Money Supply Growth Went Negative Again In December Another Sign Of Recession #GotBitcoin
Money supply growth fell again in December, falling even further into negative territory after turning negative in November for the first time in twenty-eight years. Money Supply Growth Went Negative Again In December Another Sign Of Recession #GotBitcoin
December’s drop continues a steep downward trend from the unprecedented highs experienced during much of the past two years. During the thirteen months between April 2020 and April 2021, money supply growth in the United States often climbed above 35 percent year over year, well above even the “high” levels experienced from 2009 to 2013.
Since then, the money supply growth has slowed quickly, and since November, we’ve been seeing the money supply contract for the first time since the 1990s. The last time the year-over-year (YOY) change in the money supply slipped into negative territory was in November 1994. At that time, negative growth continued for fifteen months, finally turning positive again in January 1996.
The Mises Institute now offers regular updates on this metric and its growth. This measure of the money supply differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits and retail money funds).
In recent months, M2 growth rates have followed a similar course to TMS growth rates. In December 2022, the M2 growth rate was –1.3 percent. That’s down from November’s growth rate of –0.01 percent. December’s rate was also well down from December 2021’s rate of 12.5 percent.
Money supply growth can often be a helpful measure of economic activity and an indicator of coming recessions. During periods 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 slowing rates of money supply growth. However, money supply growth tends to begin growing again before the onset of recession.
Negative money supply growth is not in itself an especially meaningful metric. But the drop into negative territory we’ve seen in recent months does help illustrate just how far and how rapidly money supply growth has fallen in recent months. That is generally a red flag for economic growth and employment.
Money supply growth also appears to be connected to yield-curve inversion—itself a recession indicator. For example, the 3s/10s yield spreadoften heads toward zero as money supply growth moves in the same direction. This was especially clear from 1999 through 2000, from 2004 to 2006, and during 2018 and 2019, and beginning in 2022. This is not surprising because trends in money supply growth have long appeared to be connected to the shape of the yield curve. As Bob Murphy notes in his book Understanding Money Mechanics, a sustained decline in TMS growth often reflects spikes in short-term yields, which can fuel a flattening or inverting yield curve.
It’s not especially a mystery why short-term interest rates are headed up fast, and why the money supply is decelerating. Since January 2022, the Fed has raised the target federal funds rate from 0.25 percent up to 4.75 percent.
This means fewer injections of Fed money into the market through open market operations. Moreover, although it has done very little to sizably reduce the size of its portfolio, the Fed has nonetheless stopped adding to its portfolio through quantitative easing and allowed a small amount (about 5 percent of $8.9 trillion) to roll off.
It should be emphasized that it is not necessary for money supply growth to turn negative in order to trigger recession, defaults, and other economic disruptions. With recent decades marked by the Greenspan put, financial repression, and other forms of easy money, the Federal Reserve has inflated a number of bubbles and zombie enterprises that now rely on nearly constant infusions of new money to stay afloat. For many of these bubble industries, all that is necessary for a crisis is a slowing in money supply growth, brought on by rising interest rates or a confidence crisis.
1. Beginning this month, I have slightly re-calculated all periods of the TMS measure presented here to conform to the changes suggested by Robert Murphy and Ryan Griggs in “The Inverted Yield Curve, Austrian Business Cycle Theory, and the True Money Supply,”Quarterly Journal of Austrian Economics 24, no. 4 (December 2021): 523–41.
Monthly M2 Shrinks For The First Time In Over 12 Years
* The economy and stock market have been built on massive stimulus and liquidity from a rapidly expanding money supply.
* Over the past three years, M2 growth has averaged 14.3% annualized.
* Inflation is an expansion of the Money Supply that generally leads to higher prices.
According to the seasonally adjusted data, M2 contracted by $83B in April. The Money Supply analysis last month highlighted the slowing money supply growth rate, but this is the first contraction seen since January 2010.
The economy and stock market have been built on massive stimulus and liquidity from a rapidly expanding money supply. With M2 growth decelerating last month, the stock market looked in trouble. Now that it has become a contraction, the effect could be very profound.
In his latest podcast, Peter Schiff discusses that the Fed must shrink the money supply to get inflation under control. The problem for the Fed is that even this small contraction has resulted in a bear market for the Nasdaq, Russel 2000, and almost the S&P. Furthermore, mortgage rates have reached 5.5% creating problems in the housing market.
