Visa Inc. is a company that almost everyone is familiar with; a financial network firm that operates in worldwide commerce made up from consumers, businesses, and governments all interacting with one another, generating $200 trillion worth of payment flows in 2025. Visa’s core fundamental to being the leading frontier in the payment processing industry is beyond just being a financial intermediary for capital flow, but, as an entity that facilitates free trade, connecting consumers and producers from different hemispheres, transacting distinct currencies in diverse respective economies, all performed behind the scenes.

At first glance, how can a business in such a strong position face determential risks? Especially one where its brand is synonymous with purchasing goods and services, where, the performance of Visa is closely tied to consumer spending, which expected to climb at around 3% annually, globally for the next 5 years. But, in fact, there are legitimate concerns with respect to uncertainty and risk which this valuation plans to not only uncover, but, reassure a bullish outlook on Visa’s future performance.

All and all, the large-cap company is revered heavily from investors but perhaps not for the obvious reasons and therefore, the objective is to solve for Visa’s true valuation, competitive advantage, and impressive underlying operating metrics that will continue to be the impetus for its success.

At the time of this modelling for this report was completed, the current market price was $359.61, the bearish outlook expects a fall as dramatic as -8.08% to as bullish as 29.81% for the foreseeable future. Our estimate expects an approximate 15% appreciation in the share price, let us unpack why.

A Primer for Visa’s Operations.

Very often, the fallacious association of Visa is made out to be a firm about banking and finance, but, Visa is not a traditional financial institution like a bank, nor do they issue cards or lend out to borrowers or even set rates for that matter.

When consumers purchase from a merchant, a simple tap from a card that takes mere seconds may seem simple but in fact a complex process happens behind the curtains; where fraud and security checks, issuer authorization, and deposit amount checks are all taken care of. This is all processed around the proprietary Visa Network composed of a linear system of four entities, whose interaction happens near instantaneously (in the matter of seconds):

Last year in 2025, an average of 901 million transactions occurred everyday with our estimate expecting total payment volume to increase by 7.22% for this fiscal year of 2026. This leads us into the foundation of Visa’s business model, centred around the proprietary VISA Global Network coupled with three main drivers that funnel revenue into the company.

First, aggregate consumer payments, categorized as domestic payments done in the United States and cross-border payments composed of international payments. Transactions are supported with approximately 160 different currencies, this is not including the addition of Visa’s development of their own full stack stable coin (a cryptocurrency pegged to a real world currency). Once implemented, there will be a platform plan to link other stable coins and payment platforms together, if executed correct, this will facilitating the act of buying and selling in emerging markets and economies with an unstable-underlying currency. Of course, this first revenue variable is highly dependent on consumer activity and macro conditions which drive consumer spending. Hypothetically, if consumer spending were to split in half, it would spell trouble for Visa.

Second, classified as money movement solutions, the secondary revenue driver covers large payments of money beyond the typical business-to-consumer framework that frequently occurs. Allowing for commercial, businesses, and governments to transact securely, typically dealing with large sums of payments periodically. Similar to the first, money movement solutions are highly susceptible to the macroeconomic environment which dictate payment volume in this regard as well.

Third and finally, is the value-added services (classified as other revenue), a diversified revenue stream insulated from payment volume. A minority of Visa’s income but nonetheless, additional operational income that are separated from the previous two. Specifically, the value-added services can be broken down into four components, with respect to 2025 data: issuing solutions ($125B)—aids financial institutions in scaling online payments, accepting solutions ($95B)—optimizes checkout experience for business to consumer, risk & security solutions ($150B)—security apparatus and applying machine learning methods to mitigate fraud, and advisory & other solutions ($150B)—consulting to help businesses scale with strong economic intel. We will see shortly how this revenue stream is projected to grow faster than expected.

For reference, here is market opening price in October 5th, a strong entry point to go long on the equity.

Disagreement with the Market.

