Chart of the week
Money growth has risen sharply due to the Federal Reserve’s response to the Covid-19 crisis and the fact that economic agents have increased their cash deposit levels to safeguard liquidity or reduce spending.
In the last twelve months, money supply has grown at its highest rate since World War II. M2¹ grew 16% YoY, 9% over the last two months only. This pace is likely to remain high in the coming months.
Our analysis
What impact will such massive money creation have on the economy and on inflation, in particular? Although the last few years have shown that the relationship between money supply and inflation is not straightforward, the current acceleration is unprecedented.
This rapid increase is currently cushioning a severe deflationary shock and the money velocity has fallen sharply, in line with activity levels. The question will really arise when business levels recover, with the stance adopted by the Federal Reserve also key. Against this backdrop, it is too early to hazard an answer, but the next few years will provide an opportunity to revisit some of classic economics questions.
¹ M2 corresponds to M1 (coins and banknotes in circulation and overnight deposits) + passbook deposits and short-term loans.
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The opinion expressed above is dated 24 April 2020, and liable to change.
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