Looking at the chart above, imagine undoing all the stimulus since Covid and consider the impact on the economy. If the small $81B contraction has caused this much pain, undoing all the M2 growth would be catastrophic.
The chart below shows the non-seasonally adjusted money supply. The current slowdown can be seen very clearly when compared to the growth since Covid. The market is not used to this and hence everything is slowing.
The table below shows this slowdown more clearly. Over the past three years, M2 growth has averaged 14.3% annualized. In the past year, that has fallen to 8%, dipping to 5.6% over the last 6 months, and turning negative in the most recent month. This is a dramatic slowdown.
When looking at the average monthly growth rate by month before Covid, April historically expands at an annualized 5.4%. This compares to -4.4% for the current month.
The Fed only offers weekly data that is not seasonally adjusted. The chart below shows how the week ending April 25th saw M2 drop by $446B! This is greater than the largest increase which occurred on March 30, 2020, when Money Supply grew by $421.7B.
The “Wenzel” 13-week Money Supply
The late Robert Wenzel of Economic Policy Journal used a modified calculation to track Money Supply. He used a trailing 13-week average growth rate annualized as defined in his book The Fed Flunks. He specifically used the weekly data that was not seasonally adjusted. His analogy was that in order to know what to wear outside, he wants to know the current weather, not temperatures that have been averaged throughout the year.
The objective of the 13-week average is to smooth some of the choppy data without bringing in too much history that could blind someone from seeing what’s in front of them. The 13-week average growth rate can be seen in the table below. Decelerating trends are in red and accelerating trends in green. Money Supply growth on a 13-week annualized basis was mostly accelerating for 16 weeks in a row. It has now been flat or down for 16 weeks in a row.
Growth has now reached 5.37% which is the lowest reading in more than 60 weeks.
The plot below helps show the seasonality of the Money Supply and compares the current year to previous years. It shows the current trajectory moving down quite steeply. In the last two years, this has rebounded in April with stimulus, but the Fed is now tightening conditions which are pushing the growth rate even lower.
While the growth rate looks to be returning to pre-Covid levels, it must be considered against the backdrop of the massive stimulus over the last two years. To reiterate, the market is conditioned to massive Money Supply growth to keep pushing the “everything bubble” higher. Without this continued acceleration, it is very likely the bubble will deflate.
Behind The Inflation Curve
The problem is that this deceleration will not do enough to slow inflation but it will certainly be enough to crash the bubble. To combat rising prices, the Fed would need to undo all the money it has created over the last several years. This would require bringing interest rates above the rate of inflation.
Unfortunately, the chart below shows that the Fed has never been further behind the inflation curve. A recession on its own will not cure this inflation problem because of the lagged effects. Looking at the period of 1970, inflation always moved higher on a delay after significant expansion in the money supply. Price increases are still waiting to feel the full effects of all the M2 growth.Furthermore, history shows it required rates higher than inflation to bring prices back down.
The charts below are designed to put the current trends into a historical perspective. The orange bars represent annualized percentage change rather than a raw dollar amount. The current contraction can be seen against more than 12 years of non-stop expansion.
If one month of M2 contraction can cause this much pain, how much carnage would unfold in a prolonged fight against inflation where M2 had to shrink consistently for months?
Taking a historical look at the 13-week annualized average also shows the current predicament. This chart overlays the log return of the S&P. Mr. Wenzel proposed that large drops in Money Supply could be a sign of stock market pullbacks. The current value of 5.4% is the lowest value since July 2019.
His theory, derived from Murray Rothbard, states that when the market experiences a shrinking growth rate of Money Supply (or even negative) it can create liquidity issues in the stock market, leading to a sell-off. While not a perfect predictive tool, many of the dips in Money Supply precede market dips. Specifically, the major dips in 2002 and 2008 from 10% down to 0%.
The latest stock market pullback is further evidence of this relationship. Based on the chart below, history would indicate that the market pullback is just getting started.
Please note the chart only shows market data through May 2 to align with available M2 data.
One other consideration is the massive liquidity buildup in the system. The Fed offers Reverse Repurchase Agreements (reverse repos). Essentially this is a tool that allows financial institutions to swap cash for instruments on the Fed balance sheet.
Current Reverse Repo exceeded $2T on May 23 for the first time in history. This dwarfs the old records of ~$500B in 2016-2017 and quarter-end is still more than a month away when Repos tend to peak.