In the analysis of Visa, our findings can be organized into four main pillars that demonstrate why we are bullish (followed by the valuation after) but also where we disagree with the market estimates, each pillar will build off each other starting into order of most importance, descending down. Let us begin.

Pillar 1—Cost of capital disagreement with respect to the market.

As of the writing of this report, the current market price is $359.41 (some figures may be slightly different due to updated market price changes) with a complementary enterprise value of ~$675B. Leading as such, there are several discrepancies between the market value and our computed valuation which diverges on three major variables. These are stated as such (market view instead of our view):

• Perpetual growth of 2.29% instead of 3.00%

• WACC of 7.72% instead of 7.12%

• Client incentives1 at 37.5% of gross by FY2031 instead of 28.5%

The first parameter is a minor differential in valuation analysis; the perpetual growth rate of 3% was derived from primarily GDP growth estimates from several sources, as real GDP growth is a leading variable of consumer spending which is the main force behind Visa’s revenue growth. Therefore, looking at the estimated data, projected GDP growth in the U.S. (43% of Visa’s total payment volume for 2025) is expected to peak this decade in 2027 at 2.54% then growth is expected to slump here on after, until 2031. For global GDP, growth is expected to be more strong and stable, as progress in AI continue, productivity gains are expected to boost growth to the point where even supposed estimates are expected to be beaten. As a result, the DCF growth estimate for our model consolidates at a fixed rate of 3% in between both real GDP rates, a slightly higher expectation from the market, nonetheless, a minuscule disagreement.

• 39.08% of revenue comes from US in 2025 FY

• 60.91% of revenue comes from International in 2025 FY

Next, we will discuss the difference in the discount rate using in our DCF valuation for Visa.

Our weighted cost of capital undershoots the market expectation due to an disagreement fundamentally about risk assessment. The market’s valuation of a WACC of 7.72% puts a higher premium on Visa’s risk factor. Meaning, that the key difference here is not so much an operational disagreement within the business but a valuation difference. There are several reasons for our lower WACC associated with Visa.

To begin, the firm’s lack of physical net asset infrastructure means that the business model is inherently dominated by the intangibles such as proprietary network, brand, and intellectual property. Furthermore, the business is mainly financed through equity, carrying low debt, resulting in the calculation of the WACC to be heavily determined by the investor’s required rate of return. This is to say that most of the profit from the business will be returned to investors rather than lenders. More specifically, Visa is 96% equity-financed (market cap method), meaning that it is only 4% leveraged.

Within that slither of 4%, there is an impact by current bond markets continue to climb as yields grow due to the Federal Reserve continuing to raise federal fund rates (with a high probability of the Fed raising rates once more before 2026 concludes). Causing the 10Y treasury to spike to 4.96% (above the historical average of 4.26%) which was exactly used for the cost of debt.

Because of this significant ratio difference in the capital structure, this is ultimately to say that Visa’s equity risk is the coincided with the business risk which is also less than expected according to our analysis which we will discuss next.

On the operational front of the business, client incentives are historically around a quarter of gross revenue2, a relatively substantial contra-revenue. Now, the market expects client incentive as a percentage of gross revenue surge to 37.5% by 2031, over a third of gross revenue reduced. This goes against the historical trend of 1.09% average growth rate annually for client incentives. Such an estimation by the market means that a large chunk revenue will continue to fall, being eaten away by greater client incentives. Fundamentally, encapsulating a higher risk on operational income.

In accordance to more conservative estimates, we expect Visa to continue to lead as the dominant payment processor, granting higher bargaining power, incrementally increasing their client incentives that will not drastically eat away at their margins. Climbing no more than 30% of gross revenue, with our estimate being 28.50% for 2031. More on this in the next pillar which also ties in to the next argument.

Lastly, all other major estimates for operations, such as revenue and payment volume align closely with the market expectations and so this will be pushed into the valuation section.

Pillar 2—Client incentives may be plateauing, contrary to market expectations.

