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MARK-TO-MARKET: US money supply soars, but is that good?

MARK-TO-MARKET: US money supply soars, but is that good?

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The term “printing money” is a commonly used axiom to describe our government’s seemingly endless supply of money it uses to fund its policy and spending endeavors. Our mind turns to visions of the U.S. Mint, working long into the night, churning out pallets of freshly-printed cash.

In reality, the source of this newly created money typically comes in the form of credit. Instead of receiving physical cash, think of a credit being added to your personal bank account. Similar to direct deposit for your paycheck, for example, recent stimulus payments were most likely added to your available cash balance. However, unlike the money moving from your employer’s bank account to yours, the stimulus money for business loans and individuals never before existed. It was simply “created” by a signed decree by Congress and the President.  

Our nation’s money supply is roughly defined as the total value of currency floating around the economy at any given point in time. The U.S. Federal Reserve has various measures used to further classify the money supply. One of the more heavily referenced is the M2 money supply. The M2 represents the total amount of U.S. currency in circulation plus money held in traveler’s checks, checking and savings accounts, CDs and money market accounts. It is a broader measure of our money supply and is frequently used as an indicator of future inflation, which is the year-over-year increase in consumer prices for goods and services.

In response to the economic fallout from the global pandemic, our nation’s money supply has soared to record levels. Over the past 12 months, the M2 money supply has skyrocketed by 26% to $19.4 trillion, the largest one-year gain since 1943.

There are a number of factors behind this surge. The Federal Reserve, which establishes U.S. monetary policy, has lowered interest rates to near zero percent. It has also lowered reserve requirements for banks, which can then lend more money out to consumers and businesses and the Fed continues to purchase large quantities of government bonds. All these actions combine to increase the amount of money within our economy.

On the fiscal policy side, Congress has passed nearly $6 trillion in stimulus spending. With the stroke of a pen, this money was simply created and placed in the hands of American consumers, businesses and local governments to spend at will. Personal spending has also declined due to pandemic-related restrictions and social distancing norms. Consequently, cash balances in bank accounts have quickly soared for many Americans.

The record-setting pace of M2 expansion has already triggered alarm bells over inflation. American consumers, flush with hefty cash balances and stimulus checks, will soon be unleashed on an increasingly open U.S. economy. This flood of money will be combined with a pent-up demand heightened by 12 months of business closures, restrictions and quarantines. The Fed’s monetary policies will remain highly accommodative, ensuring a vast money supply to help fuel the economy and labor market.

Understandably, the rationale behind the surge in our nation’s money supply is to combat the economic decline caused by the pandemic. But “printing money” has its consequences, and short-term justifications can’t completely overshadow the longer-term ramifications. At some point, they need to be addressed. As history has shown, you can’t simply print your way to prosperity.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.


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