We have had a few questions regarding the economy, inflation and how we here. I thought that the best way to describe how we’ve arrived at this point is with an analogy.

 

Let’s say you were going to throw a party and decided to have a punch bowl and your normal recipe for punch is 2 parts alcohol and 6 parts mix. This time you decide to triple the alcohol portion while not increasing the mix. It doesn’t take much to imagine what the outcome might be. The next day there will probably be some interesting stories and maybe a few hangovers with guests asking, “what happened?”. Well, this is basically what happened to the world economy during the pandemic in 2020. We were over served!

 

When the world’s going through a crisis, the federal banks around the world increase the money supply to try and dampen the effect of the potential shock to the world economy. As you can see from the chart below, the Federal Reserve in the US increased money supply to the system during the financial crises and during the Tech bubble in 2000. In both of these cases, they increased the money supply by about 2%. During the pandemic, the Federal Reserve increased money supply by over 6%. That’s three times more than any other time in history. So, if you are wondering why high-risk assets moved so high during the pandemic and why we have inflation, look no further than the increase in the money supply (M2).

 

Now the good news is that hangovers rarely last more than one day, and negative money supply, which we are going through right now, rarely lasts more than a couple of quarters. Unfortunately, negative money supply will cause a few headaches and maybe a few questions about what happened. However, a new day will come, and the headaches should be gone...

 

Source: Board of Governors of the Federal Reserve System (US), M2 [M2SL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M2SL, December 8, 2022.

 

I have included a link to our conference call entitled ‘A Look at the Year Ahead: Economic outlook, market opportunities and tax planning strategies.’ If you would like to listen please click on this replay.

 

 

If you have any questions please feel free to call us anytime.

 

Have a great weekend.

 

Milan