There Is Plenty of Cash around, but…

Friday, 21 February 2020
Melbourne, Australia
By Selva Freigedo

  • Markets
  • Explaining the trick

Markets have so far been shrugging off fears of the coronavirus.

Yet investors are starting to get anxious…

Bloomberg reports:

Investors are growing increasingly concerned about the rise in coronavirus cases outside China, threatening gains in riskier assets that propelled the S&P 500 Index to an all-time high this week.

A spike in confirmed infections in South Korea and two more deaths in Japan jolted markets on Thursday, sending the won and Singapore dollar down as much as 1%. Asian shares slid to a two-week low, and some money managers said they’re bracing for further losses.

While China reported a sharp decline in new infections, the country’s shifting reporting guidelines have raised doubts about the reliability of data from the center of the outbreak.

Meanwhile, central banks are taking a back seat.  

The US Federal Reserve released their minutes for their latest meeting this week. They’re expecting interest rates to stay the same…for now.

Truth is, central banks around the world are struggling to create inflation, even though they have pumped trillions ­— yep with a capital T — into the economy.

So, why has there been no inflation, or hyperinflation for that matter?

After all that is textbook macroeconomics. You increase the money flowing around the economy and prices are bound to go up. I’ve seen it happen plenty of times in Argentina.

How have central banks expanded their balance sheets so much and yet struggled to create inflation? What’s their trick?

More on this after the markets…


Overnight, the Dow Jones Industrial Average closed down 128.05 points, or 0.44%.

The S&P 500 closed down 12.92 points, or 0.38%. The NASDAQ also dropped 0.67%.

In Europe the Euro Stoxx 50 index closed down 42.20 points, or 1.09%. Meanwhile, the FTSE 100 lost 0.27%, and Germany’s DAX closed down 125 points, or 0.91%.

In Asian markets Japan’s Nikkei 225 is down 65.34 points, or 0.28%. China’s CSI 300 is down 0.02%.

The S&P/ASX 200 is down 14.79 points, or 0.21%.

West Texas Intermediate crude oil is US$53.78 per barrel. Brent crude is US$59.02 per barrel.

Turning to gold, the yellow metal is trading for US$1,624.37 (AU$2,459.89) per troy ounce. Silver is US$18.47 (AU$27.96) per troy ounce.

One bitcoin is worth US$9,627.11.

The Aussie dollar is worth 66.04 US cents.

Explaining the trick…

As I mentioned, the US Fed released their meeting minutes this week.

They are expecting rates to stay the same.

The bank also dedicated some part of the meeting to discuss the effects of zero rates and quantitative easing. As the bank noted, the effects are…ahem…‘modest’ on asset prices and risk premiums.

This is at a time of record bull market running and blown up property prices in cities around the world.

According to the UBS Global Real Estate Bubble Index from 2019, there are plenty of cities in the developed world that are either overvalued or at risk of a bubble, as you can see below:

Money Morning

Source: UBS

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But let’s get back to the topic that preoccupies us today. Central banks have been pumping money into the system, but they are not creating inflation.

In theory, this should create inflation.

All you need to do to boost inflation is to increase the money that people have in their pockets. More spending means more money flowing through the economy, and this helps boost economic growth.

Especially if unemployment is low, like today, money should be flowing through to the system and to wages. When workers receive a pay increase, they are likely to spend more.

But while central banks have been pumping trillions, inflation is nowhere to be seen…and it’s the same situation for salary increases.


It’s something Harry Dent addressed in one of the most recent monthly issues of Harry Dent´s Boom & Bust Letter.

Here’s what he had to say:

There are two ways to create ‘money’. The traditional way is bank lending to multiply M2, or money supply/bank deposits. That creates immediate GDP and spending growth. The second, more powerful way, is financial assets, which create a wealth effect with a minor impact on short-term spending and a major impact on long-term spending. But such assets can disappear suddenly and dramatically.[…]

So, the larger point is that M2 and ‘normal money’ doesn’t include your financial assets like the net value of your house that you can sell or borrow against. Nor does it include your stocks and brokerage account. But your brokerage account is ‘real money’ that you can spend if you want, and you can sell your house or borrow against its equity to spend. It’s just that most people plan to spend that on retirement or a vacation or something special at some point. Hence, they are investing it in the meantime to grow it at a higher rate than if they were to stick it in a checking or savings account at a bank.

That stimulus is not flowing into the overall economy. Instead, money is flowing into assets and stocks.

As you can see below, money velocity is at an all-time low. Money velocity measures the speed at which we exchange money to buy goods and services. Money velocity is what gets inflation going.

Money Morning

Source: FRED

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But money velocity is plummeting.

Money isn’t moving, it’s not changing hands. All that money from central bank stimulus is not making its way into the economy to be spent. Instead it’s making it into assets that people can hold and wait to appreciate.

This means that people are investing their money in assets, in real estate or stocks. In items that people don’t use everyday, but hold instead.

This does nothing for money velocity.

There is plenty of cash around, the problem is that it’s not moving.

And, as Harry mentions, the danger here is that asset prices can collapse suddenly.

The other problem is…

Inflation is a big factor in shrinking debt.

Yet asset prices have been increasing while wages have remained stagnant. It means we need to take on higher debt to buy assets like property, on top of that debt isn’t getting smaller. It’s increasing inequality.

Arash Kolahi summed it up nicely in a tweet:

Money Morning

Source: Arash Kolahi

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Selva Freigedo,
Analyst, Harry Dent’s Boom & Bust Letter