The ballooning money supply may be the key to unlocking inflation in the U.S.

With the Federal Reserve and Congress pushing stimulus elbow-greases to new heights, some investors are keeping a close eye on a surge in the U.S. money supply for signs of inflation’s long-awaited return.

With a inventorying of metrics showing rapid growth in the value of money waiting in banks and other liquid accounts, investors from Ray Dalio to Paul Tudor Jones pull someones leg warned that the era of tepid price rises may be coming to an end.

“It’s fair to say we have never observed money supply improvement as high as it is today,” Morgan Stanley chief U.S. equity strategist Mike Wilson wrote this week.

The “Fed may not be in lever of Money Supply growth which means they won’t have control of inflation either, if it gets going,” he added.

There are a sprinkling different ways economists measure the size of the U.S. money supply that are generally classified with the letter “M,” such as M0, M1 and M2.

The obscene M2 measure includes cash, checking deposits, savings deposits and money market securities. Because of its wide distinctness, economists and investors tend to watch changes to the M2 supply as an indicator of the total money supply and future inflation.

As underscored by Wilson, the year-over-year percent change in the M2 supply is now north of 23%. To put that in perspective, year-over-year rise in the M2 money supply had never exceeded 15% until 2020, according to Fed records dating back to 1981.

Normally delineated by slow, steady growth, the M2 supply has grown 20% from $15.33 trillion at the end of 2019 to $18.3 trillion at the end of July.

“The danger of higher inflation may be greater than it’s ever been, too,” Wilson wrote. “While this hasn’t shown up in wager end rates yet, the very sharp move higher in breakevens [bond market inflation expectations] and precious metals indicate higher inflation may be on its way.”

That seemed to be the opinion of longtime hedge fund manager Paul Tudor Jones, who in May remarked that his concerns over inflation and dollar depreciation prompted him to invest in both bitcoin and gold.

Though the remainders between bitcoin and gold are many, Wall Street has for weeks chased both assets as hedges against inflation and a comparatively safe place to keep wealth during a volatile year.

Gold, one of 2020’s best trades, on Wednesday rupture through historic resistance at $2,000 an ounce to reach a new record. Between the Covid-19 pandemic and inflation expectations, gold has reaped nearly 35% this year, far ahead of the S&P 500’s 3%.

“If you take cash, on the other hand, and you think about it from a advantage power standpoint, if you own cash in the world today, you know your central bank has an avowed goal of depreciating its value 2% per year,” Jones signified in May. “So you have, in essence, a wasting asset in your hands.”

The source of this M2 expansion and these inflation concerns isn’t surely a mystery.

Congress and the Fed have worked in tandem to combat the negative economic effects of Covid-19 with an unprecedented cocktail of financial spending, near-zero interest rates and subsidized loan programs.

Those efforts, largely designed to help issues keep workers on payrolls and ease the impact of layoffs, have been applauded for keeping consumer spending afloat in late-model months.

But between a prodigal Congress and an empowered Fed, critics argue that “printing money” to juice the economy could backfire and call a spike in prices. Banks are still stuffed to the gills with reserves that could, in time, flow into the thrift through credit and loans.

“Congress is now the critical player in driving money supply growth with the Fed fully pledged to doing whatever it takes,” Wilson wrote. “This is very different from the post [financial crisis] era when pushy monetary policy was unmet with a willing borrower and spender. We think this poses a greater likelihood for inflationary troubles to build.”

But while an expanded money supply may set the stage for inflation, the relationship between M2 and inflation has been in dispute over the years. Some, like PGIM Fixed Income economist Nathan Sheets, said he’s taking a wait-and-see manner.

Sheets, who served in the U.S. Treasury Department until 2017, said investors were also worried about inflation in the aftermath of the monetary crisis. Those fears, he said, ultimately did not come to fruition.

“Rates were very low and central bank weight sheets (and money creation) had surged. But the liquidity then sat in the banking system—including as excess reserves at the Fed,” he wrote in an email. “The ready creation must translate into increased lending and spending in order for it to be inflationary.”

The idea that in creation won’t necessarily generate inflation is centered on yet another economics concept known as the velocity of money.

The velocity of simoleons is, very simply, the rate at which money is exchanged in an economy. High money velocity is usually associated with a fit economy with businesses and consumers spending money and adding to a country’s gross domestic product.

But the velocity of wherewithal can slow during recessions as corporations and families elect to save more of each dollar they earn. Demographic varieties, such as an older population, also tend to curb the velocity of money.

According to Sheets, the Fed can go to extreme lengths to flat the economy with cash and bolster the M2 supply. But if businesses and customers aren’t inclined to spend the added dollars, the gelt will almost invariably wind up sitting idle, not contributing to GDP or inflation.

That may be a partial explanation as to why the U.S. hasn’t meditate oned headline inflation numbers increase despite the rise in M2 supply in recent months.

The Labor Department’s latest research on core consumer prices showed the index down for a third consecutive month in June for the first time since 1957. The insides personal consumption expenditures price index, the Fed’s preferred inflation gauge, increase 0.9% on a year-over-year basis in June, the slightest advance since December 2010.

“Inflation has been held down by some deep structural factors, including lifetime demographics and high debt levels — which have restrained aggregate demand and pressures on prices,” Sheets wrote in an email. “Craftsmen have struggled to get higher wages, and firms — competing against the so-called ‘Amazon price’ — have had particle capacity to raise their prices.”

“My expectation is that these forces are likely to continue on the other side of the virus,” Blankets wrote. “In response, central banks will remain highly stimulative, but hitting 2% inflation targets on a unchanging basis is going to be a challenge.”

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