By Ryan McMaken *
In February, money supply growth reached a new all-time high. February’s surge in money supply growth makes February the eleventh consecutive month of remarkably strong growth, and follows unprecedented quantitative easing, central bank asset purchases and various stimulus packages.
In February 2021, the year-over-year (YOY) growth in money supply was 39.1%. This is up slightly from the 38.7% rate in January and up from the 7.3% rate in February 2020. Historically, this is a very strong growth spurt, year to year. This is also a trend reversal from the trend that just ended in August 2019, when growth rates hit almost 2%. In August 2019, the growth rate hit a 120-month low, falling to the lowest growth rates we’ve seen since 2007.
Historically, the rate of growth has never been higher than what we have seen in the last ten months, with the 1970s being the only period that comes close.
Growth is likely to continue for now as it appears the United States has now entered a protracted economic crisis for almost a year, with around 1 million new jobless claims every week from March to mid- September. Claims have remained above 600,000 every week since. In addition, more than 3.8 million unemployed people are currently receiving standard unemployment benefits, and total unemployment claims have not returned to non-recessive levels, even a year after the start of the closures. More than seven million additional unemployed collect “Emergency indemnity in the event of an unemployment pandemic ”from February 27.
The central bank continues to engage in an unprecedented variety of efforts to “stimulate” the economy and provide income to the unemployed and provide liquidity to financial institutions. Additionally, as government revenues declined, Congress turned to unprecedented amounts of borrowing. But in order to keep interest rates low, the Fed bought trillions of dollars in assets, including government debt. This fueled the creation of new money.
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 fluctuations in mass. monetary than M2. The Mises Institute now offers regular updates on this metric and its growth. This measure of money supply differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-term deposits, traveller’s checks, and retail money market funds).
Similar to the TMS measure, M2’s growth rate reached new all-time highs in February 2021, increasing 27.0% from January’s 25.9% growth rate. M2 increased 6.8% in February last year.
Growth in the money supply can often be a useful measure of economic activity and an indicator of future recessions. During times of economic boom, the money supply tends to grow rapidly as commercial banks extend more loans. Recessions, on the other hand, tend to be preceded by periods of slowing money supply growth rates. However, money supply growth tends to emerge from its low growth trough well. before the onset of the recession. As recession approaches, the growth rate of TMS usually increases and becomes greater than the growth rate of M2. This happened in the early months of the 2002 and 2009 crises. A similar pattern emerged before the 2020 recession, suggesting that the United States was heading into a recession even before the Covid shutdowns.
The question now is how long will the current recession last. The second, third and fourth quarters of 2020 all posted negative real GDP growth. Real GDP fell 9% year-over-year in the second quarter, and real GDP declined 2.4% year-over-year in the fourth quarter.
One of the main drivers of money supply growth has been the growth of the Fed’s balance sheet. After the initial balance sheet growth in late 2019, the Fed’s total assets jumped to nearly $ 7.2 trillion in June and has rarely dropped below $ 7 trillion since then. In February, total assets hit a new record high of over $ 7.5 trillion. These new asset purchases are propelling the Fed’s balance sheet far beyond anything seen during the Great Recession stimulus packages. The Fed’s assets are now up over 600% from the period immediately preceding the 2008 financial crisis.
While the Fed’s asset purchases are not solely responsible for the surge in new currency creation, they are certainly a significant factor. Bank lending activity also increased, leading to the creation of new money as well. Total assets of the Fed, since 2007:
Also noteworthy is the continued rise in Treasury deposits with the Fed, which is also partly fueling money supply growth. There is a debate as to why this amount has increased so much and why the Treasury has decided to keep such an amount of money at the Fed. The Fed certainly helped by buying bonds in the secondary market. In all cases, these deposits are counted as part of the money supply in the calculation of the Rothbard-Salerno money supply. These dollars are not money according to M2, but of course these deposits should be counted as money. Indeed, recent stimulus packages have made it clear that the federal government could in fact spend hundreds of billions of dollars in a short period of time through various bailouts, stimulus checks and other measures. In other words, these deposits are very liquid.
The treasury might just keep dollars on hand for the next spending spree.
* About the author: Ryan McMaken (@ryanmcmakeken) is editor-in-chief at the Mises Institute. Send him your article submissions for the Betting Thread and Power and Market, but read the article guidelines first. Ryan graduated in Economics and Political Science from the University of Colorado and was a Housing Economist for the State of Colorado. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.
Source: This article was published by the MISES Institute