finds a safe place, the value goes up as people buy it up. That's the point of index funds. In an ideal case, everything would lose value at about the same speed -- cash and stocks -- so a $100 index fund is still worth $100 (with obvious winners and losers within). That's inflation, but it distorts things less. Inflation hurts people with savings, but helps people with debt. There's way too much debt in the system right now, which is causing structural harm as people can't keep up with payments (be that airplane leases, mortgages, student loans, or otherwise). A little inflation right now is healthy. If your nest egg is cash, and that's worth 2/3, that's still a lot better for you than if it doesn't inflate, but the US economy collapses. So I'd accept the inflation. But there are smarter policies we could put in place if we hadn't elected politicians who were qualified, rather than ones who acted relateable. Next year doesn't look better: it's Biden v. Trump at the federal level, and likewise down the line. We needed a Warren or a Bloomberg -- someone who isn't dumb.

lonelappde 6y ago
Inflation is a giveaway to people who took money and were expected to return it. It hurts people who do real work for wages.
- wegs 6y ago
  Inflation doesn't hurt people who do real work for wages. It helps people who have debt. It hurts people who have cash savings. It's neutral for people who live paycheck-to-paycheck. But on the whole, that summary misses most of the explanation. Inflation has less to do with individuals than with the whole way business finance works, and the whole way that monetary policy works.

sparkie 6y ago

> and therefore the purchasing power of U.S. dollars will be 2/3 of what it used to be? Pretty much, yes. The price of goods are going to skyrocket over the next 6-18 months. > If your nest egg is mostly in cash right now, what should you do? If only there were a currency which nobody could arbitrarily devalue by increasing the supply. The case for Bitcoin right now is bullish.

DrAwdeOccarim 6y ago

I'm a layman when it comes to economics, so take my opinion with a grain of salt. The way I think about it is, when the Fed "creates" like this, who actually gets it? Well, it's the person who holds the asset the Fed will buy. Those assets (like bonds) are held primarily by the wealthy. The wealthy already have enough money to do the things they want and most of the time it's about watching the number in the account go up. What I mean is, it seems like there are two economies. The economy where the wealthy* buy things. Things like art, yachts, houses in coastal cities, stocks, bonds, fancy education, fine collectables, fancy cars, fancy clothes. And the economy where the normal people buy their normal things like TVs, cell phones, commercial air travel, food, normal clothes. So when the wealthy* get money for their assets from the Fed, they aren't really buying the same things normal people are buying. So inflation so far has not crept into normal things. It has crept into wealthy* people things, a lot. Of course there is bleed-over, like housing and education and medicine, where inflation is showing up because the wealthy* and the normal people compete for the same resources or similar types of resources. So when you're talking about purchasing power, are you referring to living a normal life or a wealthy* life? If it's the former, the current CPI seems like not a big problem.

alexpetralia 6y ago
Yes, though this also affects many people who have retirement accounts and pensions. The difference is primarily between those who derive their income from capital (the financial economy) and those who derive it mostly from labor (the real economy).
- sideshowb 6y ago
  Yeah, this. Can't speak for the US but in the UK most of the middle class (at a guess around 50% of the population) has at least some* of their retirement savings in pension funds which rely on capital growth to fulfill their intended purpose. *most of the rest being in house prices to which the same applies in part.
- DrAwdeOccarim 6y ago
  I kind of agree, but again me ≠ economist. I've found value in looking at the median reitrement account value of Americans. I say median, because the wealthy* skew the mean and so it's not valuable. https://dqydj.com/retirement-savings-by-age-united-states/ https://dqydj.com/retirement-savings-by-age-united-states/ So this tells us the average person who is retired or approaching retirement, has about $40,000 of retirement savings. If that went down to $20,000 (50% drop in total market) would that change their normal person lifestyle a lot? I would say no, because CPI is pretty low and prices are pretty low for things normal people buy. It shows the inflation in asset prices seem to be detached from reality.

jdc 6y ago

does that mean that the M2 grows to $24T and therefore the purchasing power of U.S. dollars will be 2/3 of what it used to be? Not necessarily - especially if people are hoarding cash! See Sal Khan's video, Deflation despite increases in money supply. https://www.khanacademy.org/economics-finance-domain/macroeconomics/macro-long-run-consequences-of-stabilization-policies/macro-money-growth-and-inflation/v/deflation-despite-increases-in-money-supply https://www.khanacademy.org/economics-finance-domain/macroec...

gcb0 6y ago
This is the best economic answer to the question of why dollar doesn't had inflation like other currencies that increase supply. much better than the "the rich will only inflate art prices" that is currently on top of this one. But also ignores the military power. Which plays a huge part on why the dollar is always so strong, regardless of how much is printed. When Saddam decided to sell oil in euro, or Venezuela decided to accept gold, the US was ready to bring democracy and peace. On a free market you can't shut down a bakery if they decide to buy flour from your competitor.

stereolambda 6y ago

On a small, non-investment scale I'm now a little more inclined to spend for pleasure or acquiring skills (hopefully they're useful and might be an investment themselves). Normally I'm more of a compulsive capital saver, but right now who knows what will happen to value of money in the future. The divorce of stock market and the economy on the ground is another thing with trajectory that's hard to predict. I expect later outcomes in the world to be "interesting" in some way. Recently I've read about 1929 and some say that initially stocks crashed while the economy was still mostly fine. It was a very prolonged process and on the way people had very little idea what's happening. From the perspective of early 1930s, any prices from late 1929 that briefly seemed "bottom" to contemporaries were still very much peak. I wonder if older economies, like pre-Revolutionary Europe with aristocrats and peasants, could legit provide a better model of these parallel movements. Maybe not, since everyone was more anchored to grain.

coryfklein 6y ago

Lyn Alden did a fantastic in-depth explanation of this [1]. Monetary devaluation is a part of it, but inflation and deflation can work together at the same time in interesting ways. [1] https://www.lynalden.com/great-depression/ https://www.lynalden.com/great-depression/