Money supply increased in November, but the biggest trend is down

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By Ryan McMaken

Money supply growth picked up slightly in November, surpassing October’s 21-month low. Even with November’s rise, however, money supply growth remains well below the all-time highs recorded for most of the past two years. For thirteen months between April 2020 and April 2021, money supply growth in the United States often exceeded 35%, well above even the “high” levels recorded from 2009 to 2013. While money supply growth returns to “normal”, this could indicate recessionary pressures in the near future.

In November 2021, the year-over-year (YOY) growth of money supply was 7.0%. This is up from the October rate of 6.2% and down from the November 2020 rate of 36.8%. Growth peaked in February 2021 at 39.1%.

Historically, growth rates through most of 2020 and through April 2021 were far higher than anything we’ve seen in previous cycles, with the 1970s being the only period that comes close.

Rothbard-Salerno money supply measure

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. This measure of money supply differs from M2 in that it includes Treasury deposits with the Fed (and excludes short-term deposits and retail money funds).

M2 growth rates have been largely stable over the past six months, with the growth rate in November declining slightly to 12.7%. That’s down slightly from October’s growth rate of 12.5%. The November rate was well down from the November 2020 rate of 24.4%. M2 growth peaked at a new high of 27.0% in February 2021.

Money supply growth can often be a useful measure of economic activity and an indicator of future recessions. During periods of economic boom, the money supply tends to grow rapidly as commercial banks extend more loans. Recessions, on the other hand, tend to be preceded by periods of slower growth rates of money supply. However, money supply growth tends to pick up again before the onset of the recession. As a recession approaches, the growth rate of TMS generally climbs and becomes higher than the growth rate of M2. This happened in the early months of the 2002 and 2009 crises. A similar pattern emerged before the 2020 recession. Money supply growth fell through much of 2019 and the economy appeared to be heading towards recession. However, covid panic “lockdowns” and stay-at-home orders hastened this process and ensured a significant drop in economic activity. Massive stimulus measures then pushed money supply growth to record highs.

Fed stimulus and declining loan growth

Money supply growth was fueled in part by huge amounts of deficit spending that occurred throughout 2020 and 2021. This led to the “need” for large amounts of monetization by the Federal Reserve. (This was necessary to keep interest on the national debt low.) Indeed, as federal deficit spending has increased throughout 2020, the Fed’s purchases of government bonds have also significantly increased. increases. Since June 2021, however, federal spending has fallen well below its previous highs. This has allowed the Fed to reduce its monthly asset purchases, and Federal Reserve asset growth has slowed, although there are still no plans at the Fed to actually reduce total assets:

Total Fed Assets

Additionally, year-over-year growth in commercial loans has been negative since March 2021, putting additional downward pressure on money supply growth. U.S. commercial and industrial lending fell year-over-year, down 7.9% in November, and has been in negative territory since April 2021.

Another factor in lower growth rates is lower Treasury deposit totals with the Fed. These totals are factored into the TMS money supply measure – but not with M2 – and that total has grown from $1.7 trillion in July 2020 to $133 billion in November.

Overall, such a large decline in TMS growth over the past several months continues to point to a weakening economy. As commercial banks grant fewer loans, they create less new money. And because 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 depend on a constant influx of new money.

Disclosure: No position.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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