Money supply was expected to increase in recent months. This usually happens in the early stages of a recession or financial crisis. However, the magnitude of the growth is completely unexpected.
In April, the growth of money supply on an annual basis reached 21.3%. This rate comes after the increase from March, which was 11.3%. In April 2019, the rate was 1.94%. Historically, such an increase compared to both the previous month and the same month last year is huge. This violates the trend from the beginning of 2019, when until August the growth rate was about 2%. In fact, August 2019 saw the lowest increase in money supply in the last 12 months.
Inflation or prosperity: How central banks covertly destroy the standard of living
Why a rise in the consumer price index is harmful, what will happen to money and what a natural recovery would look like
The money supply metric I use was developed by economists Murray Rothbard and Joseph Salerno, who call it true money supply (TMS). It is better than the M2 indicator, and the Mises Institute provides regular data on its movement. The difference is that TMS also includes Treasury deposits in the Federal Reserve, but excludes short-term deposits, travelers ‘checks and merchants’ cash funds.
However, the growth rate of M2 also set a historic record of 18.01% in April on an annual basis compared to 10.95% in March. M2 rose 4% in April last year, after its growth slowed dramatically from late 2016 to late 2018, before starting to rise again in recent months. As of March, the trend is the same as for TMS.
An increase in money supply can be a useful metric for economic activity. During an economic boom, money supply grows rapidly as banks lend more. Recessions, on the other hand, are preceded by periods of slowing money supply. As the crisis approaches, the rate of increase of TMS is accelerating and outpacing that of M2.
Economist: The most likely scenario is hyperinflation
The Federal Reserve is ballooning the entire economy and now there is nothing more to inflate, the expert said
This is exactly what happened during the 2001 dotcom bubble and during the Great Recession of 2008. February this year was the first month since 2009 in which the rate of TMS growth outpaced that of M2. This happens in both March and April, when the dynamics show a recession.
Although some analysts say the current economic crisis is entirely due to the panic surrounding the coronavirus and the government’s closure of the economy, some indicators show that the economy was in recession even before the disease broke out. Among them is TMS, as well as the crisis in the repo market since last fall. The fact that the Federal Reserve lowered the key interest rate several times and started to increase its balance sheet again speaks of the weakness of the economy even before April 2020.
M2 in February was 17.2 trillion. dollars, and TMS – 16.3 trillion. dollars. The increase in money supply in recent months was partly due to the fact that the Federal Reserve launched unprecedented monetary incentives in March and April 2020. The Open Market Committee lowered interest rates on central bank loans more than once in the months before March 2020 but in response to the government’s closure of the economy within a month alone, it was reduced by 150 basis points.
Another factor that partly supports TMS’s growth has been the huge rise in Treasury deposits in the Federal Reserve in recent months. In April 2020, this amount rose to a record value of 783 billion dollars, which is almost twice the value of 423 billion dollars, as was the previous record in February this year.