April witnessed a further nosedive in money supply growth, sinking even deeper into negative territory after experiencing its first negative turn in November 2022, marking a rare occurrence in the past twenty-eight years. The descent in April adds to the alarming downward trajectory, which follows the unprecedented highs witnessed over the past couple of years.
The deceleration in money supply growth has been rapid since April 2021, culminating in a six-month streak of year-over-year contraction since November. The last time such a negative change occurred was in November 1994, persisting for fifteen long months before finally turning positive again in January 1996.
During April 2023, the downturn accelerated at an alarming rate, with the year-over-year growth in the money supply plummeting to a staggering -12.0 percent. This is a sharp decline from March’s rate of -9.75 percent and is significantly below April 2022’s growth rate of 6.6 percent. With negative growth now hovering near or below -10 percent for two consecutive months, the contraction of the money supply reaches its largest magnitude since the dark days of the Great Depression. Prior to March and April of this year, there has not been a single month in at least sixty years where the year-over-year money supply has plummeted by more than 6 percent.
Plunging Money Supply Reveals Disturbing Economic Significance
The chosen money supply measure in this analysis, known as the “true” or Rothbard-Salerno money supply measure (TMS), offers a more comprehensive evaluation of money supply fluctuations compared to the traditional M2 metric. Developed by Murray Rothbard and Joseph Salerno, TMS provides valuable insights into monetary trends by including Treasury deposits at the Fed while excluding short-time deposits and retail money funds.
The Mises Institute now provides regular updates on TMS growth, which has exhibited a similar trajectory to M2 growth rates in recent months, albeit with TMS experiencing a more rapid decline. In April 2023, the M2 growth rate plummeted to -4.6 percent, a significant drop from March’s rate of -3.8 percent and a stark contrast to April 2022’s growth rate of 7.8 percent.
Monitoring money supply growth can often serve as a useful gauge of economic activity and a potential indicator of impending recessions. During periods of economic expansion, the money supply tends to expand rapidly as commercial banks extend more loans. Conversely, recessions tend to be foreshadowed by a deceleration in money supply growth.
Negative money supply growth alone does not inherently hold substantial significance. As elucidated by Ludwig von Mises, recessions are frequently preceded by a mere slowdown in money supply growth, and it is not imperative for the money supply to contract in order to trigger the downturn phase of a boom-bust cycle. Nevertheless, the recent descent into negative territory underscores the alarming extent and rapidity of the decline in money supply growth. Such a trend typically raises concerns regarding economic growth and employment prospects.
The shrinking of the money supply itself is a remarkable occurrence, as it seldom occurs. Since reaching its peak in April 2022, the money supply has contracted by a staggering $2.6 trillion (equivalent to 12.0 percent). Proportionally, this decline represents the largest fall since the Great Depression. To put it into perspective, according to Rothbard’s estimates, in the lead-up to the Great Depression, the money supply contracted by 12 percent, from its peak of $73 billion in mid-1929 to $64 billion by the end of 1932.
Monetary Expansion Persists Despite Minimal Impact on the Vast Money Supply
Since 2009, the TMS money supply has surged by an impressive 189 percent, surpassing the growth of M2, which stood at 143 percent during the same period. Within the current money supply of $19.2 trillion, a substantial $4.8 trillion has been generated since January 2020, constituting a significant 25 percent. From 2009 onward, a staggering $12.5 trillion has been added to the existing money supply, indicating that nearly two-thirds of the money in circulation has been created over the past thirteen years.
Given these substantial figures, a mere ten-percent decline in the money supply only scratches the surface of the colossal edifice constructed by the influx of newly created money. The US economy continues to grapple with a substantial monetary excess accumulated over several years, which partially explains why, despite eleven months of dwindling money-supply growth, a significant slowdown in the labor market has yet to manifest.
The deceleration in monetary expansion has inflicted notable damage on the economy. The Philadelphia Fed’s manufacturing index has dipped into recession territory, mirroring the findings of the Empire State Manufacturing Survey. The Leading Indicators index continues to paint a bleak picture, while the yield curve signals an impending recession. Even Federal Reserve staff members, typically inclined toward overly optimistic economic assessments, are predicting a recession in 2023. In May, individual bankruptcy filings surged by 23 percent, and the decline in temporary jobs, a common precursor to a recession, further highlights the deteriorating economic conditions.
The Fragile Transition: Inflationary Boom Gives Way to Economic Struggles
The consequences of an inflationary boom shifting toward a bust are becoming increasingly evident. Unsurprisingly, the current signs of economic malaise have emerged as the Federal Reserve finally eases off its money-creation accelerator, marking a departure from over a decade of quantitative easing, financial repression, and a steadfast commitment to easy money. As of June, the Fed has allowed the federal funds rate to climb to 5.25 percent, resulting in an overall increase in short-term interest rates. In fact, the yield on 3-month Treasury’s in June has reached its highest level in over two decades.
The reduction in access to easy money, no longer available at near-zero rates, has dampened banks’ enthusiasm for lending. However, the impact is not evenly spread across the economy, and smaller businesses and middle-class households are bearing the brunt of the credit crunch. According to the latest Senior Loan Officer Opinion Survey conducted by the Federal Reserve, bankers anticipate tightening lending standards due to reduced expectations for economic growth and deposit outflows. Banks have observed a decline in loan demand as interest rates rise and economic activity slows. This trend underscores the challenges faced by smaller businesses and middle-class households as they encounter difficulties in accessing credit during this transitionary phase.
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