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How much money is the Fed printing?

We hear frequently that the Fed is printing money like crazy these days. This is not quite true. There are various definitions of money: For money that is being printed, one needs to look at currency in circulation, which actually counts all printed banknotes less those that have not left the Fed’s vaults. So, has the money in circulation increased like crazy since the start of the latest recession?

The currency in circulation (technically called the currency component of M1) is indeed increasing, but there is no indication that it is accelerating. To see this, we have taken the natural logarithm of the series. This means that if the slope is the same for two years, the growth rate is the same. Not taking the natural logarithm would show an illusion of acceleration, as a 1% increase in 2014 would look much bigger than a 1% increase in 1960 because the stock of currency has increased over time.

And why did it increase? One major reason is simply that the economy has grown and needs more currency to function. In the graph above, we divide the currency in circulation by nominal gross domestic product (GDP). While this ratio has indeed increased recently, it is nowhere near historical highs as some commentators seem to imply. In fact, it also seems to follow a neat U-shaped long-term trend. Thus, again, nothing special in recent years.

How these graphs were created: For the first graph, search for “currency” to find the right series. In the graph tab, expand “Create your own data transformation” and select the “Natural Log” transformation. For the second graph, undo the natural log transformation by selecting the empty transformation. Then search for GDP (not the Real one; we want a ratio of nominal series) and add it to series 1. Finally, use the data transformation “a/b” to obtain the ratio.

Suggested by Christian Zimmermann

View on FRED, series used in this post: CURRSL, GDP

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