Money Supply Growth Drops To Lowest Since Lehman

Authored by Ryan McMaken via TheMises Institute,

Growth in the supply of US dollars fell again in May, this time to a 105-month low of 5.4 percent. The last time the money supply grew at a smaller rate was during September 2008 — at a rate of 5.2 percent. 

The money-supply metric used here — an "Austrian money supply" measure — is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on this metric and its growth.

The "Austrian" 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). 

M2 growth also slowed in May, falling to 5.6 percent, a 20-month low. 

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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 falling money-supply growth. 

Thanks to the intervention of central banks, of course, money supply growth in recent decades has never gone into negative territory. 

Nevertheless, as we can see in the graph, significant dips in growth rates show up in years prior to a economic bust or financial crisis. 

For insights into what's affecting money supply growth, we can look at loan activity, such as the Federal Reserve's measure of industrial and commercial loans. 

In this case, we find that the growth rate in loans has fallen to a 74-month low, dropping to 1.9 percent. Loan growth has not been this weak since April of 2011, in the wake of the last financial crisis. 

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We find similar trends in real estate loans and in consumer loans, although not to the same extent. 

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consumer_loans.PNG

The current subdued rates of growth in the money supply suggests an economy in which lenders are holding back somewhat on making new loans, which itself suggests a lack of reliable borrowers due to a lackluster overall economy.  

This assessment, of course, is reinforced by the Federal Reserve's clear reluctance to wind down it's huge portfolio, and to end its ongoing policy of low-interest rates — concerned that any additional tightening might lead to a recession.

Comments

Rothbardian in… rcintc Fri, 07/21/2017 - 09:50 Permalink

Hasn't it been a matter of when since 2006?  Heck even "since Lehman"?  The argument was that we kicked the can and made the problem worse for later.  Well it is now nearly a decade later.  And?"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved." -LvM I think I still believe this is true.  However, when LvM said this the framework of the economic, monetary and political system was very different than it is now.  It's sort of saying that you can understand math because you are constrained by the laws and theorums within.  But then one day someone says "You know what?  Here's how you divide by zero."  Of course you know that's batshit.  But there it is.  By every cell of logic and reason you know that it isn't possible but yet...there it is.  So then you say, I still ain't buying this but shit, if that's happening then what else must not be true? We continue to assess economic reality based on a framework of understanding informed by a 20th century understanding of money and credit and value creation.  Fucking Twitter is worth how many billion?  It's market cap vs some S&P 500 companies?  It fucking sells 140 characters of millineal brain drivel!  Debt?  It's simply accounting.  It's all about ownership of assets and influence of policy.  If you have assets and you have political/regulatory checkbook then who gives a shit about the debt incurred?  We are smack in the middle of the Information Revolution and Robotic Process Automation tidal wave.  We still talk about U-3 as though it means what it used to.  We talk about debt as though it will destroy us all, when in reality the only currency that matters is military/political/legal.   If you divide by zero then the world makes total sense.  The oligarchy of the Information Age are doing just fine.  The State exchange market of violence for coercion seems to be running smoothly.  There has been no destruction of assets and the paper trail of ownership around them is completely controlable by the two mechanisms above.  The propaganda machine is doing just fine...heck even better really.  The ability to project this mechanism globally any disruptive alternative systems has never been better.  You see, what looks like doom an gloom really is just a matter of perspective.  If you can't divide by zero you might just look at the world as a snow globe of insanity.  If you can, well, then you might just see peak totalitarianism.

In reply to by rcintc

. . . _ _ _ . . . Rothbardian in… Fri, 07/21/2017 - 11:16 Permalink

The only problem in your surmise is that there is no economic theory guiding the decisions. To put it in your terms, the proof that one can divide by zero hasn't yet been worked out. You can't have a new system based on old tricks, but that's what we have in this transition time. We're building the bomb before we know the yield.It's still just a crap shoot. Cross your fingers, and I do hope you are right, but I am skeptical. (Then again, there's a part of me that wants to see it all implode.)