There is a profound finding in the estimated fiscal year for 20263, where, an inflection point occurs, the client incentives (28.1%) falls slightly for the first time in nine years. Consistent with our initial estimates, this means that last year, in 2025, $15.75B of the $55.75B gross revenue was due to Visa paying out clients, a deduction that is greater than Visa’s entire operating expense base (excluding $2.6B in litigation provision). Meanwhile, all other measures in the 10-year historical data demonstrates stability; capex 2.9-3.9%, D&A 2.9%-3.5%, and yet client incentives still jumped from 18.04% to 28.25% (from 2016 to 2026E), a 52% surge in nine years versus only a 1.22% increase in capex as % of net revenue in that same time frame.

In the end, client incentives are about bargaining between Visa and the issuers, a higher percentage of client incentives means higher business risk due to reduced operating income. But remember, our disagreements with the market do not lay in the macro conditions, where transaction volume is ultimately driven by nominal consumer spending. Instead, the bottom line is that we are proposing a possible, fundamental mispricing in the cost of capital, entailing to a higher fair value.

In the sensitivity analysis section, we will discuss what it means for the share price if the market is correct and we are not, in other words, if the WACC is higher than our model shows.

Fleshing out why we think that the market’s anticipation of a 37.5% of gross revenue by FY2031 is incorrect—this equates to 9.4% rise in five years (1.9% annually). Visa has never escalated at anything close to that pace from a basis of induction. Across FY2016–25, there was a cumulative growth of 9.9% or an average of 1.1% annually, the trajectory within that decade runs the wrong way for the bear risk of higher incentives. Moreover, the rate slowed at 0.5% annually over FY2022–26E. The market’s implied assumption requires the incentives growth to accelerate to roughly four times its recent rate, which seems implausible from our findings.

Finally, as aforementioned, client incentives are the share of bargaining power where Visa concedes to issuers to win over bank portfolios4 by paying a agreed upon amount. Visa will only pay for what the portfolio is worth, if hypothetically, contract begin to be priced at 37.5% of gross revenue, incremental volume stops—at which no deal is made and the portfolio is not purchased. The higher the client incentive climbs and compounds (year after year), the less probability of Visa accepting such an agreement. An analogy, is the trade-off between a distributor giving away margin to hold incrementally more shelf space, at a point, the utility of more shelf space is less as profits begin to contract.

Pillar 3—Demonstrated durability justifies the low discount rate.

From the 10-year historical data including the COVID-19 pandemic (which introduced demand shock to consumer spending in 2020), the most relevant results are as stated:

• Operating margin stayed in a 64.5–67.2% band — 2.7 points of variation across a decade

• Free cash flow converts at ~55% of net revenue

• Capex runs ~3.4% of net revenue — there is no physical network to maintain

• Working capital is negative and funds growth, because client incentive liabilities ($10.4B) exceed operating current assets ($5.8B)

Throughout the pandemic business cycle, Visa’s operating margins stayed relatively stable despite the downward pressure on consumer spending in 2020. Further, the lack of tangible capital to maintain paired with a net cash outflow entail excess growth of cash can be handover to the owners, rather than be spent on capex. Hence, a change in net working capital is not be largely determined by capex or D&A costs, but rather, client incentives as a % of gross revenue. This is presumed to be accurate if Visa can maintain a low rate for client incentives in the upcoming years.

Pillar 4—Revenue growth independent of payment volume.

It is clear that payment volume is the propulsion behind of Visa’s cash flows, which includes international transaction (cross-border fees), service revenue (fees charged to issuers), and data processing (network fees), which are indexed to economic performance. This means that in times of economic crisis, it will be very difficult for Visa to hedge against major losses, constricting free cash flows. This is where value-added services come into play. Where, in the revenue growth projection calculations; there was surprising growth for this under-looked stream of revenue, that has experienced significant growth, 26.78% in 2025 alone with an averaging growth rate of 19.85% for the last 10 years.

