Money is kind of a weird concept when you think about it. It’s one of those fundamental aspects of society that everybody participates in and yet it’s basically made up. Like, you go to a store and buy a shirt and give the person some paper or a credit card and then you walk out and everyone is okay with that.
Banks play a large part in the creation of this money - most notably right now, the central bank of the Federal Reserve. They just made trillions of new dollars in response to the coronavirus.
Really though, how weird is that? Boom - here is new money everyone. And no one asks any questions because, hey, free money right!?
Now, I know it’s not that simple and easy but when you look at a chart of M2, which is a measurement of all the money out there, it kind of looks like a bunch of money did appear out of nowhere doesn’t it?
If you’re like me and unfamiliar with the economic concept of money measurement despite using it every day and thinking about it often and having it be the the main reason you go to work every day, M2 is just one of the methods used to keep track of all the money floating around. For example, if you define money solely as cash that would be one amount but if you expanded it to include money in checking accounts that would be a different amount. M2 is one popular measurement variant of many.
M2 is also a closely watched indicator for inflation. And, if you didn’t happen to notice the huge spike recently, it helps explain why people are worried.
If central banks are printing lots of money and increasing the supply, prices will go up because money will be worth less on a relative basis. So, all that money under the mattress won’t be able to buy as much whereas things like shirts or stocks or houses will go up in value.
At least, in theory. Reality is always (annoyingly) more complicated. Especially when it comes to mutually agreed upon social constructs like money.