What is Money Supply?
Money Supply is the total value of money available on an economy at a point of time. The most standard measure of money supply is total of currency in circulation (not only notes but also money circulating through wire transfers, net banking etc.) and demand deposits (fixed deposits, other kind of deposits etc.)
What's the use of Money Supply?
Bank regulators or central banks (in the Indian context the Reserve Bank of India) influence money supply by placing requirements on banks to hold their reserves. They also make and change regulations (rules) for banks to lend etc.
An increase in supply of money typically lowers interest rates. As money supply increases banks have more money to lend and hence they can lend at lower rates.
Businesses respond by ordering more raw materials and increasing production.
On the other hand more money in the hands of consumers (by reduction of taxes etc.) can also increase demand.
A rise in production and rise in consumption is perfect for economic growth. Simple; but mostly it doesn't play out like that - there is always a time lag.
The pandemic and increase in money supply
As lockdown's hit the world due to the Wuhan Corona Virus, factories and offices shut and people lost jobs. Fearful of the economic fallout, Governments and Central banks all over the world increased Money Supply.
Increase in Money Supply in the USA
Surely most Central Banks and Governments believed (and rightly so) that increase in money supply will help people tide over the difficulties of a slowdown.
There were tax cuts, loan moratoriums , incentive schemes and even payments of monies directly in bank accounts of the poor (cash transfers).
All this surplus money which was released however did not go immediately to buying new things (some did). A part of this money also found its way in the stock markets.
The Global Liquidity Rally
As money flowed into the stock markets, the markets rallied. A clear correlation between increase in money supply and rise of stock markets (after the sudden fall due to the sudden lockdown) is evident.
The rise of US stock market - Dow Jones
What Next?
The increase in global liquidity during the Wuhan Corona Virus pandemic has happened at a much faster pace than the 2008 crisis.
The total money created could exceed $15 trillion or more by the middle of next year.
However there an impending event which is going to make life difficult for traders and investors - the US elections.
The other fallout of the pandemic is that voting will also happen by postal ballot in the current US elections - much more than the previous ones.
This means that election results will be delayed - it takes time to count postal ballot. This also means that there are chances of more ambiguity, charges and counter charges - regarding the efficacy and impartiality of elections.
As it is election time is an "uncertain" time as its impossible to predict the election outcomes with accuracy. Voter behaviour (swings) can change quickly as election nears.
So it will only be reasonable to expect markets to remain volatile specially when a vaccine is still some time away.
(Disclaimer : This blog is for information purposes and not to solicit any business or provide any kind of advise)
