Mises Wire

Money Supply Growth in August Slows Again, Returning to “Normal” Levels

Money supply growth slowed again in August, falling for the sixth month in a row, and to an eighteen-month low. That is, money supply growth in the US has come down from its unprecedented levels and has now returned to more “normal” levels. This comes after thirteen months of unprecedented YOY growth in the money supply, coming in at over 20 percent in each month between April 2020 and April 2021. 

During August 2021, year-over-year (YOY) growth in the money supply was at 8.2 percent. That’s down from July’s rate of 8.9 percent, and down from the August 2020 rate of 37.5 percent. Growth peaked in February 2021 at 39.1 percent.  

Historically, the growth rates during most of 2020, and through April of this year, were much higher than anything we’d seen during previous cycles, with the 1970s being the only period that comes close.


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 money supply fluctuations than M2. 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, traveler’s checks, and retail money funds).

Unlike the TMS measure, the M2 growth rate began to increase again in August, following five months of decline. M2 in August rose slightly to 13.2 percent, up from July’s growth rate of 12.5 percent. August’s rate was nonetheless down from August 2020’s rate of 23.0 percent. M2 growth peaked at a new high of 27.0 percent during February 2021 before declining from March through July.  

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 periods of slowing 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 typically climbs and becomes larger than the M2 growth rate. This occurred in the early months of the 2002 and the 2009 crises. A similar pattern appeared before the 2020 recession, suggesting the US was headed for a recession even before the covid shutdowns.  

Fed Stimulus and Declining Loan Growth

The central bank continues to engage in a wide variety of unprecedented efforts to “stimulate” the economy, provide income to unemployed workers, and provide liquidity to financial institutions. For example, although the Fed has recently hinted at ”tapering” its bond and mortgage-backed security purchases, the Fed’s portfolio continues to grow. As of October 2021, the Fed has not pared back its monthly asset purchases totaling $120 billion. These asset purchases also indirectly enable fiscal policy by allowing the Treasury to continue to borrow trillions of dollars at very low interest rates. This feeds monetary growth. 


Yet the slowing rate of money-supply growth suggests weakness in the economy, and this can be seen in part in declining loan activity. For example, commercial real estate loans in August grew only 2.8 percent year over year, placing August’s growth not far above May’s eight-year low in loan activity. Meanwhile, year-over-year growth in commercial and industrial loans has been in negative territory since April of this year, dropping to the lowest levels seen since loans went into steep decline following the 2008 financial crisis. 

Another factor in declining growth rates is declining totals in Treasury deposits at the Fed. These totals are factored into the TMS money supply measure, and this total has declined from $1.7 trillion in July 2020 to $391 billion in August of this year. 

Overall, TMS growth dipping below M2 growth suggests a weakening in economic activity. Moreover, September’s jobs totals suggests job growth is flattening out well below the precrisis totals. With only 194,000 new jobs added in September, the employment total remains more than 5 million jobs below the February 2020 peak. Hopes of a V-shaped jobs recovery have long since evaporated. 

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