The relationship between the components of the US M2 money stock and the US stock market, represented by the Wilshire Index, between 1980 and early 2021 is considered. Consistent with retail money funds (RMFs) acting as a ‘gateway’ for portfolio adjustment, the results indicate the stock market having a particularly strong influence on RMF behaviour during periods of economic and financial crisis, including since the economic effects of the COVID-19 pandemic took hold. The analysis also shows developments in the M1 stock having a very large influence on M2 deposits behaviour since September 2008 (the month of the Lehman Brothers collapse). This may be attributable to a preference among the public for more liquid forms of money in an era of low interest risk and sudden episodes of financial instability. These results point to the public’s desire to hold liquid assets at times of financial uncertainty and low interest rates having a substantial effect on US money developments.

The financial crisis has had the effect of focusing attention on the role of liquidity, but more specifically excess liquidity, in driving asset prices to unsustainable bubble levels. We think this focus is fully warranted. However, we consider that, in this critical relationship between money and other financial assets, it is only half the story. Little attention has been devoted to date to examining whether this same money–financial asset interaction might also be responsible for the excess liquidity having been generated in the first place. We argue that it is. A new dynamic is at play in which newly liberalised and democratised financial markets, a hugely expanded role for (Keynesian) liquidity preference (driven by an asset demand for money), and a monetary policy constrained to respond to threats to financial stability, play key roles. We present evidence, using asset pairing, money and equities, which is supportive of our argument. These results have important implications for both monetary policy and financial stability.