The COVID Money Cannon

The week of March 9, 2020 was when the global financial system came closer to collapse than at any point since September 2008. The S&P 500 fell 12% on Monday alone — the worst single day since 1987. Oil prices crashed as Saudi Arabia and Russia launched a price war. Corporate bond markets froze. The Treasury market — the deepest, most liquid market on Earth — seized up as dealers couldn’t process the volume of sell orders. For a brief, terrifying moment, even U.S. Treasury bonds became hard to sell.

The Fed’s response was faster and more overwhelming than anything in its history. On Sunday, March 15, the Fed cut rates to zero, announced $700 billion in Treasury and MBS purchases, and opened dollar swap lines to foreign central banks. When that wasn’t enough, it began buying assets at a pace that defied comprehension: $75 billion per day in Treasuries alone during the last week of March. That’s more than the entire monthly pace of QE3, condensed into a single day.

The balance sheet told the story in numbers that barely seemed real. On March 4, WALCL was $4.24 trillion. One week later: $4.31 trillion. March 18: $4.67 trillion — up $430 billion in two weeks. March 25: $5.25 trillion. April 1: $5.81 trillion. The line on the chart didn’t slope upward; it went vertical.

The Fed didn’t just buy Treasuries and MBS. It activated or created a dozen emergency lending facilities, most using authority under Section 13(3) of the Federal Reserve Act — the same emergency power invoked during 2008. The alphabet soup of programs read like a military mobilization:

PMCCF and SMCCF — the Primary and Secondary Market Corporate Credit Facilities — allowed the Fed to buy corporate bonds directly for the first time in its history. This was revolutionary: the Fed was no longer just supporting banks. It was directly backstopping corporate America. TALF (Term Asset-Backed Securities Loan Facility) supported consumer and small business lending. PPPLF (Paycheck Protection Program Lending Facility) funded the PPP loans. MSLP (Main Street Lending Program) targeted mid-sized businesses. The Municipal Liquidity Facility bought state and city bonds.

Many of these facilities were barely used. The Municipal Liquidity Facility lent only $6.4 billion of a $500 billion capacity. The Main Street Lending Program deployed just $17 billion. But their mere existence mattered enormously. By announcing that it could buy corporate bonds, muni bonds, and asset-backed securities, the Fed signaled to markets that there was a buyer of last resort for everything. The announcement effect was as powerful as the actual purchases.

The Fed’s balance sheet expansion was just one channel. The other was fiscal policy: Congress authorized approximately $5.2 trillion in pandemic spending across four major bills — the CARES Act ($2.2 trillion), the Consolidated Appropriations Act ($900 billion), the American Rescue Plan ($1.9 trillion), and various smaller programs. This included direct stimulus checks ($1,200, then $600, then $1,400 per person), enhanced unemployment benefits ($600/week, then $300/week), PPP loans, and state/local aid.

The fiscal money flowed directly into people’s bank accounts, pushing M2 higher. The mechanism was simple: Treasury issued bonds to finance the spending. The Fed bought many of those bonds through QE. The Treasury deposited the proceeds in its General Account at the Fed, then disbursed the money through stimulus checks and transfer payments. The money landed in household checking and savings accounts — pushing M2 skyward.

M2 went from $15.4 trillion in January 2020 to $19.4 trillion by January 2021 — an increase of $4 trillion, or 26%, in a single year. By its peak in March 2022, M2 hit $21.8 trillion. For context, it had taken from 1959 to 2011 — fifty-two years — for M2 to grow by $9 trillion. COVID added $6.4 trillion in two years.

The initial emergency phase — the $3 trillion added in ten weeks — was followed by a longer, steadier expansion. After the frantic pace of March-April 2020, the Fed settled into a routine of $120 billion per month ($80 billion Treasuries, $40 billion MBS). This was roughly the pace of QE3 at its peak, but now it ran continuously for almost two years.

By January 2021, the balance sheet hit $7.33 trillion. By January 2022, it reached $8.77 trillion. The peak came in April 2022, at $8.97 trillion — almost exactly ten times the pre-crisis level of $905 billion. The Fed owned $5.8 trillion in Treasuries and $2.7 trillion in MBS, making it the dominant player in both markets.

Meanwhile, the Treasury General Account (TGA) — the government’s checking account at the Fed — swung wildly. It surged from $383 billion pre-COVID to $1.8 trillion by mid-2020 as the Treasury pre-funded stimulus programs. Then it drained back to $78 billion by October 2021 as those funds were disbursed. Each drawdown of the TGA was effectively a stimulus injection, pushing money from the government’s account into the banking system (and into M2). We’ll cover the TGA in detail in Episode 9.

For most of 2020 and early 2021, the massive money creation didn’t show up in consumer prices. Inflation ran at about 1.4% through early 2021. The money was being saved, not spent — the personal savings rate hit 33.8% in April 2020. Velocity collapsed, as we covered in Episode 2. The Fed called emerging price pressures “transitory.”

Then the dam broke. As vaccines rolled out and the economy reopened in mid-2021, consumers started spending their accumulated savings. But supply chains were still snarled: factories in Asia were running at reduced capacity, container ships were stacked up at ports, truck drivers were in short supply. The result was too much money chasing too few goods — the textbook definition of inflation.

CPI rose from 1.7% in February 2021 to 5.4% by June, to 7.0% by December. It peaked at 9.1% in June 2022 — the highest reading since 1981. The Fed, which had spent 2021 insisting that inflation was transitory, finally pivoted in March 2022, raising rates for the first time in three years and beginning to signal the end of asset purchases.

The debate over how much of the inflation was “money printing” versus “supply chain disruption” will fill economics textbooks for decades. The honest answer is: both. The supply disruptions created the kindling. The $6 trillion in new money provided the fuel. And the reopening of the economy was the match. Without the money creation, inflation would have been much milder. Without the supply disruptions, it might not have happened at all. The combination was combustible.