Slower money supply growth in 2022 points to recession

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By Ryan McMaken

Money supply growth eased slightly in April, falling below the eight-month high in March. Even with March’s surge in growth, money supply growth remains well below the all-time highs recorded for most of the past two years. 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 April 2022, the year-on-year (YOY) growth of money supply was 7.23%. That’s down from the March rate of 7.41% and down from the April 2021 rate of 36.8%. The growth rate peaked in February 2021 at 23.12%.

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.


Money income (Author)

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 and retail money funds).

Unlike TMS, M2 growth rates have continued to decline over the past five months, with the growth rate in April dropping slightly to 8.20%. This is slightly down from March’s growth rate of 9.92%. The April rate was well down from the April 2021 rate of 18.52%. M2 growth peaked at a new high of 26.91% 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, the COVID panic “lockdowns” and stay-at-home orders accelerated this process and ensured a significant decline in economic activity. Massive stimulus measures then pushed money supply growth to record highs.

Money supply growth trends also appear to be related to the shape of the yield curve. As Bob Murphy notes in his book Understand monetary mechanics, a sustained decline in TMS growth often reflects short-term yield spikes, which can fuel a flattening or inversion of the yield curve. Murphy writes:

when the money supply is growing at a high rate, we are in a “boom” period and the yield curve is “normal”, which means that the yield on long bonds is much higher than that on short bonds. But when the banking system contracts and money supply growth slows, the yield curve flattens or even inverts. It is not surprising that when the banks “brake the brakes” with money creation, the economy quickly goes into recession.

In other words, a significant decline in TMS growth levels often precedes an inversion of the yield curve which itself indicates an impending recession. Indeed, we may be seeing it right now in mid-June 2022.

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. increase. Since June 2021, however, federal spending has fallen well below its previous highs. This allowed the Fed to reduce its monthly asset purchases, and the Fed announced the end of its massive US debt purchase program.

One of the factors that has supported TMS over the past few months – in part by pushing TMS above the M2 growth rate – has been rising levels of Treasury deposits with the Fed. These totals are factored into the TMS money supply measure – but not with M2 – and that total rose from $133 billion in December to $694 billion in April.


Overall, such a large drop in MSD growth over the past year continues to point to a weakening economy. With recent trends showing declining real wages, decades-long price inflation and a flattening yield curve, we may soon see the recessionary consequences of lower levels of MSR growth again.

Disclosure: No position.

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