Welcome to another exciting episode of RRI/Money! Picture us, your hosts, as adventurers navigating the vast ocean of financial markets. I'm Fabian, your trusty guide from StudioAlpha, joined by Tim and Max, the seasoned sailors from Oceanic Partners.
This blog is a 2-min read.
What happened? - Imagine the U.S. economy as a giant lake, with money flowing through it like water (M2). The more the economy grows, the more water fills the lake. This is a good thing! It's like having a lake that's perfect for swimming, boating, or even a lazy float on a raft. But recently, something unusual has been happening. The lake's water level is dropping. It's a bit like someone pulled the plug in a giant bathtub. The last time we saw a drop this big was way back in the 1930s.
What was M2 again? - The money supply (M2) includes cash, coins, and money in bank accounts and other easily accessible forms.
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Why is this happening? - Picture the Federal Reserve as a giant dam controlling the flow of water into the lake. Recently, it's been letting less water through. Banks, acting as rivers carrying water from the dam to the lake, have also been flowing slower. Add to this the fact that two major rivers, Silicon Valley Bank and Signature Bank, have recently dried up, and you can see why people are starting to worry.
Now, consider smaller banks as streams that feed into the lake. They've been hit hard by changes in the "weather" (the market). Think of commercial real estate as their bread and butter, or more appropriately, the water they carry. But with more people working from home, there's less need for office buildings. That's like a long dry summer causing less rain to fill the streams.
(Data: Pitchbook)
This could have a ripple effect on our lake. If the value of office buildings (the streams' water) drops, and the streams dry up, we might see the lake's water level drop even further. That's not great for our swimming and boating plans!
So, what does this mean for the lake and its future? - It's a bit like watching a slow-moving storm coming our way. We know it's coming, but we're not sure how bad it's going to be. Will it be a gentle sprinkle or a torrential downpour?
Right now, everyone's watching the storm clouds and making their best guesses. In the meantime, it's business as usual, albeit with a bit more caution and a lot of umbrellas at the ready.
In the next episode, we'll take a closer look at those storm clouds and try to predict when they might burst. So, keep your rain boots handy, and we'll see you next time on RRI/Money!
That’s it. We’ll back next week. Thank you for reading and posting your questions and feedback!
Best,
Max, Tim & Fabian