This shows that even though M2 has contracted there are still trillions of dollars in liquidity sloshing around. How will prices drop with this much excess liquidity in the system?
What It Means For Gold And Silver
Inflation is an expansion of the Money Supply that generally leads to higher prices. To bring prices back down, Money Supply has to contract. So far, the market has experienced a single month of contraction and it has ripped through financial markets.
Money Supply growth rates do not typically bottom until August. If the contraction in M2 continues for another 3 months, then it will bring nearly everything into a vicious bear market. The Fed cannot allow this to happen.The recent surge in tax revenues would most likely reverse, putting extraordinary strain on the Federal budget. Not to mention the massacre that would unfold in the stock and real estate market.
Expect the Fed to see 1-2 months of slightly lower inflation (though well above 2%), proclaim victory prematurely, and “rescue” the economy with more stimulus. This could be the moment where gold and silver take off and put $2000 and $30 well in the rearview mirror.
Data Source:M2 and also series WM2NS and RRPONTSYD. Historical data changes over time so the numbers of future articles may not match exactly. M1is not used because the calculation was recently changed and backdated to March 2020, distorting the graph.
Data Updated: Monthly on the fourth Tuesday of the month on a 3-week lag
M2 Broad Money Supply Growth Falls To -1.8% YoY, M1 Money Growth Falls To -3.6% YoY
Its just like The Federal Reserve to be cutting US money growth as US jobs cuts accelerate.
The latest US money growth numbers are out and they are daunting. M2 Money growth YoY is now negative at -1.8%.
M1 money, a narrower defition of money, is now down -3.6% YoY.
This is happening as the labor market is seeing a wave of layoffs.
Bitcoin ‘Faces Headwinds’ As US Money Supply Drops Most Since 1950S
Research from Bloomberg Intelligence argues that liquidity conditions still do not favor a continuation of the Bitcoin rally.
Bitcoin and crypto may yet see a long-term correction thanks to central banks keeping liquidity tight, Bloomberg warned.
In its latest research, Bloomberg Intelligence revealed a cool stance on the ongoing 2023 crypto market rally.
Bloomberg: Expecting BTC price to hold “may be illogical”
Despite gaining 70% in Q1, Bitcoin is not convincing everyone that it will continue to climb or even maintain current levels near $30,000.
Examining the macroeconomic climate, Bloomberg Intelligence became the latest voice to note the close relationship between crypto performance and global central bank liquidity levels.
As inflation bites, banks have been withdrawing liquidity from the economy, with risk assets declining as a result — including crypto. The United States Federal Reserve’s quantitative tightening (QT), which began in late 2021, coincided with the current all-time high for Bitcoin.
Despite the recent banking crisis, Bloomberg noted that plunging M2 money supply and bank deposits mean that liquidity continues to be squeezed.
“Risk assets typically rise and fall on the back of liquidity and plunging US money supply, and bank deposits indicate headwinds for cryptos,” it stated in an analysis uploaded to Twitter by Bloomberg Intelligence senior macro strategist Mike McGlone.
“It may be illogical to expect that stock market, crude oil, copper and the Bloomberg Galaxy Crypto Index (BGCI) to sustain recent bounces with year-over-year measures of money supply and commercial bank deposits falling around 2% — the most in our database since 1959.”
The misgivings come as Bitcoin faces a battle to flip historical resistance back to support, with bulls as yet unable to effect major change.
When it comes to liquidity, meanwhile, others have already noted that crypto now responds to the actions of central banks other than the Fed, and both China and Japan have enacted liquidity injections this year.
“A top question at the start of April is what stops the contracting liquidity?” Bloomberg, meanwhile, continued.
U.S. Dollars Gives Bitcoin Heat
BTC/USD traded around $28,100 at the time of writing on April 6, according to data from Cointelegraph Markets Pro and TradingView.
In a potential short-term tailwind for risk assets, the U.S. Dollar Index (DXY) saw fresh losses, abandoning a modest comeback to drop back below 102.
Analyzing the situation, popular Crypto Twitter account Cold Blooded Shiller remained tentatively optimistic about the outcome of BTC’s price.
Analyst Justin Bennett nonetheless flagged a distinct range still intact for the DXY, predicting a rebound to come.
“All the ‘dollar is dead’ chants are about to be silenced by what is still the global reserve,” he warned.