In response to the economic fallout from the global pandemic, our country’s money supply has reached record levels. Over the past 12 months, M2 money supply has skyrocketed 26% to $ 19.4 trillion, the largest year-on-year gain since 1943.
Several factors are behind this surge. The Federal Reserve, which sets US monetary policy, cut interest rates to almost zero percent. It also lowered reserve requirements for banks, which can then lend more money to consumers and businesses, and the Fed continues to buy large amounts of government bonds. All of these actions combine to increase the amount of money in our economy.
On the fiscal policy side, Congress has passed nearly $ 6 trillion in stimulus spending. With the stroke of a pen, this money was simply created and put in the hands of American consumers, businesses and local governments to spend at will. Personal spending has also declined due to pandemic restrictions and social distancing standards. As a result, cash balances on bank accounts quickly skyrocketed for many Americans.
M2’s record pace of expansion has already sounded alarm bells about inflation. American consumers, filled with large cash balances and stimulus checks, will soon be unleashed on an increasingly open US economy. This flow of money will be combined with pent-up demand accentuated by 12 months of business closures, restrictions and quarantines. The Fed’s monetary policies will remain very accommodative, ensuring a large money supply to help fuel the economy and the job market.