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Why did checking accounts surge during the pandemic?

Here's a nerdy puzzle for you. See if you can figure out the answer before I tell you.

"Checkable" deposits represent money you can get your hands on quickly—like a checking account—as opposed to things like CDs, which you can access only when they mature. Here are checkable deposits per household:

During the pandemic, what happened? It looks like people transferred lots of money into accounts where they could get to it more readily in case of an emergency. Right? Maybe it would help to show you M1 money supply, which is just checkable deposits plus physical currency in circulation:

Total M1 increased by $11 trillion in a single week! What's going on?

The answer is that this has nothing to do with the pandemic. That's just a weird coincidence. What happened is that on April 24, 2020, the Fed ended its rule that you could withdraw money only six times a month from savings accounts. This made savings accounts effectively checkable, so a few days later the funds in saving accounts got added to M1 all at once. Banks were allowed to redesignate accounts at their own pace, which is why the checkable deposits chart takes several quarters to show the full change.

So the increase in checkable deposits didn't represent anything real. It was just due to a change in definitions. The moral of the story is that it's not enough to look at data and invent plausible stories. Sometimes you need to know the hidden guts of where the data comes from.

7 thoughts on “Why did checking accounts surge during the pandemic?

  1. marcel proust

    The moral of the story is that it's not enough to look at data and invent plausible stories. Sometimes you need to know the hidden guts of where the data comes from.

    Eh... you can go pretty far as an economist without knowing anything about the hidden guts of where the data come from: for example.

  2. rick_jones

    What happened is that on April 24, 2020, the Fed ended its rule that you could withdraw money only six times a month from savings accounts.

    Ok, so I don’t get every memo, but a six withdrawal limit on a savings account doesn’t pass the sniff test.

    1. James B. Shearer

      "Ok, so I don’t get every memo, but a six withdrawal limit on a savings account doesn’t pass the sniff test."

      There was something like this on so called "money market" accounts which at one time long ago paid good interest rates. I was affected by it at least once.

  3. Joseph Harbin

    Kevin: "The answer is that this has nothing to do with the pandemic. That's just a weird coincidence."

    Compare to the new & enshittified Google search:

    AI Overview

    In 2020, the M1 money supply experienced a significant surge in growth, primarily due to the Federal Reserve's response to the COVID-19 pandemic through quantitative easing, leading to a sharp increase in the money supply, which is often associated with potential inflationary pressures; the most notable jump occurred in May 2020, where the M1 money supply increased substantially compared to previous months.

    Key points about the 2020 M1 growth:

    Dramatic increase:
    The M1 money supply more than quadrupled in 2020 compared to pre-pandemic levels.

    Cause: Federal Reserve policy:
    This rapid growth was largely driven by the Federal Reserve's aggressive monetary policy actions to counteract the economic downturn caused by the pandemic.

    Impact on inflation:
    While the immediate effect of increased M1 was not necessarily a significant rise in inflation, the large injection of money into the economy is considered a potential factor for future inflationary pressures.

    Who's right? Kevin is.

    But the problems with our information ecosystem are only compounded when AI repeats the b.s. that's out there.

  4. Citizen99

    This is such a great example of the first rule of logic: *correlation does not equal causation*. This rule is violated so often it's mind-boggling, especially in our political culture. The prime example, which is taken for granted, is that if something bad (or good) happens in the nation at any given time, the blame (or credit) goes to whoever is president. The media and the pollsters that serve them are especially guilty of this, and it's not just a curiosity; it could be fatal to democracy, if it isn't already.

    In Kevin's particular example, I'm sure the temptation for commentators to tie any phenomenon to actions taken by the Biden administration is overwhelming, especially when they are forever trying to prove that they are not suffused with "liberal bias." So it MUST have been excessive spending on COVID relief that caused this, because that serves their interest.

    Just like the blight of a "post-truth" society, the embrace of a "post-logic" society is a far bigger threat than most of us realize. It also feeds into the "anti-elite" vibe that has taken hold in the Trump era. And the mainstream media is just going along for the ride.

    God help us.

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