Will these asset price trends persist?
Is the Fed trying to undo the post-COVID money supply growth?
There were two instances in the past 20 years, before last month’s Federal Reserve H.6 data release, in which monthly M2 data values fell on a monthly basis.
As I pointed out previously, I find last month’s data drop in M1, M2, and currency base + demand deposits disturbing, and this month’s upcoming Federal Reserve H.6 data release will reveal important clues as to whether the Fed is attempting to engineer a contraction in the money supply. I do not recall any other instance this millenium in which all three measures fell at the same time. Will we see the start of something more everlasting if the Fed attempts to shrink the money supply?
If the Fed is attempting to actually shrink the money supply, we could see more problems going forward in all asset classes. How long can the average US citizen continue to deplete his or her savings and checking account in order to survive? These account reductions effectively shrink all three (M1, M2, currency + demand deposits) money stock measures.
A wild card here; how many foreign-held USDs are going to end up back in the United States as increasingly paranoid foreigners attempt to unload their dollars? After all, investors have lost a lot of confidence in the Fed’s abilities in the post-COVID world, and foreigners may flee by dumping dollars by buying USD-based assets and driving up US price inflation, regardless of how poorly the US citizens fare.
Time will tell, but it’s not looking good so far. Not even gold is immune to money supply contractions and higher interest rates.