What’s the Value of a Dollar?

Rick Rieder and team think that today’s potent policy cocktail holds important implications for the path of economic growth, markets and the value of a dollar.

Does Policy Path Call Into Question Economic Axioms?

The path toward an erudite grasp of personal finance is replete with age-old kernels of wisdom, like “money doesn’t grow on trees,” or “you’ve got to learn the value of a dollar.” Such phrases intend to instill the principles of monetary conservatism upon the financial learner, but for those who have been trained to adhere to such advice, 2020 was a bit of a curveball.

Indeed, the policy response to the Covid pandemic marked a profound pivot toward historically aggressive policy stimulus, with liquidity injections and debt monetization that has no modern precedent. Considering the record-shattering injections of fiat currency into global real and financial economies, it’s not unreasonable for one to question those embedded lessons regarding the “value of money.”

However, unlike numerous naysayers, we are embracing the new reality of highly liquid financial and real economies and believe that the policy response to the global pandemic will be viewed favorably through a historical lens. In fact, we think that this record-shattering liquidity, when married to a post-pandemic resumption of economic velocity, will be a powerful catalyst for both nominal GDP growth and financial markets.

Potent Policy Cocktail Impacts Economy, Markets and Dollar

Specifically, the U.S. M2 measure of money supply has surged by nearly $4 trillion over the last year, creating an outcome where more than 20% of all U.S. broad money now in circulation was created during the last 250 trading days. Moreover, U.S. M2 as a percentage of household real estate wealth and financial assets is near all-time highs, creating a powerful tailwind for assets offering positive real returns (see first graph). And since these liquidity injections are permanent, it is likely that the U.S. nominal economy has also shifted to a permanently higher equilibrium.

U.S. M2 Money Supply Growth a Likely Support for Financial Assets