What to make of booming M2?

M2 growth has recently accelerated to 20% on a vs-yr.-ago basis.  While the link from money to aggregate demand is imprecise to say the least, this strengthening is consistent with the notion that federal fiscal supports have helped and that the private sector for now remains fairly liquid on balance.

This fits in turn my view that aggregate demand can begin to recover as soon as the social distancing begins to lift, which means right now.  I would not lean on it more heavily than that, for example, to claim that the recovery is likely to be V-shaped in level terms.  I expect cash flows to remain depressed in level terms for a long time, creating opportunities for various financial accidents.

Importantly, the strength in money (basically deposit) growth is not fueling a powerful revival in bank lending.  Bank credit growth is running at just over half the pace of M2, and all of the strength there can be explained by C&I loans, presumably heavily dominated by banks drawing down credit lines, as part of a broader triggering of buffers against the COVID shock.

Separately, the strength in M2 does not map to a particular inflation outcome, although it is probably wise to maintain some convexity to inflation risk, for other reasons.

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