August 16, 2022

Slow down in Money Creation Might be Another Recession Signal

“During intervals of economic boom, money supply tends to grow quickly as commercial banks make more loans. Recessions, on the other hand, tend to be preceded by decreasing rates of money supply development. However , money supply growth tends to begin growing again before the onset of economic downturn. ”

The slowdown in cash creation could be signaling a recession.

The growth in the money supply has dropped precipitously over the last several months. As assessed by M2, the money supply expanded by 6. 6% year on year. That was down from April’s development rate of 8. 21%. In  May 2021, M2 grew by 14. 30%. M2 growth peaked at a record 26. 91% within February 2021.

Based on  the “ true” or Rothbard-Salerno money supply measure   (TMS), money supply growth also dropped in May after rising slightly throughout the previous two months.

Between April 2020 and April 2021, money supply growth often climbed above 35% on a year-over-year basis.

Economists Murray Rothbard and Joseph Salerno developed TMS to better calculate money supply fluctuations. TMS differs from M2 in that it includes Treasury deposits at the Fed while excluding short-time deposits and retail cash funds.

As  Mises Institute senior publisher Ryan McMaken explains , changes in money provide growth can help measure financial activity and indicate pending recessions.

“ During periods associated with economic boom, money supply tends to grow quickly since commercial banks make a lot more loans. Recessions, on the other hand, are usually preceded by slowing rates of money supply growth. However , money supply growth tends to begin growing again  before  the starting point of recession. ”

As you can see from the chart above, based on TMS, money supply growth currently appears to be trending higher, the slight drop in May notwithstanding.

The space between M2 and TMS is also revealing. Historically, TMS has climbed and become larger than M2 in the early months of a recession. According to McMaken, this occurred in the earlier months of the 2001  as well as the 2007– 09  recession. An identical pattern appeared before the 2020 recession.

Plus it happened again in May when the M2 growth rate dropped below the TMS growth rate for the first time since 2020.

As  our own technical analyst noted lately , even though inflation is definitely unlikely to come down as the money supply continues to grow, the stock market and economy are made on a rapidly expanding money supply. With such sluggish growth, it will be very difficult for the stock market to hit new highs and the economy to prevent recession.

The Atlanta Fed recently lowered its  Q2 GDP projection   into negative territory. That would indicate we have been in a recession because the beginning of the year. Most people seem to think the recession is going to be short and shallow, but Peter Schiff recently said that is a fantasy.

“ The idea that this particular recession could be anything but severe is farcical. There is no method we can have a shallow recession. ”


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