Unhedged: Stock prices and the velocity of money

Unhedged: Stock prices and the velocity of money

It’s the end of Unhedged’s first week. How’s it going? Email me: [email protected].

QE and stock prices (part two)

Here are two lines that mostly go up and to the right:

The two lines are the M2 money supply (cash, deposits, money market accounts) and the S&P 500. M2 is rising fast because of quantitative easing: the Fed is buying securities for cash, thereby putting new money out there. Why the S&P is rising fast is less clear. The fact that the two lines have moved together lately encourages a popular causal story: “the Fed is printing money, and it has to go somewhere, and it is going into the stock market.” A couple of days ago I noted that these causal stories are wrong, because cash is not transformed into stock. When I buy shares, the seller gets the cash. It is not “in the stock market”. 

What is really happening is that all the additional money sloshing around makes people want it less, relative to stocks, and the increased relative demand for the stocks forces share prices up. That’s how QE affects stock prices (or one way it does; other people, especially central bankers, prefer stories about QE lowering the discount rate,