3 ms·

I don't know, but I think the destination is primarily the stock market for the past year. Maybe some also went to bitcoin. - Fed open market operations: $2.8T

I don't know, but I think the destination is primarily the stock market for the past year. Maybe some also went to bitcoin. - Fed open market operations: $2.8T introduced over 9 month by the Fed in 2020[1]. - Stock market (DJIA) run-up in 2020: $2.2T [2] I don't think this can be just correlation, even on the simplest reading of how the Fed OMO works, but there is debate about this[3]. [1] https://fred.stlouisfed.org/series/M1 https://fred.stlouisfed.org/series/M1. I believe M1 money is a good proxy for the Fed's open market operations that would go towards the kind of asset purchases that would increase stock equity valuation. I'd appreciate any feedback on this [2] DJI went from $22k on Mar 1 2020 -> $30k, for an $8k change by end of year. DJI had a market cap of $8.3T when it was at $29k Dec 2019[2.1], so 8/29=0.27. 27% of 8.3T = $2.2T. [2.1] https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average [3] https://economics.stackexchange.com/questions/12226/does-the-federal-reserve-buy-and-sell-stocks https://economics.stackexchange.com/questions/12226/does-the...

shuckles 6y ago
I'm having trouble following your logic for [2]. Prices are decided on the margin whereas M1 is a metric of total assets, which is a cumulative measure. As a thought exercise: if I owned the entirety of $DJI, and you bought $2.2T of $DJI from me, M1 would be unchanged (your money is now held in deposit at my bank account), and the market cap of $DJI would be determined entirely by our transaction price. By what mechanism do you relate the two?
- pmayrgundter 6y ago
  I mean it in the usual supply/demand sense: more money => higher prices.[1]. The Fed OMO directly drives prices level/inflation. Look at the series below... the 10 year break even inflation rate[2] looks almost exactly like the stock market since the crash, but they weren't in sync before. Ofc, it's primarily being used to shore up the value of the 10-Year Treasury Constant Maturity Rate bond [3], which would otherwise look like [4]. But I think the money supply pressure effects both, and the relative quantities are on par, so seems like the pieces fit to me. [1] https://www.investopedia.com/insights/what-is-the-quantity-theory-of-money/ https://www.investopedia.com/insights/what-is-the-quantity-t... [2] 10-Year Breakeven Inflation Rate: https://fred.stlouisfed.org/series/T10YIE https://fred.stlouisfed.org/series/T10YIE [3] 10-Year Treasury Inflation-Indexed Security, Constant Maturity: https://fred.stlouisfed.org/series/DFII10 https://fred.stlouisfed.org/series/DFII10 [4] 10-Year Treasury Constant Maturity Rate: https://fred.stlouisfed.org/series/DGS10 https://fred.stlouisfed.org/series/DGS10

shuckles 6y ago

I'm having trouble following your logic for [2]. Prices are decided on the margin whereas M1 is a metric of total assets, which is a cumulative measure. As a thought exercise: if I owned the entirety of $DJI, and you bought $2.2T of $DJI from me, M1 would be unchanged (your money is now held in deposit at my bank account), and the market cap of $DJI would be determined entirely by our transaction price. By what mechanism do you relate the two?

pmayrgundter 6y ago
I mean it in the usual supply/demand sense: more money => higher prices.[1]. The Fed OMO directly drives prices level/inflation. Look at the series below... the 10 year break even inflation rate[2] looks almost exactly like the stock market since the crash, but they weren't in sync before. Ofc, it's primarily being used to shore up the value of the 10-Year Treasury Constant Maturity Rate bond [3], which would otherwise look like [4]. But I think the money supply pressure effects both, and the relative quantities are on par, so seems like the pieces fit to me. [1] https://www.investopedia.com/insights/what-is-the-quantity-theory-of-money/ https://www.investopedia.com/insights/what-is-the-quantity-t... [2] 10-Year Breakeven Inflation Rate: https://fred.stlouisfed.org/series/T10YIE https://fred.stlouisfed.org/series/T10YIE [3] 10-Year Treasury Inflation-Indexed Security, Constant Maturity: https://fred.stlouisfed.org/series/DFII10 https://fred.stlouisfed.org/series/DFII10 [4] 10-Year Treasury Constant Maturity Rate: https://fred.stlouisfed.org/series/DGS10 https://fred.stlouisfed.org/series/DGS10