Historically, value-added revenue has counted for a fraction of net revenue, with the ratio trending at 5.43% in 2016 to 10.13% in 2025, and an estimated of 12.02% for 2026. Despite still being only one tenth of net operating revenue, if estimated growth continues then Visa could possibly be building a concrete hedge impervious to the economics of commerce. Another possibility for value-added services if they continue to grow, is to noticeably offset a significant amount of client incentives, expanding cash flows.

Valuation Summary

In the methodology, unlevered cash flow was computed in accordance to the standard valuation literature, using earnings before taxes and interest (EBIT) as the source of cash flow and an effective tax rate of 17.5% across the board (flat rate) rather than an average of the historical 10-years distorted by the FY2017 TCJA re-measurement5. In addition, fiscal years during COVID-19 (2020-2022) were cut as outliers in cash flow projections (due to unprecedented metrics caused by global lock downs).

Visa is minimally leveraged, so, much of the unlevered cash flow will be returned to equity holders. In our model, from 2027 to 2031, cash flow is expected to nominally grow at a steady 8% rate; reaching 8.62% growth in 2028 and then dwindling to 7.03% in the final year, 2031.

The five explicit forecast years contribute $132.1B of present value, distributed where each year adds between $25.9B and $26.7B, the 8% nominal cash flow each year nearly cancelled by the 7.12% discount rate. The remaining $667.5B goes to the terminal value.

Other notable details in computing the value per share: Visa’s small amount of debt resulted in—$23.9B of borrowings against $13.9B of cash and investment securities, the exclusion of the U.S. covered-litigation escrow6 from cash; acting as a liability shield and not diluting to common (Class A) shareholders’ wealth. The last step was to divide the equity value, $789.7B by 1,914M as-converted Class A shares gives the target price of $412.61, around 14.8% above the current market price.

All other important assumptions can be viewed in the key assumptions table below, where much are aligned with market consensus. Service yields, cross-border yields, and data processing yields7 held flat at FY2026 levels, since ten years of history show no persistent trend in any of the three. Operating cost ratios8 hold at FY2026 levels; capex and D&A sit near their decade averages. Total payments volume fades from 7.2% to 5.8%, converging on nominal consumer spending growth.

Due to the inherent nature of the capital structure, debt makes up only 3.4% of the WACC, so the 7.12% discount rate is highly affected by the equity side, more specifically, the 5Y monthly beta (0.76) and the market risk premium (50Y S&P500: 3.06%). The 3.0% terminal growth rate assumes Visa’s residual conversion premium above nominal consumer spending has largely decayed by FY2031. Neither is precise, and both are stress-tested in the sensitivity analysis.

The 17.5% effective tax rate is the FY2022–25 average rather than the ten-year average of 22.1%, which is distorted by the FY2017 TCJA re-measurement.

The three diagnostics stated below, exist to confirm the model’s robustness. The implied exit multiple of 20.1x is close to where Visa trades today, so no re-rating is embedded on top of the growth forecast. Free cash flow converts at roughly 55% of net revenue across the forecast, consistent with the last decade. Terminal value is 83.5% of enterprise value—with capex at only 3.6% of revenue and a ten-year operating margin band of 2.7% means this valuation is precise with respect to its limitations.

The lower block reverses the valuation—holding everything else constant, what does the current price imply?

Visa at $359.41 is priced for its 2.29% perpetual growth and a 7.72% WACC. At the current market price of $359, the market believes that client incentives will reach 37.5% of gross revenue by FY2031, against a decade-long trend that extrapolates to roughly 32%. Therefore, the market is discounting the required return, not the cash flows.

It is clear that the market values Visa as a riskier investment then our model suggests. A 0.6% difference in WACC and 0.62% higher cost of equity implies a greater premium demanded by investors. This is demonstrated further by a 9% difference in client incentives for FY 2031E, signalling the less income and therefore less cash flows pouring back to owners.

For reference, our estimates for projected revenue and EBIT for the next five years are shown below. Not much of showcase as these projections line up similarly with other equity research. The main variable behind estimated revenue is total payment volume expected to peak at 7.2% in 2027 and drag down to 5.8% in 2031 as economic growth slows in the U.S. but expand globally.

