By Ryan McMaken
In October, money supply growth fell slightly from the all-time high in September, although growth remains at levels that would have been considered far-fetched just eight months ago. The slowdown in money supply growth in October comes after eight months of record growth in the United States, following unprecedented quantitative easing, central bank asset purchases and various stimulus packages. .
Historically, the rate of growth has never been higher than what we’ve seen this year, with the 1970s being the only period that comes close. Money supply growth was expected to accelerate in recent months. This usually happens in the wake of the first few months of a recession or financial crisis. But it appears that the United States has now entered a protracted economic crisis for several months now, with around 1 million new jobless claims every week from March to mid-September. More than 6 million unemployed people are currently receiving standard unemployment benefits, and another eight million are receiving “pandemic emergency unemployment compensation”. Economic growth fell in the second quarter, with GDP growth falling more than 9%.
The central bank continues to engage in a wide variety of unprecedented efforts to “stimulate” the economy and provide income to the unemployed and provide liquidity to financial institutions. In addition, as government revenues have declined dramatically, Congress has turned to unprecedented amounts of borrowing. But in order to keep interest rates low, the Fed has been buying up trillions of dollars in assets, including government debt. This fueled the creation of new money.
In October 2020, the year-on-year (YoY) growth of money supply was 37.08%. This is slightly down from the September rate of 37.54% and up from the October 2019 rate of 4.8%. Historically, this is a very strong increase in growth, year after year. It is also a trend reversal from the trend that just ended in August of last year, when growth rates hit almost 2 percent. In August 2019, the growth rate hit a 120-month low, falling to the lowest growth rates we’ve seen since 2007.
The money supply metric used here – the “true” or Rothbard-Salerno Money Supply Measure (TMS) – is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure of fluctuations in money supply. money supply than M2. The Mises Institute now offers regular updates on this metric and its growth. This measure of money supply differs from M2 in that it includes Treasury deposits with the Fed (and excludes short-term deposits, travelers’ checks, and retail money market funds).
The M2 growth rate hit new all-time highs in October, rising 24.17% from September’s growth rate of 24.04%. M2 increased by 6.4% in October last year. M2’s growth rate had declined significantly from late 2016 to late 2018, but has increased again in recent months. Since March, it has been following a trend similar to that of TMS, but to a lesser extent.
Growth in the money supply can often be a useful measure of economic activity. During times of economic boom, the money supply tends to grow rapidly as banks extend more loans. Recessions, on the other hand, tend to be preceded by periods of slowing money supply growth rates. However, money supply growth tends to break out of its low growth trough well before the onset of a recession. As recession approaches, the growth rate of TMS increases and becomes greater than the growth rate of M2. This happened in the first months of the 2002 and 2009 crises.
February 2020 was the first month since the end of 2008 that the growth rate of TMS exceeded the growth rate of M2. The growth rate of TMS has exceeded M2 for most of this year. As the year progresses, it appears that the decline in money supply growth has again preceded a recession, and a severe recession. The second and third quarters showed negative real GDP growth this year. The second quarter of this year was down 9%, year over year, and the third quarter was down 2.9%, year over year.
Although some observers will likely argue that the current economic crisis is solely the result of the Covid-19 panic and subsequent forced government shutdowns, several indicators suggest the economy was primed for a recession. The previous fall in the TMS is one such indicator, as is the liquidity crisis of late 2019 in the repo markets. The Fed’s decisions to lower interest rates and expand its balance sheet again point to the weak economy through April 2020.
After the initial balance sheet growth in late 2019, the Fed’s total assets jumped to nearly $ 7.2 trillion in June and has rarely dropped below $ 7 trillion since then. By the end of October, total assets were again over $7.2 trillion. These new asset purchases set a new all-time high and propel the Fed’s balance sheet far beyond anything seen during the Great Recession stimulus packages. The Fed’s assets are now up over 600% from the period immediately preceding the 2008 financial crisis.
While the Fed’s asset purchases are not the only ones responsible for the boom in new money creation, they are certainly a significant factor. Bank lending activity also increased, leading to the creation of new funds as well.
Below is the dollar volume for M2 and TMS:
In terms of the total dollar amounts currently available, the aggregate M2 October total money supply was $18.7 trillion and the TMS total was $19.0 trillion. Since January, this is an increase of $3.3 trillion in M2 and $4.8 trillion in TMS. In addition, for two months, the TMS total has done something new: it has become higher than the M2 total. This is largely fueled by the immense growth in US Treasury deposits at the Fed, which are reflected in TMS, but not in M2. Treasury deposits fell from $ 375 billion in March to an unprecedented $ 1.7 trillion in July. In October, Treasury deposits fell slightly to $1.5 trillion, but remained near record highs.
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Editor’s Note: The bullet points for this article were chosen by the editors of Seeking Alpha.