The Result of “Too Much Money”: Asset Price Inflation and Inequality

In the eyes of many, covid-19 has truly accelerated things. Tech aficionados have been rejoicing as virtual meetings, Zoom calls, and overall digitization within companies have seen a serious boost. At the same time, the corona crisis has intensified another contemporary development that people generally don’t really care about: today’s ongoing expansion of the money supply.

Although monetary policy had been ultraexpansionary even well before the virus hit the world, central bankers are currently upping the ante once again. While it took the Federal Reserve almost six years to create 3.5 trillion in new US dollar liquidity, this time around it took only ten months to unleash a monetary tsunami of $3 trillion with the projection of at least another $1.8 trillion next year.

hue1.png

While these astronomical numbers don’t really speak to the general public anymore, another astonishing fact resonated with them: after March 2020 alone, the US banking system is reported to have increased the M1 money supply by 37 percent. What this means in plain words is that 37 percent of all outstanding dollars and dollar bank deposits that have ever existed have been created this year. If one bears in mind that monetary aggregates like M0, M1, and M2 today no longer give an accurate account of all the money in the system because they do not account for the shadow banking’s collateral multiplier, one can only guess that the actual extent of monetary expansion must be a lot greater.

Fiscal Policy as Disguised Monetary Policy

The swaths of liquidity created by the world’s central banks are complemented by fiscal measures on the part of governments. Here, too, the US government is leading the way, having launched stimulus packages in the trillions, and other countries are also eagerly going into debt to counteract the recession. Because of all this borrowing, by the end of this year, global debt levels are expected to reach a new record of $277 trillion, according to an estimate by the Institute of International Finance. This would amount to a debt-to-GDP ratio of 365 percent.

In politics it is currently debated whether monetary or fiscal policy should have precedence. This debate is just a mirage, though. Today fiscal policy in the form of government stimulus is monetary policy, after all. Government debt has become the most popular and most sought-after asset in monetary policy actions. Fiscal policy has thus mutated into monetary policy in disguise as newly created debt is increasingly taken in by central banks and siloed in their bal