/View.info/ Money supply growth fell again in August, remaining deeply negative after turning negative for the first time in twenty-eight years in November 2022. The decline in August continues a sharp downward trend from record highs seen in more most of the last two years.
Since April 2021, money supply growth has slowed rapidly, and since November we have seen a steady year-over-year decline. The last time annual changes in the money supply entered negative territory was November 1994. At that time, negative growth continued for fifteen months, finally turning positive again in January 1996.
Money supply growth has now been negative for ten consecutive months. The decline continued in August 2023, with annual money supply growth of -10.8%. This figure is unchanged from July’s figure of -10.8% and well below the August 2022 figure of 4.4%. With negative growth now at or below -10 percent for the sixth consecutive month, the contraction in the money supply is the largest we have seen since the Great Depression. Before this year, at no other time in at least sixty years had the money supply fallen by more than 6% on an annualized basis in a single month.
The measure of money supply used here, the “real” or TMS, is a measure developed by Murray Rothbard and Joseph Salerno and is intended to provide a better measure of money supply fluctuations than M2.
The Mises Institute now offers regular updates on this metric and its growth. This measure of the money supply differs from M2 in that it includes government deposits at the Federal Reserve (and excludes short-term deposits and individual holdings).
In recent months, the growth rate of M2 has been similar to that of TMS, although TMS has been falling faster than M2. In August 2023, the growth rate of M2 was -3.7%. This was unchanged from July’s growth rate of -3.7 percent. The August 2023 growth rate is also down significantly from the August 2022 figure of 3.8%.
Money supply growth can often be a useful indicator of economic activity and an indicator of impending recessions. During periods of economic boom, the money supply tends to increase rapidly as commercial banks extend more credit. On the other hand, a recession is usually preceded by a slowdown in the growth rate of the money supply.
It should be noted that the money supply does not need to actually contract to signal a recession and boom-bust cycle. As Ludwig von Mises showed, recessions are often preceded by a simple slowdown in the growth of the money supply. But the dip into negative territory we’ve seen in recent months helps illustrate just how far and how quickly money supply growth has fallen. Overall, this is a red flag for economic growth and employment.
The fact that the money supply is contracting at all is remarkable because in modern times the money supply almost never contracts. The money supply has already declined by $2.9 trillion (or 13.4%) since its peak in April 2022. Proportionately, the decline in the money supply since 2022 is the largest decline we have seen since the Great Depression. (Rothbard estimates that on the eve of the Great Depression, the money supply fell 12% from its peak of $73 billion in mid-1929 to $64 billion in late 1932.)
Despite the recent decline in the total money supply, the upward trend in the money supply remains significantly higher than in the twenty-year period from 1989 to 2009. To return to this trend, the money supply would need to decline by at least another $3 trillion. or 15%, to a total level below $15 trillion.
Since 2009, the TMS money supply has grown by almost 185%. (M2 has grown 142% over this period.) Of the current $18.8 trillion money supply, $4.6 trillion, or 24%, has been created since January 2020. Since 2009, 12.2 $ trillion current money supply. In other words, almost two-thirds of the entire money supply in existence was created in just the last thirteen years.
With amounts like these, a 10% drop leaves only a small gap in the huge edifice of newly created money. The US economy has continued to experience very large monetary overhangs over the past few years, which is partly why after 18 months of slowing money supply growth, we have yet to see a significant deterioration in the labor market. The inflationary boom is not over yet.
However, the slowdown in monetary policy was enough to weaken the economy significantly. The Philadelphia Federal Reserve Manufacturing Index is in recession. The index of leading indicators continues to look worse. The yield curve indicates a recession. Temp jobs decline every year, often signaling an impending recession. Delinquency rates on credit cards are rising rapidly.
The inflationary boom starts to turn into a bust as soon as the new money injections stop and we are seeing that now. Not surprisingly, the current signs of malaise come as the Federal Reserve finally slows its pace of money creation after more than a decade of quantitative easing, financial repression and a general devotion to easy money. As of September, the Federal Reserve allowed the federal funds rate to rise to 5.50%, the highest level since 2001. That meant short-term interest rates generally rose as well. In September, for example, three-month government bond yields hit their highest level in more than 20 years.
However, without continued access to easy money at near-zero interest rates, banks will be less enthusiastic about lending, and many marginal companies will no longer be able to stave off financial trouble by refinancing or taking out new loans. The banking sector itself has warned investors to prepare for new rounds of layoffs. Meanwhile, the first half of the year saw a sharp increase in the number of bankruptcy filings for large corporations. According to a new report from Cornerstone Research:
“The increase in large corporate bankruptcy filings in the first half of 2023 is consistent with economic conditions that create increased bankruptcy risk for highly leveraged companies,” said Matt Osborne, director of the organization and co-author of the report. “Along with a general rise in interest rates, credit spreads for highly leveraged corporate issuers versus investment grade issuers began to widen in mid-2022, and this shift has generally persisted through the first half of 2023.”
The number of large bankruptcies filed by companies with reported assets of more than $1 billion also increased. In the first half of 2023, the number of major bankruptcies has already equaled the total for the whole of 2022. 16 and exceeded the average for the half of 2005-2022. 11.. The largest bankruptcy was announced by the financial group SVB, whose assets at the moment per filing was $19.68 billion. The largest non-financial firm to file for bankruptcy was Bed, Bath and More Ltd., which had $4.40 billion in assets at the time of the bankruptcy filing. Six major bankruptcies were filed by service companies.
Lending for personal consumption is also becoming more expensive. This week, the average 30-year mortgage rate rose to its highest level since 2000.
All these factors point to a bubble that is in the process of bursting. The situation is unsustainable, but the Federal Reserve cannot change course without triggering another spike in price inflation. Although some professional economists insist that price inflation has all but disappeared, the mood on the ground is clear that most workers feel their wages are not keeping pace with rising prices. Any spike in prices would be particularly problematic given the rising cost of living. Ordinary Americans face a similar problem with housing prices. According to the Atlanta Federal Reserve, the housing affordability index is now the worst since 2006, at the height of the housing bubble.
If the Federal Reserve reverses course now and accepts another influx of new money, prices will only go up. It didn’t have to be this way, but ordinary people are now paying the price for a decade of easy money enjoyed by Wall Street and the big spenders in Washington. The only way to put the economy on a more stable long-term path is for the Federal Reserve to stop pouring new money into the economy. This means reducing the money supply and bursting economic bubbles. But it also lays the foundation for a real economy, that is, an economy that is not built on endless bubbles, built on savings and investment, not on spending made possible by artificially low interest rates and easy money.
Translation: V. Sergeev
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