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The recent surge in US monetary aggregates does not portend to a spike in inflation. It is a red herring, in my view.
The growth in broad money reflects primarily deposit growth driven by risk aversion from US corporates and household savings from the US fiscal response 1/
The growth in broad money reflects primarily deposit growth driven by risk aversion from US corporates and household savings from the US fiscal response 1/
Contrary to popular opinion, the Fed has not been the major driver of the latest growth in broad money. If they were, then we would have seen a commensurate risk in monetary aggregates during the Fed's prior LSAP/lending program episodes. That did not happen (see prior chart). 2/
So why has M2 surged? Two reasons mostly. First, in March US businesses started to take down huge lines of credit from commercial banks to prep for the Covid fallout.
Most of these proceeds were put into bank deposits and MMFs, both part of M2. 3/
Most of these proceeds were put into bank deposits and MMFs, both part of M2. 3/
This behavior was driven by risk aversion, not a rise in inflation expectations.
This is an important point that has been highlighted by @DavidBeckworth.
As these loans get paid back, deposits will decline and M2 will fall. 4/
This is an important point that has been highlighted by @DavidBeckworth.
As these loans get paid back, deposits will decline and M2 will fall. 4/
The 2nd driver of the rise in broad money was the US CARES act. This provided direct payments to HHs of $1.2k to $2.4k and a federal UR benefit of $1.6k per month.
While good portion of this was spent on essentials, much was saved. Hence the spike in the US savings rate. 5/
While good portion of this was spent on essentials, much was saved. Hence the spike in the US savings rate. 5/
In other words, a sizable portion of the government stimulus checks were put into bank deposits.
Hence the continued surge in broad money after March. Federal payments didn't come in full swing until April... 6/
Hence the continued surge in broad money after March. Federal payments didn't come in full swing until April... 6/
This analysis has some important implications.
1/ It suggests markets are likely misreading the spike in broad money and its implications for U.S. inflation. If anything, it is more reflective of precautionary savings from HHs and corporates, which is not inflationary. 7/
1/ It suggests markets are likely misreading the spike in broad money and its implications for U.S. inflation. If anything, it is more reflective of precautionary savings from HHs and corporates, which is not inflationary. 7/
2/ Ironically, a fall M2 from here may actually be a better sign of economic strength than it is of weakness.
If the economy is healthy enough for businesses to pay back precautionary lines of credit, consumers to spend, and the gov't to pull back, that is a good thing. 8/
If the economy is healthy enough for businesses to pay back precautionary lines of credit, consumers to spend, and the gov't to pull back, that is a good thing. 8/
3/ Lastly, the conflation of M2 with an inflation surge signals that markets are probably a bit too over their ski's on the inflation trade (Gold 
, famous last words).
Inflation could by all means come, but the latest surge in M2 is a spurious signal at best. END
, famous last words).Inflation could by all means come, but the latest surge in M2 is a spurious signal at best. END
