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U.S. has money to spend

Christian Fernsby ▼ | October 23, 2020
For some unknown reason, the most pronounced ascent by the U.S. money supply in possibly 70 years has received little mention.
U.S. consumers
Money to spend   U.S. consumers
In part, that may be because the charge owes much to an unprecedented surge by the currency, deposits, and money market funds held by U.S. nonfinancial corporations, John Lonski, Chief Economist, Moody’s Capital Markets Research, writes.

Topics: U.S.

Aided by the Federal Reserve’s extraordinary support and as a defensive reaction to the extraordinary risks stemming from coronavirus, U.S.

nonfinancial corporations increased their holdings of the aforementioned highly liquid financial assets by $1.167 trillion from a year earlier to a record-high $3.165 trillion during 2020’s tumultuous second quarter.

That yearly increase is without precedent.

However, even after excluding the U.S. deposits and money market funds held by nonfinancial companies, second-quarter 2020’s 23.2% yearly increase by the M2 monetary aggregate slows to a still very rapid 17.8%, where the latter is still the fastest yearly advance by the metric since the available record begins in 1981.

The previous record high rate of growth for this narrower version of M2 was the 12.6% of 1983’s first quarter.

As of 2020’s third quarter, M2’s yearly increase edged up to 23.6%.

In turn, M2 probably approximates 89% of GDP.

The latter is well above what might be considered normal.

As inferred from a trend line beginning with 2010’s final quarter and ending in 2019’s final quarter, third quarter 2020’s ratio of M2 to GDP might have instead approximated 73% absent coronavirus.

The difference between the two ratios suggests that at least roughly $3 trillion of M2 is above what businesses and households might want to hold under normal conditions.

Once coronavirus risks recede, excess cash balances will fund purchases of goods, services, and assets both real and financial.

In addition, some unwanted cash will finance the paydown of outstanding debt.