M2 Growth and The Nation's Budget Deficit

August 7, 2020

Michael Jamison, Portfolio Manager

John Carey, Portfolio Manager


It seems like yesterday that we were staring down into the Covid-19 abyss wondering if a recovery was anywhere in sight. And now, just a few months later, the market has surged out of the abyss and continues to climb. Americans love a comeback story and the star of this one is the growth of the U.S. Money Supply. Figure 1 represents the Y-O-Y % change in U.S. money supply growth. As you can see, the gargantuan stimulus package that was pumped into the U.S. economy last spring has led to the fastest growth of our nation’s money supply in more 60 years. “It’s fair to say we have never observed money supply growth as high as it is today,” Morgan Stanley’s Chief U.S. Equity Strategist, Mike Wilson, wrote last week. While we’re not entirely certain what the economic implications are, we're hopeful that approval of a Covid-19 vaccine will motivate corporations and investors to begin putting all of this cash to work.

On the other hand, the current U.S. budget deficit (Figure 2) now exceeds that associated with the Great Recession.

The only deficit that has been close was in 2009. According to Richard Bernstein Advisors, “the one meaningful difference between 2009’s deficit and today’s deficit is that non-US investors were willing to finance U.S. spending. In 2009, net flows were positive. Today they are negative suggesting that other countries are less willing to finance US deficits.” As a metric, changes in net flows have important implications for tax policy because government spending in major categories is unlikely to get cut. Regardless of what happens in the upcoming election, we believe investors can count on a tax increase in the future.

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