The valuation range states our projected fair price alongside bear and bull price ranges.

Bear Risks and Sensitivity Analysis.

There are various bearish elements that have been hinted throughout the analysis or some that you as the reader, may have thought of. It is true that many of these situations could derail the investment thesis; the biggest risk is if the weighted cost of capital increases too much than expected, signalling uncertainty around Visa being able to deliver adequate profits back to its owners. The second biggest risk is a slumping terminal growth rate, that may be due to unprecedented macroeconomic stagnation near the end of the decade or even downwards pressure to GDP, due to some unexpected event. In any case, the former risk factor is not only more plausible but has a greater magnitude effect on the share price, as investors will demand a higher premium to compensate for the business risk.

The following matrix (WACC x Terminal growth rate) explores and quantifies exactly what occurs to the share price if WACC is less or more than expected, same with the terminal growth. In the most bearish scenario occurs if terminal growth falls to 2% and subsequently, the WACC jumps to 8.12%, for such conditions to happen, there hypothetically would be high interest rates, extreme market risk, economic stagnation, productivity drag, and even de-dollarization (both China and Russia typically reject using Western payment processors). These scenarios become seemingly more far-fetched and so it’s best we focus on the most pragmatic outcomes in the second matrix.

The biggest, most probable threat that may drive WACC to rise is on-going litigation that may drag on towards the future. For instance, there is currently an monopoly lawsuit filed against Visa from the U.S. Department of Justice, claiming an illegal monopolization of the debit card market. This not to mention numerous secondary antitrust laws, mainly around alleged unjustified inflated transaction costs. Although, litigation is no stranger to the industry, historically in the last 20 years, there has been continuous a legal onslaught against Visa and other competitors like Mastercard from a cumulative amount in the millions of merchants, mainly claiming unfair fees that bite into their profit margins. Going to trial is of course costly and timely, so in cases like 2024, there was a $38 billion settlement from Visa and Mastercard ordered by a U.S. district federal judge.

Even in 2025, Visa spent $2.5B in litigation provisions, but, a significant amount ($1.375B) goes to fund their escrow account—that adjusts the conversion rate of Class B shares into Class A shares, to prevent taking cash out of the business to spend on litigation. Rather, relying on dilution of Class B shares to maintain the wealth of Class A shareholders. This liability shield for public shareholders should insulate idiosyncratic risk for foreseeable litigation battles.

Next, moving away from exogenous factors and focusing on the operational risk, a climb in client incentives will reduce the total earnings of the company if bargaining power was to be reduce on Visa’s behalf, forcing higher fees to be paid out to issuers. Resulting in a marginally reduced share price, in contrast, to the discount rate has a higher magnitude affect it it were to rise, similar to the last matrix. But the difference here is that, if client incentives continue to rise and stay elevated ~30-32%, then the WACC will also follow suit. This is because investors would need to compensated a higher premium for taking on more risk, as cash flows and margins will begin to get squeezed.

At last, the positively correlated variables of WACC and client incentives compound each other and possible bear scenario, if both factors were to rise in the future.

Ultimately, the uncertainty around imposed and excess regulations on the payment processing industry presents the biggest hurdle—in the form of capped transaction fees, higher rates, settlements & law suits, and continuous legal pressure will threaten operation margins. Disruptions like a wide-array adoption of cryptocurrency or abandonment of the traditional payment processing system seem unlikely but should still be considered.

What to Watch Out For.

The results for the fiscal year 2026 will be filed officially near the end of October. The 10-K filing, will either strengthen or weaken the probability of our projections. Here are are several indicators we will keep a close-eye on:

• Total Payment volume—when Visa’s 10-K 2026 FY SEC filing for the last quarter of 2026 is published.

  • GDP & consumer spending data—mainly on U.S. and Europe—published—U.S. Bureau of Economic Analysis (BEA), Eurostat, IMF.

