Cash supply growth fell again in September, dropping to some 37-month low.
August’s drop continues a steep downwards trend from the unprecedented heights experienced during much of yesteryear two years.
During the thirteen months in between April 2020 and Apr 2021, money supply development in the United States often climbed above 35 percent year over year, well above even the “ high” levels experienced from 2009 to 2013.
During September 2022, year-over-year (YOY) growth in the money supply was at 3. 92 percent. That’s down from August’s rate of four. 54 percent, and down from September 2021’s rate of 7. 02 %.
The particular growth rates during the majority of 2020, and through April 2021, were much higher than anything we’d observed during previous cycles, with the 1970s being the only period that came close. Since then, however , we have observed a fast fall from previous highs and such rapid declines generally point to economic contraction in following months.
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 money supply variances than M2. The Mises Institute now offers regular updates on this metric and its development. This measure of the money provide differs from M2 in this it includes Treasury deposits at the Fed (and excludes short-time deposits and retail cash funds).
In recent months, M2 growth rates have followed a similar training course to TMS growth prices. In September 2022, the M2 growth rate was 2 . 52 percent. Absolutely down from August’s growth rate of 3. 78 percent. September’s rate seemed to be well down from September 2021’s rate of twelve. 88 percent.
Money supply growth can often be a helpful way of measuring economic activity, and a good indicator of coming recessions. During periods associated with economic boom, money supply tends to grow quickly as commercial banks make a lot more loans. Recessions, on the other hand, are usually preceded by slowing prices of money supply growth. Nevertheless , money supply growth tends to begin growing again before the onset of recession.
Another indicator associated with recession appears in the form of the gap between M2 plus TMS. The TMS growth rate typically climbs and becomes larger than the particular M2 growth rate within the early months of a recession. This occurred in the earlier months of the 2001 and the 2007– 09 recession. An identical pattern appeared before the 2020 recession.
Notably, this has happened again beginning in May this year as the M2 growth rate in fell below the TMS growth rate for the first time given that 2020. Put another way, when the difference between M2 and TMS moves from a positive number to a negative number, that’s a fairly reliable sign the economy has entered into recession. We can see this within this graph:
In the two “ false alarms” over the past 3 decades, the M2-TMS gap reverted to positive territory rapidly. However , when this space firmly enters negative territory, that is an indicator that the economy is already in recession. The gap has now been negative for 5 from the past 6 months. Furthermore, the gap in September was -1. 4, and there is only one case— 1998— in more than 30 years during which the gap was more than -1 and the US not really in recession.
Interestingly, this indicator furthermore appears to follow the pattern associated with yield curve inversion. For instance , the 2s/10s yield inversion went negative in all the exact same periods where the M2-TMS gap pointed to a economic downturn. Moreover, the 2s/10s inversion was very briefly adverse in 1998, and then nearly went negative in 2018. This is not surprising due to the fact trends in money supply growth have long appeared to be connected to the shape of the yield curve . As Bob Murphy notes in the book Understanding Money Mechanics , a sustained decline in TMS growth often shows spikes in short-term yields, which can fuel a flattening or inverting yield contour.
Not necessarily especially a mystery why short-term interest rates are headed up fast, and the reason why the money supply is decelerating. Since January of this yr, the Fed has elevated the target federal funds rate from. 25 percent up to three or more. 25 percent.
This means fewer injections of Fed money into the market through open market operations. Moreover, although it has done very little to actually reduce the size of its portfolio, the Fed has nonetheless ceased adding to its portfolio via Quantitative Easing, and permitted a small amount ($240 billion out of $8. 9 trillion) to roll off. Consequently, market interest rates have got headed upward and money-supply growth has decelerated. Economic pain is likely to follow.