The slowdown in money creation could signal a recession.
Money supply growth has fallen sharply in recent months. Measured by M2, money supply increased by 6.6% year-on-year. That was down from April’s growth rate of 8.21%. In May 2021, M2 increased by 14.30%. M2 growth peaked at a record 26.91% in February 2021.
Based on the “true” or Rothbard-Salerno money supply measure (TMS), money supply growth also fell in May after rising slightly in the previous two months.
Between April 2020 and April 2021, money supply growth often exceeded 35% year-over-year.
Economists Murray Rothbard and Joseph Salerno developed the TMS to better measure fluctuations in the money supply. TMS differs from M2 in that it includes Treasury deposits with the Fed while excluding short-term deposits and retail money funds.
As Ryan McMaken, editor of the Mises Institute, explainschanges in money supply growth can help gauge economic activity and indicate impending recessions.
“During economic booms, the money supply tends to grow rapidly as commercial banks extend more loans. Recessions, on the other hand, tend to be preceded by a slowdown in money supply growth rates However, money supply growth tends to pick up again before the onset of the recession.
As you can see from the chart above, based on the TMS, money supply growth already appears to be on an upward trend, despite May’s slight dip.
The gap between M2 and TMS is also revealing. Historically, TMS has climbed and become higher than M2 in the first months of a recession. According to McMaken, this happened in the early months of the 2001 and 2007-2009 recession. A similar trend emerged before the 2020 recession.
And it happened again in May when the growth rate of M2 fell below the growth rate of TMS for the first time since 2020.
As our technical analyst noted recently, while inflation is unlikely to come down as the money supply continues to grow, the stock market and the economy rely on a rapidly expanding money supply. With such slow growth, it will be very difficult for the stock market to reach new highs and for the economy to avoid recession.
The Atlanta Fed recently lowered its Q2 GDP projection into negative territory. This would indicate that we have been in a recession since the start of the year. Most people seem to think the recession will be short and shallow, but Peter Schiff recently said that was a fantasy.
The idea that this recession could be anything but serious is outlandish. There is no way we can have a shallow recession.
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