Lots of Liquidity

While the debate rages on over whether inflation is transitory or long lasting, there’s no debating that an enormous amount of liquid assets has piled up since the start of the pandemic.

The accumulation began with a mad dash for cash by panicked individuals and businesses. But since “Modern Monetary Theory Week” (March 23-27, 2020), when the Fed and the Treasury (a.k.a. “T-Fed”) joined forces, the huge accumulation of liquid assets has been mostly attributable to “helicopter money.” Actually, “helicopters” don’t do the situation justice: It’s been more like T-Fed loaded up B-52 bombers with cash and has been carpet bombing the economy and financial system since then. How much cash has been dropped from the B-52s, so far? Let’s count it up:

(1) T-Fed’s B-52 money. Since February 2020, the Fed’s balance sheet has increased $3.6 trillion to a record $7.7 trillion through April (Fig. 1). Over that same period, the Fed’s holdings of Treasuries increased $2.5 trillion (Fig. 2). So the Fed purchased 54% of the $4.6 trillion increase in the Treasury’s publicly held debt from February of last year through April 2021 (Fig. 3). The Fed now holds a record 25.7% of the Treasury’s outstanding publicly held debt (Fig. 4).

Just as significant, the 12-month sum of federal government’s outlays increased $2.1 trillion y/y to a record $7.3 trillion during April (Fig. 5). This extraordinary jump was led by a $1.2 trillion increase in federal outlays on income security, which includes the Economic Impact Payments, i.e., the three rounds of checks sent to most Americans since the start of the pandemic (Fig. 6).

(2) M2 & velocity. Total deposits at all commercial banks in the US rose a whopping $3.5 trillion from the March 18, 2020 week through the May 12 week of this year to a record $17.1 trillion (Fig. 7). The monetary aggregate, M2, is up $4.6 trillion since February 2020 through April to a record $20.1 trillion.

Many economists track M2 velocity, which is the ratio of nominal GDP to M2. It remains near the record lows of the past year. We prefer to track the inverse of this ratio. It shows that over the past year, M2 has been equivalent to 89% of nominal GDP, a record high (Fig. 8). The potential for all this money to fuel higher consumer price and/or asset inflation is hard to ignore.

(3) Who is liquid? Then again, it’s possible that the pandemic spooked lots of people, who’ve decided to hold more precautionary balances in liquid assets as a result.

The Fed’s Distributional Financial Accounts shows that liquid assets held by households jumped by $3.3 trillion from Q4-2019 through Q4-2020 to a record $15.9 trillion (Fig. 9). This category is the sum of currency, checkable deposits, other deposits, and money market mutual funds. Over this same period, here are the increases and latest levels of liquid assets held by the bottom 50% wealth percentile group ($154 billion to $549 billion), the 50%-90% group ($0.9 trillion to $5.0 trillion), the 90%-99% group ($1.2 trillion to $6.0 trillion), and the top 1% group ($1.1 trillion to $4.4 trillion) (Fig. 10).The bottom half of households in terms of wealth undoubtedly needed to spend the cash they received from the government for pandemic relief, so they didn’t accumulate much in liquid assets. The top half might actually have raised some cash at the start of the pandemic by selling other assets. Much of the cash they received from the government was probably saved.

The question is: What will these households do with all that cash they've accumulated since last year? Odds are they will continue to spend it on goods and services and to invest in financial assets.

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