By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
Welcome to our Friday mailbag edition!
Every week, we receive fantastic questions from your fellow readers. And every Friday, I answer as many as I can.
Up first today, a question from reader Richard on the U.S. money supply…
It is my understanding the money supply is low. What does that mean to the markets, and what forces/actions will cause it to increase?
– Richard S.
Hi Richard, that’s a great question.
You are correct, with one tweak – money supply growth is slow. Money supply itself remains quite high by historical standards.
Take a look at the two graphs below. The first shows a more historical perspective. The second shows how there’s been a dip in money supply since the Fed began raising rates last March.
The total money supply, or what’s referred to as M2, includes M1 (money that’s really liquid such as cash, checking deposits, and traveler’s checks), plus money that’s less liquid such as certificates of deposits and money market funds.
In a nutshell, what that means is that as the Fed has been raising rates, people are actually keeping less money in banks and short-term investments. In other words, they are spending it because things are costing more.
In fact, the U.S. savings rate hit a 17-year low at the end of last year (although it’s increased a little into the start of this year).
For the markets, less money in circulation has also coincided with less investing, which is one reason markets have dropped in tandem with the Fed’s rate hikes.
The reason some of this changed in January is because the market expected the Fed to fully pivot (to cut rates, or in our terms, get to Stage 3 of its 3-stage pivot) more quickly as a result of certain lower inflation data.
Yet, subsequent inflation data has made the markets think twice about this and that’s why they have fallen recently. Money supply will increase once the Fed does fully pivot to cutting rates or even buying more bonds in the form of quantitative easing (QE).
And in the wake of the recent banking crisis and the next Fed meeting scheduled for next week on March 21, we have yet to see how the Fed will proceed with rate hikes.
Either way, when inflation decreases, more money will be in financial instruments as opposed to purchasing things.
Next, reader John wants to know about the implications of a central bank digital currency (CBDC)…
What are your thoughts on the effects of the upcoming central bank digital currency with regard to inflation, the market, and the U.S. economy?
– John G.
Hi John, that’s a terrific question. And it’s one that we’ll devote a number of full essays to over the months and years to come.
The short answer: having a CBDC won’t impact the supply chain, the cost of getting goods from point A to point B (and the fuel to do so), the cost of eggs, or how much a babysitter might charge per hour.
However, once fully done and dusted, a CBDC does offer a central bank, take the Fed, the ability to create money and disperse it even more quickly than it can with non-digital fiat currency.
What that means is that when the Fed deems it necessary to help the financial system again, it can overshoot easily.
In terms of the economy and markets, the Fed will have another mode to digitally print money that can cause more monetary inflation. This has the potential to reduce the buying power of the dollar or make your money not stretch as far.
So, from that standpoint, the real impact of a CBDC will happen when we are in a monetary-policy-loosening-mode again.
Now, of course, the Fed won’t say any of this. They will just say that a CBDC makes the financial system more efficient…
Stay tuned for more on this topic.
And that’s all for this week’s mailbag. Thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins