by Ryan McMakeney
Money supply growth picked up slightly in November, rising above a twenty-one month low in October. However, despite the November increase, money supply growth remains well below the unprecedented highs experienced during the past two years. During the 13 months between April 2020 and April 2021, money supply growth in the United States often climbed above 35 percent, even well above the “high” levels experienced from 2009 to 2013. Money supply growth returns to “normal”, however, this could indicate bearish pressure in the near future.
During November 2021, the year-on-year (YOY) growth in money supply stood at 7.0 per cent. This is up from October’s rate of 6.2 percent, and down from November’s 2020 rate of 36.8 percent. The highest increase occurred in February 2021 at 39.1 percent.
Historically, growth rates during most of 2020 and through April 2021 were much higher than anything seen during previous cycles, with the 1970s being the only period that comes close.
The money supply metric used here – the “true” or Rothbard–Salerno money supply measure (TMS) – is a metric developed by Murray Rothbard and Joseph Salerno, and used to provide a better measure of fluctuations in the money supply than M2. has been designed. This measure of money supply differs from M2 in that it includes Treasury deposits with the Fed (and does not include short-term deposits and retail money funds).
M2’s growth rate has remained largely stagnant for the past six months, with growth falling slightly to 12.7 percent in November. This is slightly less than the growth rate of 12.5 per cent in October. The November rate was well below the November 2020 rate of 24.4 per cent. M2 growth reached a new high of 27.0 percent during February 2021.
Money supply growth can often be a helpful measure of economic activity, and an indicator of an impending recession. During periods of economic boom, the money supply tends to increase rapidly as commercial banks lend more. A recession, on the other hand, is preceded by a period of slow rates of money supply growth. However, money supply growth starts to pick up again. before this Beginning of recession. As the recession approaches, the growth rate of TMS generally climbs up and becomes larger than the growth rate of M2. This happened in the early months of the 2002 and 2009 crisis. A similar pattern appeared before the 2020 recession. Money-supply growth fell for much of 2019, and the economy headed for a recession. However, the “lockdown” and the COVID panic stay-at-home orders hastened the process and ensured a major drop in economic activity. The massive stimulus pushed money-supply growth to record levels.
Fed stimulus and credit growth slump
The increase in the money supply was partly driven by massive deficit spending in 2020 and 2021. This led to a “need” for large amounts of monetization by the Federal Reserve. (This was needed to keep interest on the national debt low.) In fact, as federal deficit spending increased throughout 2020, Fed purchases of government bonds also increased significantly. Since June 2021, however, federal spending has fallen significantly from its earlier peak. This has allowed the Fed to reduce its monthly asset purchases, and the Federal Reserve’s asset growth is slowing – although the Fed still has no plans to reduce total assets:
In addition, the year-on-year growth in commercial loans has been negative since March 2021, putting further pressure on money-supply growth. Commercial and industrial loans in the US were down year over year, up 7.9 percent in November, and have been in negative territory since April 2021.
Another factor in the decline in growth is the sum total of the decline in Treasury deposits at the Fed. These totals are included in the TMS money supply measure – but not with M2 – and have reduced the total from $1.7 trillion in July 2020 to $133 billion in November.
Overall, such a steep decline in TMS growth in recent months points to a weak economy. As commercial banks lend less, they make less new money. And as the Federal Reserve buys fewer assets, it creates less new money to do so. This is good for price inflation, but a drop in new money can be a big problem for zombie companies and bubble industries that rely on a constant influx of new money.
Disclosure: No designation.
Editor’s Note: The summary bullets for this article were selected by Seeking Alpha editors.