  • Federal Reserve possible rate hikes—not only can affect Visa’s minimal debt but can trigger reduced spending in the economy.

• Value-added/other revenue growth rate YoY%

• Client incentives % of gross revenue for FY 2026

• Share Price—change in price for YTD

Closing Thoughts.

Kind reminder that this report is not financial or investment advice, rather an opinion-based valuation based off publicly available information, therefore, I bear no responsibility for any potential financial losses.

If you are interested in more equity reports like this one, please make sure to subscribe with your email, this work will remain free for the foreseeable future.

For those curious, the appendix that holds proof and work of the full valuation can be found on my website, where, you can also find my other research or inquiry me about a concern, thank you very much for reading!

All the greatest inventors, businessmen, scientists, investors, luminaries, innovators, industry-disrupting and impactful individuals have garnered their success from the two principles of being obsessed with something and remaining consistent with it. The formulaic approach of obsession and consistency given a long enough time frame will inevitably produce consequences, these consequences are what we interpret as success. In their prime, Warren Buffet read over 500 pages a day worth of 10-K statements, Thomas Edison famously worked and tinkered 18 hours a day, Bill Gates in the early days of Microsoft; pulled all-nighters to finish code. The pattern is evident and the formula is axiomatic. If you want to win, you have to be willing to do what others won’t. Average input equals average output. So go above and beyond, understand that the harder it is, the less people are willing to do it.

Granted, luckiness is a fair criticism of merit. Some people will never amount to anything and some will literally become famous overnight from one sensational clip or might win the lottery from a lucky ticket. The way we can cope with this inescapable truth is to always “stay cheerful in spite of your troubles” stated by Charlie Munger during a investment conference. Life is unfair and is capable of being utterly cruel but we must experience this suffering to derive any meaning from fulfillment. No matter your circumstance, keep on moving and understand that remaining bitter is plainly counter-intuitive regardless of your situation.

In the advent of modern science, we are understanding more about the health repercussions of overworking, drug abuse, and other means of pushing the limit. But, this creates a safeguard for mediocrity (in my opinion), as, people can shield insecurities about themselves onto others but making statements such as “that’s not healthy” or “you should enjoy life more”. To this, I ask; name a person of significance in all of human history who did not go through a period of imbalance in their lives. It never happened, they understood that in order to achieve, you have to be willing to sacrifice. Everyone has the same time in day but those who amount to something understand the vital importance of prioritizing what is actually important. Really analyze what you are doing with your hours in the last 7 days. Was most of your time used wisely, did you progress any closer to the goals that you promised yourself? Are you worse off or better off? Time is something most people seemingly give away without realizing before its too late.

How you do anything is how you do everything

Aristotle once said that "We are what we repeatedly do, excellence is not an act, but a habit'" which is to say that how you perform in one domain of life, no matter how trivial it may seem, translates to how to tackle more meaningful pursuits in life. For example, if you take a 4.0 GPA student at a prestigious university, chances are that student does everything with excellence. There is a strong probability that they have numerous healthy habits in addition to their effective studying. Such as daily reading, practicing an instrument, or perhaps they playing a sport regularly. They have order and discipline that drives their life. Ultimately, they do everything with excellence because they understand that how do you do anything is how you do everything.

Who can suffer the most will win.

"I don’t know how to teach it to you except that I hope suffering happens to you...", Jensen Huang, CEO of NVIDIA, when speaking with Stanford graduates. Arguably one of the most successful companies in the world currently is NVIDIA with a market cap of 3.3 trillion, NVIDIA seems to be the hardware backbone of the AI renaissance with industry leading GPU systems like the H100s, which have been restricted for selling in China. How remarkable is it that an idea discussed at a Denny’s restaurant was the inception of a multi-trillion dollar company. More about the AI race and the semiconductor industry, I highly recommend the extraordinary work from SemiAnalysis by Dylan Patel.

