Mises Wire

Money Supply Growth Surges to 92-Month High

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The money supply growth rate rose again in March, climbing to a 92-month high. The last time the growth rate was higher was during July 2012, when the growth rate was 11.5 percent.  At that time, however, money supply growth was on its way down. The current upward trend has more in common with the trend we saw during late 2008 and early 2009.

During March 2020, year-over-year (YOY) growth in the money supply was at 11.37 percent. That’s up from February’s rate of 7.33 percent, and up from March 2019’s rate of 1.9 percent. The increase in money supply growth in March represents a sizable reversal of the trend we saw during most of 2019. In August, the growth rate hit a 120-month low, falling to the lowest growth rates we’d seen since 2007. The growth rate has now surged back to where it was in the wake of the 2008 financial crisis.


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).

The M2 growth rate also increased in March, growing 10.96 percent compared to February’s growth rate of 7.25 percent. M2 grew 3.98 percent during March of last year. The M2 growth rate had fallen considerably from late 2016 to late 2018, but has been growing again in recent months. As of March, it is following the same trend as TMS.

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 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 March 2020. 

The overall M2 total money supply in February was $16.1 trillion, and the TMS total was $14.9 trillion.

The growth in the money supply is in part tied to the fact that the Federal Reserve grew more accommodative in late 2019, and embraced unprecedented monetary stimulus in March. The Fed drove down the target key interest rate to 0.25 percent and began broad and unprecedented new “quantitative easing” programs. The Federal Open Market Committee (FOMC) cut the target fed funds rate more than once in the months preceding March 2020, but in response to government-forced shutdowns of several sectors of the economy, the Fed responded by cutting the federal funds rate by 150 basis points in less than a month. The Fed has flooded markets with new money by purchasing a variety of assets from US government debt to securities. The Fed’s balance sheet is now at an all-time high.

Another change partially driving the increase in the TMS is the large increase in Treasury deposits at the Fed that we’ve seen in recent months. In March 2020, this sum remains near an all-time high of $376 billion.

Weekly data suggests that money supply growth is likely to continue growing at highly elevated levels at least through April. Weekly data on commercial loans for recent weeks (not fully reflected in March data) shows that year-over-year growth in April is at historic highs.

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