Why I Stopped Holding Cash

What's up, Graham? It's Guys here, and I want to talk about something rather concerning that's been brought up a lot lately on my channel, and that has to do with this statement here: "25% of all US dollars were created in 2020."

Now, usually, it's easy to hear something like this and then dismiss it as something your Uncle Larry would say over a Thanksgiving dinner while talking about the Great Reset. But that statement usually doesn't do itself any justice without being accompanied by this graph here, which shows you the M1 money supply. As you can see, since the 1970s, the amount of money in circulation slowly increases year by year at a normal pace. But then we get to 2020, and boom! It immediately jumps up 20% nearly overnight, and then again, mid-November, it suddenly jumps up another 10% seemingly out of nowhere.

So, given how many people are bringing this up, the confusion over what's really going on, and how many people are concerned about the severity of having so much new money entering our economy, let's talk about it. I'll tell you what's going on, I'll tell you whether or not this is something to be concerned with, and then, of course, what you could do about it. And by the way, there was a lot of time and research that went into making this video, so if you appreciate the information, it would mean a lot to me if you inflated that like button by making it turn blue for the YouTube algorithm. That way, YouTube knows to recommend this video to a brand new audience who could also smash the like button, and then we could slowly take over YouTube with personal finance videos that help people make more money. So, thank you so much for doing that, and let's begin here.

All right, so to understand what's going on, you first got to understand this chart right here. This is called the M1 money supply. Consider this kind of like your "I wish they taught this stuff in school" lesson because, seriously, from all the stuff they taught us, this was left out, and arguably some of this is the most important information that we need to know because it relates to our money that everyone uses in order to survive. But don't worry, YouTube to the rescue, and we can just learn all this stuff here.

So here's how all of this works: anytime we measure how much money is out there floating around from person to person, we do so by calculating what's known as M1, M2, and M3. Now, I know it sounds like we're talking about BMWs, but just think instead money one, money two, and money three, and each of those represents something different.

At first, we have M0. This is the physical cash money out there that you might have in your pocket, hiding under the mattress, or the money I'm holding in my hand, or the money in a bank vault somewhere, ready to be taken by the Joker. Next, we have the M1 money supply, and this is the very spooky chart that I showed you at the beginning of the video. This represents a combination of all the money in checking accounts as well as all the physical money that I mentioned in M0.

Next, we have M2. Now this includes money sitting in savings accounts, money market accounts, or other accounts with less than a hundred thousand dollars that people don't use for day-to-day spending. This number also includes everything in M1, so you basically take M1, add it to M2, and this is the number you get. After that, finally, we have M3. This includes investment accounts, retirement accounts, and other long-term holdings that you would not necessarily spend immediately, but you could if you really wanted to. And just like the others, M3 also includes M2, which also includes M1, which also includes M0.

So to break it down even further, just think of it like this: if you have a hundred dollars in cash, a thousand in your checking, ten thousand in your savings, and a hundred thousand dollars in a retirement account, then M0 would be a hundred, M1 would be eleven hundred, M2 would be eleven thousand one hundred dollars, and M3 would be all of that combined at one hundred and eleven thousand one hundred dollars.

Each rating has a different classification as to how easily it could be spent, and the closer it is to cash, the lower the number you're gonna have. So once you understand that, we need to finish this off with what's known as the velocity of money. This tracks how often that money is actually spent and then how often it circulates throughout the entire economy. For example, if I spend ten dollars at a restaurant, who then pays their server ten dollars, who then spends ten dollars at a grocery store, who then spends ten dollars with their wholesaler to pay for more food, who then pays ten dollars to the farmer who makes the food, who then pockets the money and makes a YOLO investment into GameStop, that works out to be a money velocity of five because the money has changed hands five times.

The velocity of money shows how willing people are to spend their money, and generally, the higher the velocity of money, the better our economy is doing because it's showing that that money is transferring from one person to another. Well, as you can see right here, we have the lowest velocity of money in history because people are not spending money.

So what's going on? Because here's where things start getting quite juicy. When you see a massive uptick in the M1 money supply or money in checking accounts, it doesn't necessarily mean that 25% more money was just magically printed out of thin air. Now sure, some of it is absolutely created by multi-trillion dollar stimulus packages, but the rest of it might be a little less alarming.

Now initially, the largest shift of money into the economy was through the $2.3 trillion CARES Act, so that's an easy one to display on the graph. As we see right here, more money was created and leveraged as debt. Banks didn't have to keep as much money in reserves so they could lend more money at a very low interest rate. More people were incentivized to refinance and borrow money because of it, and overall that equated to more money in our economy.

Now normally, when this happens, we would see rampant inflation, but in this new economy, with everything closed down and nowhere to spend our money, that money either sat around doing nothing, as we could see by the velocity of money right here, which again is at its lowest level in history, or the money was invested, which might explain some of the hyperbolic growth of the stock market. But once we go into the few recent weeks where it seemed to have spiked suddenly without any warning whatsoever before even another stimulus package was announced, we have to go into a few other potential causes.

First, there is a big shift of money that moved from savings accounts and into cash and checking accounts, or to put it more appropriately, there's a big influx of money from M2 and into M1, where it could be spent more easily. The thinking was that this was around the same time where some mortgage forbearances would be expiring. We weren't sure if rental protections would be extended beyond December 31st, and end-of-year financial obligations may have cost some money to move from M2 and back into M1, or basically money just moves from savings accounts into checking accounts or M2 into M1, and that shows up as a big blip right here.

Now second, it was also theorized that this might have something to do with the proposed tax changes on capital gains for people making over a million dollars a year. There have been quite a few proposals for tax increases and further taxes on inheritances, and because of that, many wealthy people have shown an interest in planning for that ahead of time or cashing out now when they know their capital gains are going to be at a lower rate. The same thing could also be said about private equity firms or corporations who want to lock in a lower tax basis just in case they end up going up.

