M3 Money Supply for the United States

This picture fairly sums up what is going on with markets. Last spring, the Federal Reserve and U.S. Treasury combined to inject a record amount of cash into the U.S. economy. An amount some have suggested would have been more appropriate in 2008-9. But with little institutional knowledge, at that time, of how to deal with a systemic financial breakdown—the only recent precedent having been the Great Depression more than 60 years earlier—the government response looked gargantuan. But in retrospect, more could have been done especially in the area of government spending (which is another issue). This time around, the government, especially the Fed, did not want to make the same mistake as before and undershoot the problem. There was still a lingering sentiment that not enough had not been done during the financial crisis to stimulate long-term growth—and that the Fed had tightened too soon—which led to ten years of anemic, but positive, economic growth.

The graph shows how the injection of liquidity is unlike anything we have seen before. As public health policy led to a forced economic shutdown and combined with the uncertainty over contagion, this led to the huge injection of cash intended to restore and maintain confidence in financial markets, which had not experienced a pandemic in 100 years. Heading into the pandemic, there were already fears that we were inching closer to a recession, with the long recovery slowly losing steam. With global deflationary pressures still lurking not far from the surface, Jay Powell and the Fed didn’t have to look further than 2008 to turn on every spigot they knew of to keep the economy and markets afloat. Until this money finds a home and the money supply returns to a normal trajectory, there will be a lot of sloshing in the market. There are those that think that no doubt this is inflationary, but really, there is a long way to go for that. Those that can access and successfully deploy this apparent excess of capital will be the winners.

When some aging rock stars were asked where all the money that they made had gone, they replied that they had spent it on women, alcohol and drugs, and the rest they wasted. We see examples everyday of fun money being disbursed in markets that have become unhinged from economic fundamentals. And it will likely continue as the global economy opens up and vaccine rollouts continue. Following that, we’ll see whether or not the rest gets wasted.

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