In Jordan Peterson’s 12 Rules For Life, there are many fantastic heuristics and mental models that help one turn their life around by adapting new ways of thinking such as holding once self accountable. One of my favorite heuristics is the community of selves. Imagine a yourself in a fourth dimensional plane; similar to the third dimension, where you can move physically and freely. Backwards, forward, and so forth. So, going back to the fourth dimension, you can move freely through time just like how you would move forward in 3D space. Furthermore, in the fourth dimensional plane, imagine a contingent timeline from birth, stretching towards the future where it obscures into darkness. Every single action you took has lead you to this very moment. Every choice, subjectively good or bad has put you in the position that you are in today. From this conclusion, you can predict the trajectory of your future based off the decisions you are making now. Are you exercising enough? Studying hard enough? Deliberately expanding your expertise? Executing on your startup idea? Whatever you infer, understand this. You are a custodian of your future self and your past selves are custodians of your present self. Do not disappoint your future self because if you do, not only will you resent yourself but you will never experience all that you could of been.

I’ll leave you with one my favorite quotes from Peterson’s book which I highly encourage you to read, “If you’re not suffering now, you will be in 5 years.”

January 2020, a new year reborn with unprecedented world events waiting to be unravelled. The last quarter of 2019 showed that the Federal Reserve sat on $18.6 trillion of total assets, a steady growth since the 2008 subprime mortgage crisis.

In the month of March of 2020, the infamous Covid-19 shutdown the world economy with the powerhouse of the United States being no exception. Commerce came to a halt, supply chains choked, and an economic impasse emerged with an no clear direction. The Fed immediately responded the same month with quantitative easing; purchasing of asset classes composed of US treasuries and mortgage-backed securities. This was one of the first policies that led to an influx of money creation by making money more available in the economy which caused interest rates to drop at near-zero levels.

At the end of 2020, the Fed added $3.2 trillion to its balance sheet.

• Jannuary 2020, federal fund rate = 1.55%

• March 28th, 2020, federal fund rate = 0.10%

  • From March 2020-2022, interest rates would be near zero

This was the first turning of the mechanism. When the Fed buys assets from the open market, it has go-to buyers composed of large banks and other financial institutions, which are entrusted by approval. Think of these approved buyers as intermediaries to the monetary policy. When the Fed initiates QE (quantitative easing), these intermediaries are vital in completing the process.

As these large banks collect money from the Fed by selling their bonds or mortgage-backed securities, the reserves of these large banks increase. As bank reserves rise, this becomes the driving force for money creation as banks now have more money to lend out. This effect cascades into the greater economy as money becomes more abundant. All that money is lent to home buyers, businesses, and everyday consumers which ultimately drives economic growth.

Bank reserves - cash holdings held by a bank; banks are required to hold a minimum amount of reserves at all times.

The acceleration factor.

Fractional reserve banking has been abandoned in the past after the pandemic. It was a system that facilitated borrowing among banks within their local economies. By allowing banks to lend out more money than actually kept in reserve. A law that had been the standard for the last 150 years.

Reserve ratio - the percentage of deposit that must be kept in cash as a reserve in case of customer withdrawal.

Hypothetically, if the reserve ratio was 5% and a customer had just deposited $100 into his local bank then that bank would be required to always have at least $5 on hand, no exceptions. The other $95 can be used for investment opportunities, lent to borrowers, or any other leveraging. If you envision this on a scale of millions of consumers and only a couple of banks, it can seem quite precarious.

• A 100% reserve ratio would imply if every customer demanded to take their money out at once, the bank would have it all available.

  • Such a ratio is unpractical but drives the point home.

Many economists critique fraction reserve banking as its biggest vulnerability being a bank run. If such an event were to happen, even a bank with a healthy capital ratio would go bust. As there is just not enough time to liquefy total assets as customers are withdrawing all their money almost instantaneously. This is assuming that the bank is extremely conservative with its leveraging.

Capital ratio - the percentage of a bank's capital to its risk-weighted assets.

