US money supply grew 37% in November – OpEd – Eurasia Review

By Ryan McMaken *

In November, the rate of money supply growth remained essentially the same as in October and remains near the all-time high in September. The stabilization of money supply growth in recent months comes after eight months of record growth in the United States, following unprecedented quantitative easing, asset purchases by the central bank and various debt plans. relaunch.

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 5 million unemployed people currently receive standard unemployment benefits, and 8 million more receive “Emergency pandemic unemployment benefit ”at the end of November.

The central bank continues to engage in an unprecedented variety of 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 bought trillions of dollars in assets, including government debt. This fueled the creation of new money.

In November 2020, the year-over-year (YOY) growth in money supply was 37.08%. This rate is unchanged from the October rate and up from the 5.9% rate in November 2019. Historically, this is a very large increase in growth, year over year. other. 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 mass. monetary 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).

M2’s growth rate hit new all-time highs in November, increasing 25.07% from October’s 24.17% growth rate. M2 rose 7.06 percent in November of 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 emerge from its low growth trough well. before the onset of the recession. As recession approaches, the growth rate of TMS increases and becomes greater than the growth rate of M2. This happened in the early months of the 2002 and 2009 crises. February 2020 was the first month since the end of 2008 when 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.

While some observers are likely arguing that the current economic crisis is the result solely of the Covid-19 panic and the resulting forced government shutdowns, several indicators suggest the economy was poised 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 actions to lower interest rates and raise its balance sheet again are a testament to the weakness of the economy until April 2020. In addition, world trade contracted in 2019 for the first time. since the Great Recession, suggesting that the global economy was heading into some form of contraction.

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. At the end of November, total assets again exceeded $ 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. As expected, bank lending activity also increased, leading to the creation of new currency as well.

Below is the dollar volume for M2 and TMS:

In terms of total dollar amounts currently in existence, the total M2 money supply in November was $ 19 trillion and the TMS total was $ 19.3 billion. Since January, this is an increase of 3.6 trillion dollars for M2 and 5000 billion dollars for TMS. Also, for the past five months, the TMS total has done something new: it has become greater than the M2 total. This is largely fueled by the huge growth in US Treasury deposits at the Fed, which count in TMS, but not in M2. Treasury deposits fell from $ 375 billion in March to an unprecedented $ 1.7 trillion in July. In November, Treasury deposits edged down to $ 1.5 trillion, but remained near record levels.

* About the author: Ryan McMaken (@ryanmcmakeken) is editor-in-chief at the Mises Institute. Send him your article submissions for the Betting Thread and Austrian, but read the article guidelines first. Ryan graduated in Economics and Political Science from the University of Colorado and was a Housing Economist for the State of Colorado. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

Source: This article was published by the MISES Institute

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