In reply to by Rothbardian in…

rex-lacrymarum Rothbardian in… Fri, 07/21/2017 - 13:24 Permalink

Allow me to point out that what Mises said continues to be 100% true. The changed financial landscape has not changed any of the fundamental concepts Mises laid out in the "Theory of Money and Credit" (TMC) and refined later  in "Human Action" (HA). On the contrary, a careful reader of TMC will be astonished at many of the things he will come across in this book that was written in 1912 (!). Inter alia Mises foresaw the evolution toward a fiat money system and warned against it. Note that it was widely assumed at the time that a fiat money system would be "impossible" to implement, a claim Mises contradicted verbatim in TMC. But the essential point is that Mises uncovered the central error of the British Currency School and noted that deposit money created ex nihilo by banks via lending out demand deposits had to be included in the money supply in the broader sense. These money substitutes, even if they were uncovered, were used and accepted as a means of final payment just as banknotes were. For us the important take-away is that the process of creation of additional money units has remained exactly the same - additional legal tender can only be created by commercial banks or by the central bank directly. The shadow banking system, for all its vastness, cannot create a single cent in additional money. But the system is now faced with a new wrinkle, as people have begun to create private currencies. These only represent secondary media of exchgange so far, but that could potentially change. Still, to the extent that we are trying to forecast future asset price trends and economic activity, the actual money supply remains the lynchpin around which everything revolves. This is so because the expansion of money and credit has distorted relative prices across the economy and falsified economic calculation in the process. The entire "recovery" was little but yet another period of massive capital consumption. A slowdown in money supply and credit growth is bound to unmask a great many malinvestments in the economy. Many of the accounting profits that were reported in the past eight years will turn out to have been an inflationary illusion. 

In reply to by Rothbardian in…

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rex-lacrymarum True Contrarian (not verified) Fri, 07/21/2017 - 13:04 Permalink

Money "velocity" is a nonsensical concept. It is essentially a fudge factor to make the Fisherian quantity equation "work", but this equation is essentially a tautology completely bereft of any information. When you look at a "velocity" chart today, all it shows you is that the Fed has printed a big load of money and GDP has failed to grow anyway. Well... duh. 

In reply to by True Contrarian (not verified)

gmak Fri, 07/21/2017 - 09:50 Permalink

When you're talking about the 2nd derivative and not the 1st - it doesn't matter. Paper is still being printed.  If flesh-eating bacteria slows down from it's exponential growth, it's still all over but it just takes longer.

flea Fri, 07/21/2017 - 10:25 Permalink

What gets me is the almost monotonic increase in equity valuations with so little volume. That low volume goes hand in hand with decreased velocity - but the indexes go up, up, up. I think the bots are biased to 'buy'. Every day at 3:45 pm the volume spikes several sigma above the daily average. The bots are buying. There's more money on the take, not the make.

Too-Big-to-Bail (not verified) Fri, 07/21/2017 - 10:45 Permalink

Yeah definitely not enough money in the system send in QE4 or better yet "Helicopter Money"!!!

rejected Fri, 07/21/2017 - 10:58 Permalink

During periods of economic boom, money supply tends to grow quickly as banks make more loans. Proof positive that banks create the money they loan. No wonder they laugh and people joke at savers!They create the $150,000 for your new home then you have to slave at some corporation for 30-40 years paying it back with 'Earned Money'.  But they're kind enough to let you write it off 'your taxes'  LOL.Several 'new' millions of dollars for them and more debt for the cattle.And then, the cattle send their young off to fight and die for this system.  Mannnn,,, You can't beat that with a stick! 

Stormtrooper Fri, 07/21/2017 - 12:54 Permalink

The Fed is not worried about a recession.  We've been in a structural depression since around 2000 and they know it.  They are worried about a total collapse of their system of robbery, armageddon and their heads ending up on pikes.

rex-lacrymarum Fri, 07/21/2017 - 12:58 Permalink

Growth in the narrow Austrian money supply measure TMS-1 (or AMS) has fallen even more dramatically. It stands now at a mere 1.5%, the lowest in more than a decade. As a result, free liquidity has actually turned negative in the US. Combine this with one of the most overvalued stock markets in history and you have the ingredients of a crash.