In February, money supply growth reached an all-time high again. The spike in money supply growth in February makes February the eleventh straight month of remarkably high growth, driven by unprecedented quantitative easing, central bank asset purchases and various stimulus packages.
In February 2021 year-on-year (YOY) The growth of the money supply was 39.1 percent. This is a slight increase compared to the January rate of 38.7 percent and compared to the February 2020 rate of 7.3 percent. Historically, this is a very big year-on-year growth spurt. It’s also quite a reverse of the trend, which didn’t end until August 2019 when growth rates hit nearly 2 percent. In August 2019, the growth rate hit a 120-month low and fell to the lowest growth rates since 2007.
Historically, the rate of growth has never been higher than it has been in the past decade, with the 1970s being the only time period that comes close.
It is likely that growth will continue for the time being, as it appears the United States has been in a widespread economic crisis for almost a year now, with around 1 million new jobless claims being made every week from March to mid-September. Since then, the claims have stayed over 600,000 each week. In addition, more than 3.8 million unemployed are currently receiving standard unemployment benefits, and the total number of unemployment claims has not returned to non-recessive levels a year later Lock started. From February 27, more than seven million additional unemployed will receive the “Pandemic Emergency Unemployment Compensation”.
The central bank continues to make a variety of unprecedented efforts to “stimulate” the economy, generate income for the unemployed, and provide liquidity to financial institutions. Also, as government revenues have fallen, Congress has turned to unprecedented borrowing. To keep interest rates low, the Fed has bought trillions of dollars in assets – including national debt. This has fueled the creation of new money.
The monetary metric used here – the “true” or Rothbard-Salerno monetary measure (TMS) – is the metric developed by Murray Rothbard and Joseph Salerno and is said to provide a better measure of fluctuations in the amount of money than M2. The Bets The 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 with the Fed (and excludes short-term deposits, travelers checks, and retail money funds).
Similar to the TMS measurement, the M2 growth rate reached new all-time highs in February 2021, increasing by 27.0 percent compared to the January growth rate of 25.9 percent. M2 grew 6.8 percent in February last year.
Money supply growth can often be a helpful measure of economic activity and an indicator of coming recessions. In times of economic boom, the money supply tends to grow rapidly as commercial banks lend more. Recessions, on the other hand, tend to be preceded by periods of slower growth rates in the money supply. However, money supply growth tends to grow out of its slow growth well before the onset of the recession. As the recession approaches, the TMS growth rate typically increases and becomes greater than the M2 growth rate. It did so in the early months of the 2002 and 2009 crisis. A similar pattern emerged before the 2020 recession, suggesting that the US was heading for a recession even before the covid shutdowns.
The question now is how long the current recession will last. The second, third and fourth quarters of 2020 all showed negative real GDP growth. Real GDP declined 9 percent year over year in the second quarter and real GDP declined 2.4 percent year over year in the fourth quarter.
[Read More: “The V-Shaped Recovery Never Happened” by Ryan McMaken]
A major driver of money supply growth was the growth of the Fed’s balance sheet. After initial balance sheet growth in late 2019, the Fed’s total assets rose to nearly $ 7.2 trillion in June and have rarely fallen below $ 7 trillion since then. As of February, total assets hit a new all-time high of over $ 7.5 trillion. These new asset purchases are driving the Fed’s balance sheet well beyond anything seen during the stimulus packages of the Great Recession. Fed wealth is more than 600 percent higher than immediately before the 2008 financial crisis.
While Fed asset purchases are not solely responsible for the spike in new money creation, they are certainly a significant factor. Bank lending activity has also increased and has also spurred the creation of new money. Fed total assets, going back to 2007:
Also noteworthy is the sustained rise in Treasury deposits with the Fed, which in some cases also promotes growth in the money supply. There is some debate about why that amount has increased so much and why the Treasury Department decided to keep such a large amount of money with the Fed. The Fed certainly helped by buying bonds in the secondary market. In either case, these deposits are counted as part of the money supply below that Rothbard-Salerno Calculating the amount of money. These dollars are not money according to M2, but of course these deposits should be counted as money. This is because recent stimulus packages have made it clear that the federal government could actually spend hundreds of billions of dollars on various bailouts, economic reviews, and other measures in a short space of time. In other words, these deposits are very liquid.
The Treasury Department may only be holding dollars for the next spending spree.