Summary: The M2 money is being inefficiently absorbed by banks and large state or local government owned companies.
The issue of M2 growing rapidly without an increase in people's pockets has been a long-standing topic, similar in significance to the debate between protecting housing prices or exchange rates, which are essentially irresolvable. Here are the conclusions:
Let me start with something else. I believe that the development of all things is determined by the interaction of the most fundamental and important factors. All the miscellaneous elements are just smoke bombs and insignificant. Take Masayoshi Son, for example. Is he impressive because he is daring? I think it's because he belongs to the world's top players in grasping the big picture. Maybe it was when he was in his teens and the CEO woke him up to learn computer science and English. After gaining extensive knowledge and experience, he not only seized the Japanese internet bubble but also embraced e-commerce, correctly bet on consumer trends, and captured the cloud platform and so on. He has had many investment failures, such as WeWork, which burned a lot of money, but that doesn't overshadow his fame for his precise judgments on the big picture.
I would like to share another personal opinion. The more I see, the more I think. It seems that the development of the era is similar to the cycle of life and death for individuals, and the same goes for systems, especially when it comes to finding a system that can self-repair and self-improve. This is due to human selfishness and the biological need for survival. I now believe that capitalism and socialism are merely different distribution mechanisms, exhibiting extreme disparities between the rich and the poor. This is because human greed is limitless, and all beliefs, morals, and even laws in the world are not adhered to when there are no costs for doing wrong. All systems have loopholes, and the larger the country, the more loopholes there are. If we consider the goal as the absolute happiness of humanity, it is much more challenging to achieve overall happiness for the entire population in the United States compared to China. This means that due to the existence of numerous loopholes, some people always benefit from them, thereby widening the wealth gap. Now, let's discuss the loopholes related to M2.
To begin with, the issue of M2 growing too rapidly while people's pockets do not seem to increase has been a recurring topic. It is on par with the debate between preserving housing prices or maintaining exchange rates because fundamentally, it is an unresolved problem. Let's start with the conclusion:
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The reason why M2 grows so fast but fails to reach the real economy lies in the limited control that the central bank has over individual banks. They cannot prevent banks from lending to entities that borrow funds and then use them to purchase financial products from the same bank. This is essentially a game theory optimal strategy:
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For banks, this strategy allows them to fulfill their lending targets, earn interest rate spreads, and reduce bad debts. Only reputable and large companies can receive bank loans since smaller companies do not provide the same risk-reward profile. Banks may even prefer lending to trustworthy companies that are certain to invest in their own products, as the risk-reward ratio in the real sector is higher compared to investing in banks. This explains why many listed companies report high growth rates in financial products.
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For companies, especially listed ones, this strategy allows them to earn money from financial products (which generally have higher interest rates than loans), increase assets on their balance sheets, boost working capital and cash flow for investments. Although debt also increases, many listed companies have debt ratios exceeding 50% for major clients, so increasing both the numerator and denominator helps decrease the ratio. This is beneficial for companies and indirectly promotes stock prices.
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For the general public, there is no direct impact as the money does not flow in and out of their pockets.
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The reason for the rapid growth of M2, excluding the possibility of high-level officials trying to benefit before leaving their positions, could be an attempt to stimulate the economy amid its sluggishness. Unfortunately, it has once again resulted in unintended consequences, allowing undeserving individuals to take advantage of the situation.
How outrageous is our M2? If I remember correctly, the size of our M2 is equivalent to the combined total of the United States and the European Union (although the United States seems to have replaced M2 with M3 for some reasons, as it provides a more accurate representation).
So, who ends up losing in the end? Of course, it's the people. If the amount of money being circulated without productive use keeps increasing and listed companies continue to profit and cash out, the wealth gap will further widen. It's akin to a form of substantial negative interest rates. If the money in society flows into a large reservoir (previously real estate), the purchasing power of the remaining money (the part that can still circulate) essentially plummets. We understand that most of the money in the reservoir cannot be taken out due to the lack of buyers (extremely poor liquidity), and selling it off directly would trigger a systemic economic collapse (as an influx of 200% money supply would usually lead to 100-200% inflation).
On a side note, if we examine it carefully, the inflation caused by an additional 200% money supply is likely to be less than 200%. This is because poor individuals would spend all their money on essential items like food, while the wealthy might only spend 10% of their money. As a result, at the pricing level of essential goods, the increase in monetary supply of 200% would not be proportional, but rather smaller than double the amount. However, in practical terms, due to social unrest caused by poor people who cannot even afford to eat, the increase in transaction costs (reduced life safety, breakdown of mutual trust, etc.) might lead to an upward trend in pricing. The example of severe inflation in Turkey can be referenced here.
Returning to the point, this game of idle money circulation can only be sustained under two necessary conditions:
- The interest rates on loans are lower than the returns on bank financial products. In other words, if financial products default too frequently (as seen in the bond market last November), companies won't continue to borrow money and invest in bank products.
- The central bank refrains from regulatory intervention.
From my personal understanding, it seems that this game will continue for now since no accidents have occurred yet. The pace of M2 growth might only slow down after the next major financial product default.