Liquidity: it's the level that matters
Fears of a severe recession because of the rapid pace of Federal Reserve tightening fail to take account of the exceptional stimulus of the pandemic years.
“This is the worst broad liquidity contraction since… after the Lehman crisis!” cries JP Morgan in a research note (cited on Twitter by CNBCs Carl Quintanilla). And they show a scary chart to prove it:
At a first glance, this does indeed look like a disastrous contraction in the money supply. That’s bound to cause a recession, isn’t it? No wonder there are calls for the Fed to pause interest rate rises and even restart QE.
But it’s not quite what it appears. JP Morgan’s chart shows the rate of change, but it doesn’t show the level - though the enormous spike in 2020 and secondary spike in 2021 should give some clue that the level of liquidity in the system is not exactly normal by historical standards. So, for the hard of interpretation, here’s the level of M2, in billions of dollars:
There is no shortage of liquidity, and nor is there likely to be in the foreseeable future. So why the fear of recession?
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