The Impact of the Pandemic on Money Supply

The saying goes that a picture can tell a thousand words, and this chart depicting the M1 money supply does just that.

During the pandemic, M1 rose rapidly as a result of federal stimulus packages that were implemented to support individuals who faced financial hardships. M1 represents the total amount of currency and bank deposits held by the public. M2, on the other hand, includes M1 money supply as well as other easily convertible assets into cash.

When analyzing a chart such as this one, it becomes apparent why inflation has been on the rise in recent years. Economist Milton Friedman famously stated, “Inflation is caused by too much money chasing after too few goods.” This encapsulates what has been unfolding in the economy since the onset of the pandemic. An influx of cash from relief measures, combined with a decrease in production and supply of goods, has helped foster an inflationary scenario.

However, over the past few months, M1 has started to trend lower. In fact, it is declining at a rate not seen since 1930. So, what exactly is going on?¹

M1 appears to be shifting for a variety of reasons, with the predominant one being the expenditure of stimulus funds. This trend is expected to continue for the foreseeable future.

When I observe charts like this one, I can’t help but feel relieved that I’m not a Federal Reserve governor. Determining monetary policy is an enormous challenge that requires officials to consider many different factors. As wealth advisors, we may not always agree with the Fed’s approach, but we understand the elements involved in their decisions and are constantly evaluating the possible outcomes.

If you have questions or concerns about the state of the economy, reach out to your advisor to discuss the most effective ways to navigate times of uncertainty.

¹Reuters.com, March 30, 2023. “US money supply falling at the fastest rate since 1930s.”