Now third, as more people save money and don't spend it, it's going to be reflected in the amount of money they have in their checking and savings accounts, and that would further inflate the number that you see here. After all, if you lost your job, you're getting unemployment, and you're not sure when you can start working again, chances are you're saving as much money as you can right now, and that money isn't flowing back through the economy like it normally would. As we can see here from the chart, the personal savings rate has skyrocketed, the velocity of money is down, and that could help boost up the M1 and M2 money supply.

Or, in other words, overall, yes, more money was introduced through the trillion dollar CARES package. People were then forced to save more because there were fewer places they could spend their money. Low interest rates promoted more borrowing so people would have access to more money. Then the velocity of money dropped because people had nowhere to spend it, and because of that, there was a very large influx of money into checking and savings accounts than during any other time in history. This is why the money supply ended up seeing such a big increase this year.

But the spike that we saw out of nowhere in the middle of November was not because the Fed increased their balance sheet, otherwise known as printing money, which, as we could see right here, has remained fairly constant. Instead, this was due to a large amount of money moving from savings accounts and into checking accounts and cash. That would imply that people or institutions want more money available to them in cash at the end of the year for maybe some of the reasons I just discussed.

So that, of course, leads us to what does this mean for all of us, and is this even a big deal to begin with? Well, the biggest concern people have when they see this is that their money is losing value through inflation. When there's such a large increase of money entering the economy, the go-to thought is that now our money is worth less, prices are going to be going up, and now we need to make more money to pay for the same things that we could buy a year ago.

And they're somewhat right. The more money that's out there, the higher the likelihood that prices will end up going up. However, what makes this so unique is that with everything shut down, there's actually not enough demand out there to create inflation. For there to be inflation, there actually has to be more demand to push up the cost, and without it, prices would stay the same.

For example, if the Fed were to print two trillion dollars but then go and put it all under a mattress, that's not going to cause inflation because there's no pressure to spend it. At this point, what the Federal Reserve is desperately trying to avoid is deflation. This means prices come down because there's less demand to buy them, and over time, your cash becomes more valuable. So then people start hoarding cash, causing prices to go down even further, and then just starting the cycle all over again.

And when it comes to a recovering economy, that is not what we want. That's usually associated with an all-out depression, which is definitely not what any of us want. So, in a way, to jump-start the economy, more money can be introduced without creating inflation in the traditional spots that we see it.

Now, the counterargument to this is that with everything shut down and nowhere to spend your money, where does all the money go? And in this case, that could very well be in the stock market and in real estate. Even though we might not see normal inflation in the sense of going to the grocery store or going and buying clothes, we're certainly seeing higher prices in things like the stock market, real estate, gold, Bitcoin, or any other investment that people could stock money away with.

Some of this might be in part due to the Fed lowering interest rates to zero and creating a frenzy for people to borrow as much cheap money as they can, but some of it might also be in part to people having more money left over that they would normally spend. Because of that, they have more money to invest. The only realistic concern that I see is that if demand comes surging back after all this is over and interest rates are still near zero percent, there could very well be an argument for inflation.

I don't necessarily think there's going to be hyperinflation that would devalue our currency into pretty much nothing, but at this rate, it's a little like picking between the lesser of two evils. Would you rather have deflation during a time where our economy is extremely fragile, or the potential of future inflation when things recover? I would argue that the potential for inflation in the future is a lot better than a strong likelihood of deflation today.

So from that perspective, what we're seeing now is better. Kind of. Now, in terms of what you could do about all this, it's really rather simple. I think the only cash that you should really keep on hand is enough to cover a three to six-month emergency fund with money held within a high-interest savings account and enough in a checking account to cover your day-to-day expenses. And then, of course, the rest of it should be immediately invested unless you're saving up for something in particular.

The reality is that long term, your money is going to be losing value over time. It's how our economy was designed, and even though some periods might lose value faster or slower than others, it's never a good idea to sit on too much cash for too long without investing it. Now, if we see inflation, that's typically going to boost up real estate and stock values. If you have a mortgage or a low-interest rate loan, that loan is going to become a lot easier to pay off in the future with future dollars than it would be today.

So unfortunately, inflation benefits those with assets and low-interest rate debts, like with mortgages on real estate, and it hurts everybody else who now needs to make more money to pay for those exact same things. Now, I'm not implying that this specifically is going to cause inflation. Like I mentioned, I think this has more to do with money moving from savings to checking accounts than the Fed just printing more money. But regardless of the reason, it's never a good idea to keep more cash than you need on hand without investing it long-term.

So, I hope this clears up any confusion the next time you see anything about 25% of all currency printed in 2020. Because sure, there is some truth to that, and there was a lot of money thrown at the economy to keep it running. Although more recently the big jump in money supply has more to do with money moving from savings into checking than it does about the Fed just magically printing more money. Tax changes, the end of forbearance, and year-end tax changes could all play an effect on this, but it is unlikely that it was just another injection of money from the Fed without any warning at all.

Regardless, though, yes, there is a lot more money in circulation. A lot of that has to do with people having fewer places to spend their money, so they just choose to keep it. Until there's sufficient demand again, we're unlikely to see inflation. Now, in the future, that might be a different story as stock and real estate prices continue to go up. But at least now, you know more about it and how the money supply affects you and your wallet.

So with that said, you guys, thank you so much for watching! I really appreciate it. As always, make sure to destroy the like button, subscribe button, and notification bell. Also, feel free to add me on Instagram; I post there pretty much daily. So if you want to be a part of it there, feel free to add me there, as on my second channel, The Graham Stephan Show, I post there every single day I'm not posting here.

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