The U.S. money supply contracted for the third consecutive month, and is declining at the fastest pace since the Great Depression, new Federal Reserve data show.
In February, the M2 money supply - a benchmark for how much cash, bills, bank deposits, coins, and money market funds are circulating throughout the national economy - tumbled 2.24 percent from the same time a year ago, down from negative 1.7 percent in January. This represented the third straight month of a contracting money supply.
In total, the U.S. money supply stood at $21.099 trillion at the end of February.
Between 1929 and 1933, the money supply plummeted by 28 percent.
Despite the year-over-year percentage decline, the money supply remains nearly 38 percent above the pre-pandemic level.
The downward trend, which started in February 2021, resulted from the central bank reversing its pandemic-era liquidity injections, the Fed reducing the enormous balance sheet, and sliding bank deposits.
Across the globe, many economies are reporting slowing or contracting M1 money supply growth.
In the European Union, the M1 annual growth rate contracted by 2.7 percent in February, down from negative 0.8 percent in January. The United Kingdom’s M1 slowed to 1.55 percent in January. The M1 for Canada fell for three straight months to close out 2022, tumbling 3.57 percent in December.
So, does this point to a recession? Some economists warn that the collapse in money supply growth in the United States and other countries is a warning of an economic downturn.
“We have not seen money supply declines like this since the Great Depression,” said Mike Shedlock, an economist and registered investment advisor for SitkaPacific Capital Management.
“The contrarian position isn’t that a recession will come later, but rather that it’s already started.”
According to Steve Hanke, the professor of applied economics at Johns Hopkins University and a senior fellow at the Independent Institute, thinks “a U.S. recession is baked in the cake.”
“Due to the Fed’s monetary mismanagement, the M2 money supply is falling at its fastest rate since the 1930s,” he stated.
“The QUANTITY THEORY OF MONEY tells us that, w/ a 6-18 month lag after M2 drops, economic activity will slump.”
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