Trapped Liquidity, Dead Velocity, and the Risk Asset Rally No One Understands

Since late 2022, Bitcoin has more than tripled. AI stocks are breaking out. Gold just made new highs. And yet, global GDP remains soft, productivity is stagnant, and inflation is cooling. The real economy doesn’t feel booming — but asset prices are soaring.

Welcome to the liquidity paradox: where velocity is dead, M2 is still bloated, and capital is bypassing the real world entirely on its way into speculative assets. If you’re still waiting for growth to justify the rally, you’ve misunderstood what’s driving this cycle.

The Core Imbalance: Liquidity Without Circulation

Today’s market setup can be explained in a single contradiction:

• Global money velocity is flatlining — capital is not being recycled through the economy in productive ways.
• Global M2 to GDP remains high — there’s still a massive overhang of money supply relative to actual output.
• GDP growth remains structurally weak, with little to show for the monetary expansion of the past five years.

And yet, risk assets are flying.

Since the end of 2022:

• Bitcoin has rallied from under $17,000 to over $70,000
• Nasdaq-100 has returned over 50%
• AI-related equities like NVIDIA have seen price multiples
• Gold has just made new all-time highs

How does this happen when economic conditions look fragile?

This Isn’t Reflation — It’s Asset Inflation in a Hollow Economy

The answer lies in where the money is flowing. We’re not witnessing broad-based economic growth. This is not healthy reflation where capital spending, job creation, and demand expansion push the economy higher.

Instead, we’re seeing selective asset inflation. The bulk of liquidity is being pulled into yield-chasing instruments — not factory floors or infrastructure. No one wants to spend. No one wants to build. Everyone just wants to park capital where it might outrun future debasement or earn a speculative return.

This dynamic mirrors previous cycles:

• 2009–2011: Post-GFC QE led to an asset boom while the real economy stayed anaemic
• 2020–2021: Money printing fuelled crypto, tech, and meme stocks, not Main Street
• Japan: Three decades of near-zero rates and bloated central bank balance sheets inflated asset prices while wages stagnated and real demand collapsed

This isn’t new. It’s just intensified.

The Fed’s Decision Will Trigger the Next Leg

Here’s the danger: the liquidity is already in the system. It’s not a question of whether stimulus will be injected — it already was. What we’re watching now is a delayed reaction.

If inflation trends lower — say CPI drops to 2.3% or below — and the Fed starts cutting rates into this setup, the response from markets won’t be measured. It will be explosive.

• Bitcoin could push well past $80,000, with little resistance above its previous high
• AI stocks could reprice again, driven by a second wave of institutional FOMO
• Volatility would spike as capital floods back into high-beta assets across the board

In other words, the dam isn’t cracking — it’s already full. The only thing missing is a green light from policy.

The Key Chart: M2 vs Velocity

The structural imbalance is best captured by the relationship between two metrics:

• Global M2 / GDP (liquidity relative to output) remains elevated, a legacy of COVID-era monetary expansion and central bank asset purchases.
• Global money velocity — the pace at which money changes hands — remains historically low.

This divergence hasn’t resolved. And it won’t stay frozen forever. Eventually, something gives.

There are only three ways this imbalance can unwind:

1. Inflation — if velocity picks up while M2 remains high, consumer prices surge
2. Deflation — if demand collapses and velocity drops further, asset prices deflate
3. Volatility — the more likely short-term path, where markets swing aggressively in search of equilibrium

Conclusion: This Bull Market Isn’t About Growth

The next leg of this market cycle won’t be powered by productivity, innovation, or GDP expansion. It will be driven by trapped liquidity — money that’s already in the system, but has nowhere productive to go.

The only thing holding it back is monetary policy lag. When that shifts — whether by data or decision — markets will move swiftly.