The money supply confirms the bust

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Editor’s Note: Originally published on on August 31, 2022

[This blog post is an excerpt from a commentary published at TSI last week]

We referred to the 6% level for the annual growth of true money supply (TMS) in the United States (the U.S. monetary inflation rate) as the boom-bust threshold, because transitions from an economic boom to an economic downturn typically begin only after the TMS growth rate has made a sustained move below this level. It was different this time, however, as by other indicators the U.S. economy entered the recession phase of the monetary inflation-driven boom-and-bust cycle in the first quarter of this year with a TMS growth rate still above 6%. Why was it different this time and what is the current situation?

We’ve outlined the most likely reasons why it’s different this time around in previous comments, most recently in the July 27 interim update. Here is the relevant excerpt from our July 27 comment:

We believe that the current recession started at a higher rate of monetary inflation than in the past for two main reasons. The first is that the Fed was still in monetary easing mode at the height of the economic boom. This had never happened before and resulted in an even greater waste of real savings/resources than in previous booms. The second reason is that due to decades of increasing manipulation of money and interest rates by the central bank, the economy has become structurally weaker and therefore collapsing a boom now requires less relative monetary tightening than in the past.

The main new point we want to make today is that US money supply data for July 2022, which was released on Tuesday of this week, reveals that the rate of monetary inflation has now confirmed the fall by way of well below the 6% boom. -bust threshold. This is illustrated by the first of two monthly charts displayed below. Additionally, the second of the following graphs shows that the year-over-year growth rate of the TMS minus the year-over-year percentage change in the median CPI*, an indicator of the actual change (inflation-adjusted) US monetary inflation rate, has plunged to near a multi-decade low.

American TMS


CPI-adj.  American TMS


Incidentally, from the end of last year to the end of July this year, the real American money supply increased by $580 billion. This figure includes the change in currency in circulation, the change in commercial bank savings and demand deposits, and the change in the amount of money held by the US government in the Treasury General Account (TGA) at the Fed. It is roughly equal to the increase in commercial bank credit plus the increase in Federal Reserve credit minus the increase in the Fed’s Reverse Repo program. During the aforementioned period, the direct actions of the Fed REDUCED the US money supply by approximately $210 billion, but the actions of the Fed were more than offset by the money-creating actions of the commercial banking sector.

With the Fed still on a tightening path, the lines on the charts above are unlikely to have bottomed. One implication is that the yield curve will likely invert further in the coming months. Another implication is that it would be difficult to be too bearish on the 6-12 month outlook for the US stock market.

*A price index calculated by the Cleveland Fed

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

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