Money supply growth is slowing rapidly

by SchiffGold 0 0

There is no doubt that money supply growth is slowing, but it is still far from restrictive.

According to seasonally adjusted data, M2 increased by $83 billion in February. January was revised down from $245 billion to $176 billion.

Figure 1: MoM M2 change (seasonally adjusted data)

The table below shows that M2 is decelerating quite slightly at 4.7% compared to the 6-month and 12-month averages (8.9% and 11% respectively).

Chart 2: M2 growth rate

As seen below, the current rate of 4.7% in February actually fell below February’s 10-year average of 6.6%.

Figure 3: Average Monthly Growth Rates

The Fed only offers weekly data do not seasonally adjusted. The chart shows how fairly weak the rebound in unadjusted money supply is compared to recent history, especially since December 27 concluded 9 weeks of M2 expansion.

Figure 4: WoW M2 change

The 13-week “Wenzel” money supply

The late Robert Wenzel of the Economic Policy Journal used a modified calculation to track the money supply. He used a 13-week annualized average growth rate as defined in his book The Fed Flunks. In particular, he used the weekly data which do not seasonally adjusted. His analogy was that to know what to wear outside, he wants to know the current weather, not the average temperatures throughout the year.

The goal of the 13-week average is to smooth out some of the choppy data without bringing in too much history that might obscure someone from seeing what’s in front of them. The average growth rate over 13 weeks can be viewed in the table below. Decelerating trends are in red and accelerating trends in green. Money supply growth on a 13-week annualized basis mostly accelerated for 16 straight weeks. It has now been stable or falling for 7 consecutive weeks.

Figure 5: WoW 13-Week Average Money Supply Growth

The chart below helps show the seasonality of the money supply and compares the current year to previous years. This shows that the current trajectory is beginning to decline. In recent years, this reversed sharply in April, but the Fed is currently trying to contain inflation. This could lead to a further deceleration in the money supply in the coming months.

As M2 growth has been extremely high in recent years, the market has become accustomed to a certain level of growth. This deceleration could quickly put pressure on the stock market.

Figure 6: 13 week annual overlay

Behind the inflation curve

The chart below shows YoY M2 versus Inflation and Fed Funds. As noted earlier, the current trajectory uncomfortably resembles that of the early 1970s with three major differences.

  1. Money growth has been more extreme in recent years
  2. Inflation is actually upper if measured the same way
  3. The Fed is a lot further behind the curve

As shown below, inflation tends to gap increases in M2 by about 1-2 years. Notice how all the black peaks occur a few years after the large orange bars. While most forecasters are talking about an ongoing inflation spike, the chart below suggests that we are in the early innings. Keep in mind that inflation only reversed once the Fed raised rates above the inflation rate.

However, this time they are lower than ever compared to the rate of inflation. Moreover, the chart shows that it takes time for higher rates to bring inflation down. The Fed doesn’t have the luxury of waiting for higher rates to work when they’re so far behind the curve.

Figure 7: Annual variation of M2 with CPI and Fed Funds

Historical perspective

The charts below are designed to put current trends into historical perspective. The orange bars represent the annualized percentage change rather than the gross dollar amount. As can be seen, the more recent period is more comparable to pre-Covid growth rates.

Figure 8: M2 with growth rate

A historical look at the 13-week annualized average also shows the unprecedented growth seen over the past 24 months. This chart overlays the S&P newspaper yield. Mr. Wenzel proposed that sharp declines in the money supply could be a sign of a stock market pullback.

His theory, derived from Murray Rothbard, states that when the market experiences a declining (or even negative) money supply growth rate, it can create liquidity problems in the stock market, leading to a sell-off. While not a perfect predictor, many declines in the money supply precede market declines. Specifically, the major lows in 2002 and 2008 went from 10% to 0%.

This current decline in the money supply could prevent the stock market from rebounding and reaching new all-time highs soon.

Please note that the chart only shows market data through February 28 to align with available M2 data. This only reflects a short period of the war in Ukraine.

Figure 9: 13-week annualized M2 and S&P 500

Another consideration is the massive accumulation of liquidity in the system. The Fed offers Reverse Repurchase Agreements (reverse repos). It is essentially a tool that allows financial institutions to exchange cash for instruments on the Fed’s balance sheet.

The current Reverse Repo hit a record high of $1.9 trillion on Dec. 31, eclipsing previous highs of around $500 billion in 2016-2017. The latest rate is $1.76 billion and rising rapidly. Reverse repos generally peak at the end of the quarter before falling again. The current spike shows a trajectory that could very well break above the December 31 high and even exceed $2,000,000! It will decline after March 31, but that would still be a huge number!

Figure 10: Fed Reverse Repurchase Agreements

What this means for gold and silver

Inflation is an expansion of the money supply which generally leads to higher prices. Therefore, gold and silver can be used as insurance assets to protect against dollar devaluation (higher prices). Money supply has been growing at alarming rates for years and has exploded in the last 2 years. It shouldn’t be surprising to any rational individual that much of this showed up in the CPI.

That being said, the current deceleration is remarkable. It is entirely possible that the market will experience some turbulence as there is less fuel to continue propelling the markets higher. Gold and silver have a lot of cross currents right now, as recent technical analysis shows. Regardless of short-term moves, the math shows the Fed cannot raise rates without causing catastrophic damage to the federal deficit and the economy as a whole. Any pullback in gold and silver (if any) could be short-lived.

Data source: and also WM2NS and RRPONTSYD series. Historical data changes over time, so future item counts may not match exactly. M1 is not used because the calculation was recently changed and backdated to March 2020, distorting the chart.

Data updated: monthly on the fourth Tuesday of the month with a 3 week lag

Latest data: February 28, 2022

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