In their landmark 1963 book "A Monetary History of the United States," Milton Friedman and Anna Schwartz convinced many economists that M2, a measure that included both checkable deposits and other bank deposits that could easily be transferred to checking accounts, was a powerful economic predictor — so much so that the Federal Reserve could basically cure the business cycle simply by keeping M2 growing slowly but steadily. In particular, they argued that the Fed could have prevented the Great Depression if it had prevented M2 from falling 30 percent from 1929 to 1933. But here's the thing: the Fed doesn't directly control M2. All it controls is the "monetary base," the sum of bank reserves and currency in circulation. (It only controls the sum, not the individual components, since people can decide to withdraw currency from banks or put it back.) What Friedman and Schwartz asserted was that the Fed can control M2 indirectly — that it can push monetary aggregates up or down if it's willing to move the monetary base enough. The 2008 financial crisis wasn't kind to that view. The Fed hugely increased the monetary base, but banks basically just sat on the additional reserves, so that deposits and hence M2 didn't rise much: This in turn very much calls into question the notion that the Fed could have prevented the Great Depression. But that's another story. More to the current point, M2 has in fact soared during the pandemic: And the Fed has indeed bought a lot of government debt. But is the Fed really financing the budget deficit? Not really. At a fundamental level, households are financing the deficit: the funds being borrowed by the government are coming out of the huge savings undertaken by families saving much of their income in an environment where much of their usual consumption hasn't felt safe. However, household financing of the deficit isn't direct. Instead, it has taken the form of a sort of financial daisy chain. Families are stashing their savings in banks. Banks, in turn, have been accumulating reserves — that is, lending to the Fed, which these days pays interest on bank reserves. And the Fed has been buying government bonds. Here's a rough picture: More or less, households have acquired $2 trillion in deposits; banks have acquired $2 trillion in reserves; and the Fed has acquired $2.5 trillion in government securities.