In March, the year-on-year growth rate of the money supply fell again, but the decline in March was the smallest in 16 months. Additionally, the month-on-month growth rate of the money supply in March was the highest in two years. The current trend of money supply growth indicates a continued recovery after a significant contraction over the past year. As of March, the money supply seems to have entered a period of stability, remaining flat or declining compared to the same period last year, but showing significant growth in recent months.
Currently, the money supply has been in negative year-on-year growth for 17 consecutive months. In March 2024, the money supply continued to decline with a year-on-year growth rate of -2.57%, showing an improvement from the -5.76% decrease in February and a much smaller decline compared to the -9.87% decrease in March 2023. The negative growth has been ongoing for over a year, with most of the time in the past year and a half witnessing negative growth below -5%, marking the most severe money supply contraction since the Great Depression. Prior to 2023, for at least 60 years, the year-on-year decline in the money supply in any month did not exceed 6%.
The significant decline in the money supply appears to have temporarily halted. In fact, when observing the monthly changes in the money supply, there was an increase of 0.98% from February to March, the largest increase since March 2022. On a monthly basis, out of the past 10 months, 7 months saw positive growth in the money supply, further indicating a new trend of stabilization or sustained growth in the money supply.
The measurement of money supply used here—the “True” or Rothbard-Salerno True Money Supply (TMS)—is a metric developed by Murray Rothbard and Joseph Salerno aimed at providing a better indicator of monetary supply fluctuations compared to M2. The Mises Institute now regularly updates this index and its growth.
In recent months, the growth rate of M2 has followed a similar trend to TMS, but TMS has experienced a faster year-on-year decline than M2. In March, the growth rate of M2 was -0.28%, showing an increase from the -1.82% growth rate in February. The growth rate in March 2024 was also higher than the -3.74% in March 2023. Furthermore, the overall growth of M2 was higher than TMS, with M2 increasing by 1.1% from February to March this year.
The speed of money supply growth is often a measure of economic activity and a predictor of economic downturns. During times of economic prosperity, as commercial banks issue more loans, the money supply tends to grow rapidly. Conversely, before an economic recession, the growth rate of the money supply often slows down.
It should be noted that actual contraction of the money supply is not necessary to indicate an economic recession. As Ludwig von Mises pointed out, the slowdown in money supply growth often precedes an economic downturn. However, the recent months of negative growth do help explain the magnitude and speed of the decline in money supply growth, serving as a warning signal for economic growth and employment.
In summary, an economic recession often manifests after a period of slowing down in money supply growth before accelerating again. This pattern was seen in the early 1990s economic recession, the 2001 dot-com bubble burst, and the Great Depression of the 1930s.
Despite a significant decrease in the total money supply last year, the trend of the money supply remains far above the levels seen from 1989 to 2009 over a span of 20 years. To return to this trend, the money supply would need to decrease by about $3 trillion, or 15%, bringing the total below $15 trillion. Additionally, as of March, the total money supply had increased by over 30% (approximately $4.5 trillion) compared to January 2020.
Currently, the TMS money supply has grown by over 185% since 2009, while M2 supply has increased by 145% during the same period. Out of the current $19 trillion money supply, $4.6 trillion (24%) has been created since January 2020. Over $12 trillion in money supply has been created since 2009, meaning nearly two-thirds of the total money supply has been created in the past 13 years.
With such a high total, a 10% decrease in the money supply would have a minimal impact on the newly created massive money supply. The U.S. economy still faces the challenge of significant monetary excesses in recent years, which is why after 17 months of negative money supply growth, we have only seen a slowdown in employment in recent months (for example, since the end of 2023, full-time employment growth has turned negative while total employment remains steady). Additionally, the Consumer Price Index (CPI) inflation rate remains significantly above the 2% target, defying mainstream economists’ predictions of substantial “disinflation.”
Like most central banks, the Federal Reserve faces two conflicting political challenges. The first is price inflation. Governments are concerned about high levels of price inflation, as it is well known that high inflation can lead to political instability. One of the central bank’s methods to combat rising prices is to allow interest rates to rise.
The second challenge lies in people expecting a central bank of a regime to assist in issuing debt and engaging in deficit spending. One of the primary tools the central bank uses to provide this assistance is to keep government debt at low rates. How does the central bank achieve this? By purchasing government debt, artificially increasing demand for government debt and pushing interest rates lower. The issue is that purchasing government debt typically requires creating new money, putting pressure on prices to rise.
Therefore, during times of rising prices, central banks face two conflicting tasks: maintaining price inflation rates and keeping interest rates low.
This is the current dilemma of the Federal Reserve. Although the anticipated “disinflation” has not materialized and the CPI inflation rate has not returned to 2%, the Federal Reserve has recently made it clear that it has no plans to increase its policy target rate. Politically, the Fed cannot afford to let rates rise as people expect the Fed to prevent a significant increase in interest payments on government debt (i.e., yields).
Recently, economist Daniel Lacalle has provided some insight into this issue:
“The Fed’s decision not to further tighten the money supply comes as demand for U.S. treasury bonds is being questioned globally. While foreign-held U.S. debt has reached historical highs, this number is deceiving. Demand has weakened relative to the supply of new bonds. In fact, the U.S. Treasury expects a significant increase in new bond issuances, causing a headache for the Federal Reserve. When interest payments on public debt reach $1 trillion, borrowing costs will significantly rise, demand remains strong but not enough to keep up with the pace of uncontrolled deficits.”
“According to U.S. Treasury data, China’s holdings of U.S. treasuries have decreased for two consecutive months, reaching $775 billion, and the softening yen may require intervention from the Bank of Japan, which means selling off some U.S. treasuries from foreign exchange reserves.”
Considering this, it is quite surprising that the growth of the money supply did not turn positive sooner.
The actions the Federal Reserve is taking now might be best interpreted as a “wait and see” strategy. The Fed refuses to let rates rise but also does not lower the target rate. Instead, the Fed seems to be maintaining a stable target rate, hoping for something to happen that would bring yields on government debt down without needing to print more money to purchase more debt, risking a new round of politically damaging price inflation. However, “hope” is not a sound strategy, and the potential outcome could lean towards maintaining low rates so the government can borrow more money, leading to increased price inflation for ordinary people.