Monetary Transmission Destination Test
Track where newly created money lands to assess its economic potency
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 96%
Begin by measuring how much liquidity authorities created, then trace its destination rather than treating every balance-sheet expansion alike. Money retained by banks as excess reserves strengthens financial cushions but may produce little immediate lending or spending. Money deposited into household checking accounts, payroll accounts, and business transaction accounts creates more direct purchasing power. Next, determine whether consumers can currently spend those balances or are accumulating suppressed demand. When restrictions ease, accessible money can meet recovering demand and produce a spending boom, stronger nominal growth, and inflation. The output is a directional judgment about the potency of stimulus and its implications for bonds, equities, and prices, not a point forecast.
Origin
Jeremy Siegel derived this distinction from his monetary-policy training, historical research, and lessons from Milton Friedman, then applied it to the contrasting responses to the 2008 financial crisis and COVID-19.
Core principles
- 01Money creation is not equally stimulative in every destination
- 02Excess bank reserves transmit weakly to spending
- 03Transaction-account growth increases purchasing power directly
- 04Fiscal and monetary policy must be analyzed together
- 05Inflation risk rises when liquid balances meet reopened supply
How to run it
- 1
Measure monetary expansion
Quantify central-bank asset purchases, emergency lending, and other additions to system liquidity.
Pro tip Compare the expansion with both prior crises and the existing monetary base.
Watch out A large central-bank balance sheet alone does not prove that consumer-price inflation will follow.
- 2
Locate the money
Determine whether the liquidity remains in excess bank reserves or enters checking, payroll, and other transaction accounts.
Pro tip Use M1, M2, bank-deposit, and fiscal-transfer data together.
Watch out Do not classify reserves held by banks as equivalent to spendable household cash.
- 3
Assess transmission potency
Rate direct transfers and account-funded loans as more immediately potent than reserves that banks do not lend.
Pro tip Look for evidence that balances increased among households and small businesses.
Watch out Credit availability does not guarantee borrowing or spending.
- 4
Identify suppressed demand
Check whether travel restrictions, closures, or uncertainty are temporarily preventing people from spending accumulated balances.
Pro tip Watch savings rates, refundable purchases, and sector-specific spending constraints.
Watch out Some accumulated savings may remain precautionary rather than becoming consumption.
- 5
Project the release
Evaluate how reopening, therapeutics, or restored confidence could release purchasing power into the economy.
Pro tip Use forward-looking health and reopening indicators rather than relying only on lagging reports.
Watch out Supply constraints can change how much of the release becomes real growth versus inflation.
- 6
Translate into asset implications
Adjust expectations for inflation, bond yields, equity revenues, and interest-rate-sensitive assets according to the transmission strength.
Pro tip Express conclusions as scenarios and ranges rather than exact forecasts.
Watch out Policy can change before the transmission process finishes.
In the wild
After the financial crisis, much of the Federal Reserve's expansion accumulated as excess bank reserves. During the COVID response, government checks and PPP loans placed funds directly into household and business accounts, making the intervention more capable of supporting spending after reopening.
→ The test produces a higher inflation and spending-risk assessment for the COVID intervention than for post-2008 quantitative easing.
An analyst separates a new package into bank-liquidity facilities, household transfers, and payroll loans. The analyst then estimates which components create spendable balances and whether closed sectors are suppressing demand.
→ The portfolio team can distinguish financial-system support from stimulus likely to affect nominal demand.
Common mistakes
Equating all liquidity with spendable money
Central-bank reserves and household transaction balances have different transmission mechanisms and should not be combined into one undifferentiated stimulus number.
Ignoring fiscal delivery channels
Analyzing the Federal Reserve without tracing government checks, payroll programs, and tax changes misses how money reaches end users.
Predicting inflation without a release mechanism
Liquid balances may remain idle while activity is restricted or confidence is weak, so the analyst must identify how and when spending can resume.
Is it for you?
Best for
It is best for investors and analysts comparing the likely effects of different monetary and fiscal interventions.
Not ideal for
It is not ideal for precise short-term inflation timing or forecasting individual securities.
From the transcript
“Because I said, it's going into excess reserves. I see a little bump in the money supply and that, but nothing else.”
“That's the critical difference what I see today is it's lent out in fact that the PPP program is go to the banks and get…”
“But more potent is if that gets pushed into M one and M two, you're going to see a much much stronger effect.”
From the episode
Jeremy Siegel on the Stock Market Under Covid-19 (Podcast)