Recently, the Federal Reserve stealthily admitted that it has no ability to steer and manage the economy any longer and that its traditional tools cannot be relied upon to prevent economic disaster.
How exactly did the Fed tacitly make this galling admission? It do so by refusing to any longer publish M1 and M2 monetary figures.
What Are M1 and M2?
M1 and M2 are official names for certain aggregate counts of the money supply. M1 refers to the total amount of money that is currently in circulation in the country, plus all of the money that is currently sitting in all people’s and institutions’ checking accounts. M2 includes a count of everything in M1, plus all of the money that sits in savings accounts, money market accounts and certificates of deposit, or CDs.
According to a post on Seeking Alpha from April 12, the Fed has not published updated figures for either M1 or M2. The last published M1 figure came from the St. Louis branch of the Fed in February.
The Fed Is Out of Ammo
The fact that the Fed is no longer publishing data about how much money exists in the country is very distressing. To understand why, however, it is necessary to understand what the Fed does.
The Fed is usually referred to as the “lender of last resort” for the banking system. Normally, banks engage in what’s called fractional-reserve banking — that is, they lend out more money than they actually have to lend and only keep a fraction — say, 10% — of depositors’ money on hand. If everyone ever came to withdraw his money from a bank all at once, that bank would collapse.
By creating so much additional credit, banks fuel speculative booms in assets like real estate and stocks.
The Fed’s purpose is to create money and give it to banks, thus shielding them from the consequences of lending with fractional reserves. The Fed can also decrease interest rates to make borrowing money seem more attractive. In essence, it prolongs speculative booms. But prolonging a boom cannot permanently stave off a bust.
When institutions like banks or major companies are in trouble — mainly because they engage in various unsound financial practices — the Fed creates money to bail them out and buy off their bad assets. Since companies know the Fed will bail them out if anything goes wrong, they have no incentive to engage in prudent financial behavior.
But with all of the bailouts and coronavirus stimulus spending that we’ve seen of late, those in charge at the Fed know that they’ve created so much money that it’s best the public not be acquainted with the full extent of it. The Fed fears that if the public knew about how much money it has created, an inflationary death spiral would follow.
The Fed’s refusal to publish M1 and M2 is a desperate bid to keep the game going.