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With the cloud of Covid hanging heavy across the nation, Americans are sitting on an unprecedented mountain of cash. M2 – the money supply – a statistic no one has cared about since Paul Volcker ran the Federal Reserve in the late 1970s, has exploded! If ever there were a silver lining, it’s that staying at home has enabled Americans to amass a cash reserve as never before. It’s confounding! In 2020, the nation endured perhaps the worst trauma and drama of the post-War era; deaths from Covid are breaking tragic records not expected to peak after Christmas; a political schism amid an information revolution is tearing apart the political fabric of the nation, but stock prices have repeatedly broken new all-time record-highs! What is going on?!
Back in April, disposable personal income was sent skyrocketing by emergency Covid aid in the CARES Act . That also sent personal savings surging, to a once-unfathomable rate of 32%! The savings rate has been coming back toward normal since April but very slowly, and THAT’S created this huge cash hoard. Turns out, instead of spending all that cash on restaurants, vacations and entertainment, consumers have been banking it, leaving the savings rate much higher than normal since April. Keep in mind, the higher-than-normal savings rate has been going on month after month since April and the effect is cumulative: The pile of cash being saved keeps growing month after month! What’s that mean?
Money supply, also known as M2, which consists of currency held by the public plus checking, savings and money market accounts, has skyrocketed like never before in modern times! With interest rates low and the Fed saying it is not planning to raise rates for the foreseeable future, bonds are not an attractive investment. So consumers sitting on this mountain of cash that has been mounting for months now may see no better place to put the savings glut than into stocks and housing. Central bankers and economists will be debating the long-term effects of the growing influence of government in the U.S. economy and the risk it poses but the financial outlook for now is unexpectedly bright, even as the dark cloud of the pandemic casts a long shadow over the nation.
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