Wealth can't be spent. Money can. A stock portfolio, a house, a bond—these are claims on money, not money itself. The ratio between these claims and the actual dollars available to settle them tells us something important about financial system fragility.
Since the US left the gold standard in 1971, the money supply (M2) has grown about 33-fold. Over the same period, total credit market debt grew 256-fold. For every new dollar of money created, roughly eight dollars of new debt was issued.
This creates what Ray Dalio calls "the illusion of liquidity." Investors see a portfolio worth $1 million and think of it as money in the bank. But in aggregate, if everyone tried to convert their financial assets to cash simultaneously, the money supply would be overwhelmed. Prices would have to fall until claims matched available cash.
For every dollar of actual money in the US economy, there are now about three dollars in equity claims alone. Include bonds and other financial assets, and total household wealth reaches 7.9x the money supply—nearly eight dollars of claims chasing each dollar of liquidity.
Shaded area indicates elevated risk zone (>250%)
The danger isn't the ratio itself—it's what happens when holders of financial assets need actual cash. To service debt. To meet margin calls. To cover unexpected expenses. When enough people sell at once, there simply isn't enough money to absorb the selling pressure at current prices.
This is effectively a bank run on asset markets. The system then faces a binary choice: let prices collapse (deflationary bust) or print more money to absorb the selling (inflationary devaluation). Historically, central banks have chosen inflation.
Bubbles occur when the amount of financial wealth becomes very large relative to the amount of money, and bubbles burst when there is a need for money that leads to the selling of wealth to get it.
— Ray DalioThe US is an outlier. Globally, the equity-to-money ratio sits around 1x. China holds $47 trillion in M2—more than double the US—with much lower equity ratios. European households keep 31% of financial assets in deposits versus 13% in the US. America has financialized more aggressively than any other major economy.
This doesn't mean a crash is imminent. The dot-com ratio was elevated for over two years before the collapse. Being "right early" is functionally the same as being wrong. But it does mean the system is fragile—small shifts in sentiment can trigger outsized moves when claims exceed settlement capacity by this much.
Physical gold has no counterparty risk—it's not a claim on anything. When money printing devalues cash and selling pressure crashes equities, gold tends to hold value.
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