In the past three months, the Fed has unleashed a truly historic amount of liquidity in its attempt to prop up the economy market and avoid a prolonged second great depression, printing trillions in digital money equivalents, with the resulting expansion in the money supply the largest since the Great Depression.
Discussing the chart above, Deutsche Bank’s Jim Reid writes that historically “there’s a decent correlation through history between the annual change in the money supply and nominal GDP growth, as would be implied by the PQ = MV equation/identity. As the chart shows this is only the 10th time that YoY money supply growth has gone above 20% in the US.”
So what happens next? Or rather, what is supposed to happen next? Well, as Reid – who is clearly more in the “inflation is coming” camp – puts it, “on all previous occasions nominal GDP soon moved comfortably into double digits – mostly through inflation.”
The obvious conclusion is be that, if this time is not different, then US inflation is set to explode higher, not just in stocks as this liquidity flood makes