What happened to the money supply in 2020 was unprecedented

Measured by M2, the amount of money in circulation in the US gained more than 25% in a year.

Classic monetarist theory is that a growth in money of this scale would inevitably be followed, after a lag, by inflation. That’s what happened. 

Are we in another  unprecedented monetary phenomenon? In the 12 months to November, according to the Fed, M2 growth was exactly zero. This was the first time this had ever happened.

The most positive implication, following the monetarists, is that after a lag inflation should return to a bearable level. 

The negative implication is that the lack of liquidity sharply increases the risk of a systemic crisis somewhere in the markets.

John Authers Bloomberg  6 januari 2023 

M3 contracted at an annual rate of 4.9pc over the three months to November in nominal terms. 

It is almost down to zero year-on-year, something that never came close to happening in the 1970s.

The Fed is not looking at this flashing red signal. It has tied its credibility - and the fortunes of the US economy - to two sets of lagging indicators: jobs and core inflation.

Ambrose Evans-Pritchard Telegraph 3 January 2023

Policymakers risk a recession by misreading the easing in financial conditions.

A recession is always a possibility, but most economists have that penciled in for 2024, leaving plenty of time to avoid one. 

For my money,  it’s that last bit about “a fall in inflation” that probably best explains the easing financial conditions, which policymakers should cheer rather than fret about

Robert Burgess  Bloomberg 4 januari 2023


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