Money supply growth fell to its lowest level in 15 months in May – OpEd – Eurasia Review


By Ryan McMaken *

Money supply growth slowed again in May, falling for the third consecutive month and to its lowest level in 15 months. That is, money supply growth in the United States has fallen from its unprecedented levels and, if the current trend continues, it will return to more “normal” levels. Yet even with this slowdown, money supply growth remains close to some of the highest levels seen in previous cycles.

In May 2021, the year-over-year (YOY) growth in money supply was 15.3%. This is down from the April rate of 23.1% and down from the May 2020 rate of 29.5%. Growth peaked in February 2021 at 39.2%.

Historically, growth rates for most of 2020, and through April of this year, were much higher than anything we had seen in previous cycles, with the 1970s being the only period that left. close.

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. However, “emergency” government spending appears to be slowing from unprecedented levels recorded in 2020, and this is likely reflected in lower money supply growth. Nonetheless, Congress continues to resort to very large borrowing, and in order to keep interest rates low, the Fed has bought back trillions of dollars in assets, including government debt. This fueled the creation of new money.

The money supply metric used here—the “real” 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 money supply fluctuations 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, traveller’s checks, and retail money market funds).

Similar to the TMS measure, the growth rate of M2 slowed in the spring of 2021, falling to 14.1% in May 2021, from 18.3% in April 2021, and from the rate of 21.8% in May. 2020. M2 growth peaked at a new high of 27.0% in February 2021 before declining in March, April and May.

Growth in the money supply can often be a useful measure of economic activity and an indicator of future recessions. During times 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 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 usually increases and becomes greater 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, suggesting that the United States was heading into a recession even before the Covid shutdowns.

The recession became a reality in the spring of 2020, with the second, third and fourth quarters of 2020 all showing negative real GDP growth. Real GDP was down 9% year over year in the second quarter, and still down 1.8% for the fourth quarter of 2020. Although year over year GDP growth on the other was positive in the first trimester of 2021 (at 0.5%) this represents very weak growth given the huge monetary and fiscal stimulus that have poured into the economy as a whole. Given the Fed’s reluctance to cut stimulus packages, there appears to be little confidence that the economy would stay in positive territory without a continued stimulus. At last month’s FOMC meeting, Fed officials announced that there would be no target interest rate hike until 2023, at the earliest.

Another driver of money supply growth has been the growth of the Fed’s balance sheet. 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. Assets have now reached a new all-time high above $ 8 trillion. These new asset purchases, fueled by newly created currency, are propelling 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.

Total assets of the Fed, since 2007:

However, other factors are helping to slow money creation. For example, commercial and industrial loans have slowed year-over-year since February, with loan growth falling from 10.1% in February to minus 16.1% in May. This is the biggest drop since 2009. A drop in lending activity will put downward pressure on money supply growth.

*About the Author: Ryan mcmaken (@ryanmcmakeken) is editor-in-chief at the Mises Institute. Send him your article submissions for the Betting Thread and Power and Market, but read guidelines for articles 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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