Since the interest rate hike cycle began in 2022, the U.S. benchmark interest rate has been high between 5.25%-5.50%, yet the U.S. M2 money supply (simply understood as the money in the market) has reached $21.86 trillion, setting a new historical high.
According to traditional macroeconomic theory: high interest rates tighten the money supply, usually leading to a reduction in the money supply; while low interest rates loosen the money supply, which promotes an increase in the money supply. However, in reality, high interest rates and record-high M2 are occurring simultaneously, indicating that the superficially tight interest rate policy does not necessarily equate to true liquidity tightening.
How did this come about?
Although the Federal Reserve has raised interest rates, the fiscal deficit is extremely high, and U.S. debt continues to expand (already over $36 trillion). The fiscal deficit is financed through issuing government bonds, and a large number of institutions (sovereign funds, money market funds, banks) are buying government bonds. The U.S. Treasury spends this money in the private sector (such as infrastructure, clean energy, military spending, the CHIPS Act, etc.), leading to an increase in deposits and subsequently pushing M2 higher.
From the data, it can be seen that there has been more money in the market in recent years, which is why U.S. stocks, gold, Bitcoin, and other assets have been rising. The wealth of the rich is increasing rapidly, and they can earn significant interest while doing nothing. However, the middle and lower classes must bear high interest costs, such as mortgage and credit card living expenses, feeling 'very cold,' which is a core reason for the growing dissatisfaction among ordinary Americans.
In other words, the expansion of M2 in the U.S. is more driven by fiscal injections (debt financing) rather than credit expansion. The beneficiaries are institutions and the wealthy, which can be simply understood as funds 'circulating' in the financial market, with more funds entering financial asset markets (like U.S. stocks, Bitcoin, gold) and not entering real social production and living conditions. Meanwhile, interest rate hikes are tightening the screws on ordinary people!
This situation has not only caused social rifts and intensified contradictions, but also the U.S. debt crisis is urgent. Even Musk and Trump have turned against each other and attacked one another over this issue. Trump has repeatedly expressed dissatisfaction with the Federal Reserve for not lowering interest rates, but why has the Federal Reserve been reluctant to lower interest rates? Or why does it dare not lower interest rates?
The root cause is the high prosperity of American finance, but the manufacturing sector has been hollowed out. In the past, the United States leveraged dollar hegemony, and other countries produced goods for export to the U.S. to earn dollar foreign exchange. After earning dollars, they would send talent to the U.S. through study abroad, tourism, investment in U.S. stocks and bonds, thus supporting the development of the U.S. financial market. The U.S. would periodically 'harvest' the globe through 'dollar tides': raising interest rates causes dollars to flow back to the U.S., harming other countries, then lowering interest rates releases dollars to buy cheap foreign assets, completing the cycle.
However, this time the dollar tide has been impeded. Whether it's the Russia-Ukraine war, Middle East conflicts, or the previous tariff wars, the U.S. has not gained much benefit, and it has even seriously damaged its national image and the credibility of the dollar. The demand for the dollar from other countries is decreasing, and they are even not buying U.S. bonds, leading to dollars being unable to exit.
The result is that U.S. debt has imploded, and the Federal Reserve can only attract funds through high interest rates to maintain liquidity in U.S. stocks, U.S. debt, and large institutions. When this precarious financial system will collapse is hard to say, which is why funds are tightly holding onto gold and Bitcoin.