The money supply growth rate surged to an all-time high in April as the Federal Reserve created cash at an unprecedented rate through quantitative easing and other money-creating monetary policies.
According to Ryan McMaken at the Mises Institute, the only time the Fed has come close to this level of money creation was in the 1970s – the era of stagflation.
It was expected that money supply growth would surge in recent months. This usually happens in the wake of the early months of a recession or financial crisis. The magnitude of the growth rate, however, was unexpected.”
The year-over-year money supply growth in April came in at 21.3% based on TMS*. That nearly doubled March’s healthy 11.3% expansion. To put it into historical context, the percent growth in April 2019 was 1.94%. The M2 growth rate also increased to historic highs last month, with an 18.01% surge. That compares to March’s growth rate of 10.95%. M2 grew 4.0% in April 2020.
There’s no sign that this growth in the money supply will slow anytime soon. The Federal Reserve’s balance sheet swelled by another $212.8 billion to $6.934 trillion last week, as money supply surged another $198.6 billion. To put that into perspective, when the Fed did QE3 during the great recession, it was expanding the balance sheet by $80 billion a month. We just did over $212 billion in one week. The highest the Fed balance sheet got during the last crisis was $4.5 trillion. We’re now approaching $7 trillion with no end of QE in sight. This is inflation on an unprecedented scale.
I have been arguing that the economy was already in trouble before coronavirus as evidence by three rate cuts in 2019, the fact that the Fed was running repo operations to stabilize the financial markets, and the fact that the central bank had already launched quantitative easing before the COVID-19 pandemic. McMaken said changes in the money supply and looking at the historic relationship between M2 and TMS also reveal the US economy was likely primed for a recession pre-corona.
Money supply growth can often be a helpful measure of economic activity. During periods of economic boom, money supply tends to grow quickly as banks make more loans. Recessions, on the other hand, tend to be preceded by periods of slowdown in rates of money supply growth. However, money supply growth tends to grow out of its low-growth trough well before the onset of recession. As recession nears, the TMS growth rate climbs and becomes larger than the M2 growth rate. This occurred in the early months of the 2002 and the 2009 crises. February 2020 was the first month since late 2008 that the TMS growth rate climbed higher than the M2 growth rate. The TMS growth rate again exceeded M2 in March and April 2020. As of mid-April 2020, it does appear that the decline in money supply growth has again preceded a recession. While some observers will likely claim that the current economic crisis is a result solely of the COVID-19 panic and resulting government-forced shutdowns, several indicators do suggests that the economy was primed for a recession. The decline in TMS is one, as is the late 2019 liquidity crisis in the repo markets. The Fed’s moves to drop interest rates and to once again grow its balance sheet speaks to the weakness of the economy leading up to April 2020.”
Yes, the coronavirus government shutdowns created unprecedented disruptions in the economy. That’s not debatable. But that economy was rotten to the core before the pandemic due to the very policies the Federal Reserve and the US government ramped up in order to save the economy. It was a great, big, fat, ugly bubble blown up by debt. Powell’s prescription is not going to save the economy. At best, it will save the bubble – for a little while longer.
During a recent podcast, Peter Schiff said that all of the people who think this can go on forever are in for a rude awakening. Things that can’t go on forever don’t.
Just because we’ve gotten away with it for this long doesn’t mean we’re going to get away with it forever. … I think we’re very, very close to a major collapse of the dollar, a major breakout in the price of gold, to a breakdown in the bond market. And it isn’t going to happen overnight. It’s going to sneak up on people when they least expect it. … It’s not a crisis until it becomes a crisis. And then it becomes a crisis very, very quickly.”
* The money supply metric used by McMaken—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 fluctuations than M2. This measure of the money supply differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits, traveler’s checks, and retail money funds).
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