While headlines have focused on the strength of the AI boom and the potential for interest rate cuts, another important element is the ongoing increase in US money creation. Despite political uncertainty and central bank tightening, growing liquidity is continuing to lift asset prices. This raises questions about the long-term effects on inflation, currency values and investor sentiment.
For more than a year, the US money supply has been expanding at a rapid pace. Since May 2023, US liquidity, measured using a mix of commercial bank assets and money market fund holdings, has increased by $US2.2 trillion. This marks a rise of nearly 10%, far outpacing the rate of overall economic growth. This flood of cash has pushed up the prices of stocks, gold and digital assets, even with the broader pressure from US Federal Reserve tightening measures.
The rise in market confidence is evident in major indices. This week, the S&P 500 hit new record highs, shrugging off concerns about a possible US government shutdown. At the same time, Australia's ASX 200 climbed more than 1% to its strongest level in four weeks. Analysts note that even though global liquidity is trailing behind the US, the scale of American money creation is still lifting asset prices worldwide.
Capital markets are also feeling knock-on effects from this liquidity wave. Gold prices have jumped nearly 48% over the past year, reaching record levels above $US3,800 per ounce as investors seek safety from currency declines. Bitcoin has also risen 33%, hitting a new peak of $US125,000 amid expectations of continued weakness in the US dollar.
Looking ahead, liquidity growth still appears strong. Even with official policy aimed at tightening, other factors such as private credit growth and rising bank deposits are continuing to inject cash into the financial system. While this trend supports current asset inflation, experts caution that markets may become more vulnerable in the event of a sudden shift in investor behaviour focused on rebuilding cash reserves.
In Australia, the effects are visible in expectations for the upcoming AGM season. Analysts anticipate more upbeat trading updates from domestic firms, particularly among smaller companies. This reflects growing confidence in the economic outlook. After several cautious years, this could signal a shift in earnings trends and investor sentiment.
