Skyrocketing Money Supply M2

Posted By Darren Winters on Oct 12, 2020

Skyrocketing Money Supply M2

The 2020 pandemic controversial global lockdowns have accelerated many existing trends, one of the greatest ones being, for portfolio managers is the skyrocketing money supply M2.

Triggered by the current economic conditions, the US Government issued 3 trillion USD in fiscal stimulus. Moreover, the Fed, the world’s central bank by default, increased the money supply by a staggering 3.4 trillion USD from January to September 2020. 

Exhibit 1 shows the skyrocketing money supply M2 over time.

So the central banks have filled a vacuum of lost income, caused by the enforced great global lockdowns, by ramping up the money supply.

The skyrocketing money supply M2 is rocket propelling public deficits, corporate debts, and household borrowing

Put simply the enforced global lockdowns shutdown income forcing households, businesses, and governments deeper into a debt spiral.

The 2020 pandemic is a debt pandemic as the economy survives at the mercy of the central banks skyrocketing money supply M2

Skyrocketing Money Supply M2

A debt pandemic shock accommodated by skyrocketing money supply M2 could mean that heavyweights are better positioned to survive the debt shock than say flyweights. 

So advanced economies are more robust and likely to better shake-off a debt pandemic shock than emerging economies that were already struggling to service debt before the 2020 pandemic.

“The COVID-19 pandemic has greatly lengthened the list of developing and emerging market economies in debt distress,” wrote the IMF in a recent report entitled, “The Debt Pandemic”.

Exhibit 2 illustrates how quick funding by multilateral helped offset a collapse of government revenue and the withdrawal of private capital.

Advanced economies have first access to the central banks skyrocketing money supply M2

So wealthy nations have better credit options available, they can arrange more favorable loan terms, and borrow their way out of the 2020 pandemic.

“So far, the pandemic shock has been limited to the poorest countries and has not morphed into a full-blown middle-income emerging market debt crisis. Thanks in part to favorable global liquidity conditions conferred by massive central bank support in advanced economies, private capital outflows have moderated and many middle-income countries have been able to continue to borrow in global capital markets,” wrote the IMF report.

What does the skyrocketing money supply M2 mean for portfolios?

As we can see in exhibit 1, the Fed has increased the money supply by an unprecedented 3.4 trillion USD since 2020, and there is still more than two months until the year ends!

With so much liquidity sloshing in the financial system and the US government issuing 3 trillion in fiscal stimulus a stock market crash seems unlikely.

Dismal bond yields, pitiful interest on cash deposits, and the ongoing debasement of fiat currency where the central bankers refuse to acknowledge the existence of monetary inflation is spurring on forced optimism, particularly in value stocks. 

Through a policy of skyrocketing money supply, M2 central bankers are sacrificing savers to keep asset prices ticking over. “Cash is trash,” said billionaire hedge fund king Ray Dalio and maybe he is right when you consider monetary inflation. 

So there is a sense of forced optimism in buying value stocks and tangible assets. 

But if cash is trash, then so too is debt. In a fiat system, a person’s asset is also someone else’s debt.

Sovereign bonds are perceived to be valuable because it is widely believed that a government is unlikely to default. Cash deposits are safe, assuming that the banks are unlikely to collapse under a tsunami of bad loans. But these assets all have risk. 

Even Bitcoin, which is immune from monetary inflation, has some counterpart risk since it depends on a functioning network of computers. 

The only asset that is immune from the central banks skyrocketing money supply M2 and monetary inflation is physical precious metals if the precious metal is in your possession

An ounce of gold, silver has value irrespective of a sovereign debt default, corporate bankruptcy, a bank collapse, a server malfunction. Put simply precious metals are the ultimate haven asset because it is a tangible asset with zero counterpart risk if is in your custody. 

How does the skyrocketing money supply M2 compare with US precious metals coin production in the pandemic era?

Visual capitalists calculated the value of money supply added as well as bullion minted, and divided it by the US population to get total production per person. Here’s how the January-September 2020 data breaks down based on Oct 5, 2020 spot prices of $1,915.93 for gold and $24.47 an ounce for silver. 

US Total Gold Ounces amounted to 826,000 with a dollar value of $1.6B and a USD per person equal to $4.79.

U.S. Silver Ounces amounted to 22,261,500 with a dollar value of $544M and $1.65 value per person.

But here comes the zinger with the US money supply expanding by $3.4T during the first nine months of 2020 that now represents $10,250.16 per person.

The US debt also expanded $3.8T, which represents $11,578.36 per person. 

Put another way skyrocketing money supply M2 was 2,100 times higher than the value of new gold minted. Compared to minted silver, the value of the new US money supply was over 6,000 times higher

So, for every ounce of gold created, there has been $4 million US dollars added to the money supply.

Skyrocketing money supply M2, if it continues at this rate, could cause a monetary crisis, or at the very least monetary inflation

In a hyperinflationary environment what is perceived as a nest egg, cash held in deposit accounts, could be the most vulnerable to currency debasement. Perhaps that is why we are witnessing the reflation trade into value assets and why the fear of a stock market crash is of the least of investors’ worries as the VIX is being lullabied to sleep. 

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