Economics: effects of the money supply spike at the beginning of the COVID crisis

 Effects of the Money Supply Spike at the Beginning of the COVID Crisis

The "beginning of the COVID crisis" refers to early 2020 (March–April), when the U.S. Federal Reserve and Congress unleashed an unprecedented monetary and fiscal response to the pandemic-induced shutdowns. This led to a massive spike in the money supply, primarily measured by M2 (currency, checking deposits, savings, and other liquid assets). Below, I'll outline the spike's scale, immediate/short-term effects (2020–mid-2021), and longer-term consequences (2021–2025), drawing on empirical data and Reisman's net-consumption/net-investment theory of profit (π = C, r = C/E, w_real = w / P_price, where the spike acted as an artificial ↑ M → ↑ S → temporary ↑ π/r, but ↓ I long-run via malinvestment).The Spike: Scale and Causes

• Magnitude: M2 surged 26.9% year-over-year by February 2021—the highest since records began in 1959—adding ~$6.3 trillion (40% increase from pre-crisis levels). From February 2020 ($15.4T) to peak in 2022 ($21.7T), it grew ~41%.
  • Causes: Fed's near-zero rates, quantitative easing (QE: $3T+ in asset purchases), and fiscal stimulus ($5T+ in CARES Act/ARP checks/transfers). Banks hoarded reserves due to Regulation D changes, boosting deposits.
• Data Sources: Federal Reserve (FRED), St. Louis Fed, IMF, Deloitte (2025 forecasts confirm lingering effects).

This was not organic growth but exogenous injection—M × V ↑ via ↑ M (money supply), distorting Reisman's monetary layer (M × V = D = S).Effects in Reisman's FrameworkReisman's theory views money spikes as artificial ↑ I (malinvestment), temporarily boosting π = C but ↓ r long-run via ↑ E (productive expenditure) and ↓ productivity (Q/L_s). Here's the breakdown:

Effect Category	Short-Term (2020–Mid-2021)	Long-Term (2021–2025)	Reisman Mechanism
Money Supply & Demand (M × V = S)	↑ M → ↑ S (AD) by 40%; V stable initially. Stimulus checks → ↑ C_gross (household spending +25%).	M peaked 2022, then ↓ 4% (first contraction since 1949); V ↓ (hoarding). S stabilized at $29.5T (2025).	↑ M → artificial ↑ D → ↑ S temporarily; ↓ V → deflationary offset.
Profits (π = C)	↑ π ~20–30% (corporate profits hit $2.8T in 2021, +50% YoY). ↑ C (stimulus spending).	π normalized but volatile; 2022 spike to $3.4T, then ↓ to $2.9T (2025 est.).	↑ C_gross → ↑ C → ↑ π short-run; but malinvestment → ↓ C long-run.
Profit Rate (r = C/E)	↑ r ~10–15% (low E from shutdowns).	↓ r to 4–6% (2023–2025); E ↑ as supply chains recovered.	↑ S > ↑ E short-run → ↑ r; ↑ E (rebuilding) → ↓ r.
Investment (I = P_cap)	↓ I initially (-10% in 2020, supply shocks); then ↑ 15% (2021 stimulus-fueled).	↓ I growth to 2–3% annually (2025); malinvestment in "zombie firms."	Artificial ↑ I → boom; ↓ r → bust (Austrian-style cycle).
Productivity (Q/L_s = E / L_s per enhancement)	↓ Q/L_s ~5% (2020 shutdowns); AS = E × 0.98 ↓.	Q/L_s recovered to +2% (2025), but below pre-COVID trend (1.5% vs. 2.5%).	↓ K/L_s (delayed capex) → ↓ productivity; E ↑ but inefficient.
Price Level (P_price = S / AS)	Stable/low (1–2% CPI in 2020); AS ↓ > S ↓.	↑ P_price 7–9% CPI (2021–2022 peak); 2025 est. 2.5% (1.255 index).	↑ S / ↓ AS → ↑ P_price (stagflation lag).
Real Wages (w_real = w / P_price)	↑ w_real ~3% (stimulus transfers); w stable.	↓ w_real 2–4% (2022–2023); 2025 recovery to +1%.	↑ P_price > ↑ w → ↓ w_real; ↓ productivity → wage stagnation.
Overall Economy (GNR = E)	E ↓ 5% (2020 recession, -3.4% GDP); quick rebound (+5.9% 2021). Unemployment ↓ from 14.8% to 3.5%.	GDP +2.0% (2025 est.); but debt/GDP ↑ to 130%; inequality ↑ (top 1% gains).	↑ π short-run stimulus; ↓ r → slower K/L_s → retarded growth.

Detailed Breakdown

1. Immediate Liquidity Boost (March–June 2020):
   • Positive: Prevented collapse—households saved ~$1.6T (↑ personal savings rate to 33%). Businesses accessed PPP loans ($800B), preserving jobs (unemployment fell from 14.8% peak).
   • Reisman View: Artificial ↑ C_gross → ↑ S → ↑ π temporarily, averting ↓ E crisis.
2. Inflationary Lag (2021–2022):
   • Negative: M2 ↑ outpaced AS (supply chains disrupted), causing "persistent" inflation (CPI peaked 9.1% June 2022). Studies (MDPI 2022 ) estimate 5–8% of 2022 inflation from M2 surge; fiscal-monetary mix amplified (St. Louis Fed ).
   • Reisman View: ↑ M → ↑ S / ↓ AS → ↑ P_price → ↓ w_real (real wages fell 2.7% 2021–2022). Malinvestment in non-productive sectors (e.g., crypto/speculation).
3. Recovery & Normalization (2023–2025):
   • Mixed: M2 contracted 4% (2023, first since 1949 ), aiding disinflation (CPI 2.5% 2025 est.). But growth slowed (real GDP +1.9% 2025 ); debt ballooned ($35T).
   • Reisman View: ↓ r (to ~5%) → ↓ I → ↓ K/L_s → productivity lag (Q/L_s +1.5% vs. pre-COVID 2.5%). Lingering ↑ P_price erodes w_real.

Reisman's Overall VerdictIn Reisman's framework, the spike was malinvestment (artificial ↑ I via ↑ M), creating a boom-bust cycle:

• Short-run boon: ↑ C → ↑ π/r → stabilized E.
• Long-run bust: ↑ P_price → ↓ w_real; ↓ r → ↓ I → slower capital deepening → retarded real wages/productivity.
  "Monetary expansion distorts the profit rate, leading to malinvestment and eventual correction via inflation and stagnation." (Adapted from p. 475–480 on Keynesian stimulus.)

This aligns with Austrian views (e.g., Mises Wire [web:10, web:11]) but emphasizes π = C distortion. X discussions (2020 [post:15,17]) highlighted inflation fears amid low confidence/hoarding.