Nonetheless, on March 15th, 2020, the Fed announced a reserve ratio of 0%. Which now meant that banks were no longer required to hold any money in their reserves and were able to lend out all their cash. The Fed’s intention was to bolster the economy as people were not spending and saving exuberantly, made evident by the bank deposits.

Speaking of which, bank deposits spiked as Americans were not able to spend in a locked-down economy. This is where the vernacular expression “printed money” originates from. Although, it is utterly erroneous to believe that the Fed as a single entity physically prints all of the money into the economy. A combination of QE and 0% reserve ratio equates into a tremendous injection of money into the economy.

Banks were now able to leverage and loan out entire reserves, this lead to an over 35% increase in aggregate bank deposit growth, the fastest in recent history.

Bank deposits - money kept or held in bank accounts for saving or interest.

• March 11th, 2020: bank deposits = $13.479 trillion

• December 30th, 2020: bank deposits = $16.06 trillion

  • Fun fact, more money was bottled up in the US economy than the size of China’s GDP ($14.7 trillion in 2020)

This hawkish policy poured monetary gasoline on the inflationary fire. As regional banks were now able to lend out at record levels. But once again, during a time where commerce virtually stopped dead in it’s tracks.

In macroeconomics, the leading theory for money creation states that banks create new money when creating loans. If bank A loans out deposits from customers to bank B, bank B can now loan out their borrowed money to bank C, and so forth. A perpetual cycle which can be calculated using the money multiplier effect.

• Most money is created by commercial & regional banks, not the Federal Reserve

Ultimately, this phenomenon expands the bank deposits rapidly.

This is all occurring during a time when Americans are worried, demand is climbing (due to newly created money), and supply is stagnating (consumer spending down 2.7% from 2019-2020).

Monetarism says look at the money supply.

Despite what the politicians, radio, or corporate news is telling you with various theories to understand why inflation spiked from the supply chain to the oil reserves being drained. When in actuality, the strongest case can be accredited to the Monetarist school of thought. The philosophical premise of Monetarism would argue that economic growth can be optimized through the amalgamation of the money supply. In other words, money is the lifeblood of an economy; it is to say that too much or too little can cause serious damage.

When primarily studying the M1 money supply, in December 30th, 2019, the M1 was at a balance of $4.2 trillion. In a lapse of single year, the M1 reached an immense balance of nearly $18 trillion in December 28th, 2020. A meteoric 329% increase in the money supply.

M1 - the count of all notes and coins in circulation (an estimate of aggregate cash, chequing, and saving account deposits).

• The M1 money supply peaked to exactly $17.989 trillion for the year 2020

  • Total peak reached to $21 trillion in April 2022

    • That’s more than the total amount of gold above ground = $12 trillion

    • And the entire market cap of the cryptocurrency markets = $2.3 trillion (April 1st, 2022)

    • Combined together…

The point of no return.

Now, such an unprecedented and drastic increase in the money supply subsequently increases demand as buying power rises, combined with a quarantined economy halts virtually all markets due to public health mandates. This causes the supply of nearly all goods to stagnate for a whole host of reasons; such as mass layoffs across the country, businesses filing for bankruptcy, overall energy consumption decline, general fear and anxiety, and supply chain complications.

In the end, what happens if demand rises and supply falls? Inflation. Leading to the inflation peak of 9.1% in June 2022.

CPI (consumer price index) - the average change in the prices paid by consumers for a market basket of consumer goods and services.

• CPI rate for January 2020 = 2.5%

• CPI rate for April 2022 = 9.1%

• Current CPI rate for July 2024 = 2.9%

There is more nuanced discussions to be had with other factors that led to the inflationary period of 2022 such as the Russia-Ukraine invasion, CARES Act, and a overheated labour market. For the sake of your time, it will be left out for another time.

Overreaction by the FED?

I’ll leave this one for you as the reader to decide. Regardless of politics or diverging views on monetary policy. One thing is for certain, the sentiment of most Americans is frustration from lack of affordability in their every day lives. Do you believe the central banks were too aggressive in pumping money into their respective economies?