November Money Supply: Similar and Different to Nov 1972

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by Peter Schiff, Schiff Gold:

M2 increased by $249.2B in November. This represents a 1.16% MoM increase which annualizes to 15.1%. Although only a single month, 15.1% annualized growth exceeds the 6-month, 1-year, and 3-year averages. At this rate, it’s hard to believe inflation will subside on its own. The Fed can taper their asset purchases, but shrinking the Money Supply is the only way to rein in inflation.

Speaking of tapering, last month showed the balance sheet grew by $126B, which was higher than the targeted $105B. Thursday will reveal the latest Fed balance sheet which, according to Powell and the Fed, should expand by less than $100B. It’s not looking good though given that $92B was added in a single week.

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In either case, the Money Supply growth in the chart below shows that this year is closing even hotter than last year. Looking at Aug to Nov from the last two years shows that 2020 saw total M2 increase by $642B. In 2021, that number has climbed to $858B!

Figure: 1 MoM M2 Change

Comparison to November 1972

Looking at a much longer historical perspective in the chart below shows the YoY growth rate for each November dating back to 1960. The current November clocks in at 13.1% which is behind only Nov 2020 (24.3%) and Nov 1971 (13.4%). The chart below shows this growth rate (bars) alongside CPI (black line) and the Fed Funds Rate (blue line).

Figure: 2 YoY M2 Change with CPI and Fed Funds

As shown above, 1973 and 1974 is when inflation really took off, after two years of significant increases in the Money Supply. From 1969-1972 M2 annual increases were: 4.1%, 6.1%, 13.4%, and 12.7%. The 1969-1972 M2 setup looks quite similar to the 2018-2021 setup in the current environment, only this time is more extreme where M2 has grown: 3.3%, 7.0%, 24.3%, and 13.1%.

While the M2 growth looks similar, the current actions by the Fed do not. Unfortunately, the current Fed is way behind the Fed of Nov 1972. While Money Supply was growing at 12.7% in 1972, the Fed Funds rate was set at 5.1% against a CPI of 3.4%. In the current environment, with M2 growing at 13.1%, the Fed Funds rate is still at 0% while CPI is closing in on 7%.

In 1972, before inflation really spiraled out of control (and the CPI had been completely doctored), real interest rates were actually positive by 1.7%. Compare that to today where real interest rates are -6.88%! So, while money supply was growing at about the same aggressive YoY 13% growth, the difference in real rates from 1972 to 2021 is -8.58%. Forget being behind the curve, the Fed isn’t even on the same planet!

Simple math tells you why: higher interest payments would blow a hole through the Federal budget and shatter the entire bubble economy. Therefore, the CPI has left the Fed in the dust, resulting in the largest negative real interest rates in the last 60 years by a wide margin!

The Fed can keep hoping inflation will come back down, but history shows it requires the Fed to actually stand and fight (notice in the chart how the blue line stayed above the black line). But as Peter Schiff says, “The Fed won’t even enter the ring”.

Getting Back to the Current Money Supply

The table below shows the change in M2 over different period lengths. All numbers have been annualized for consistency. As can be seen, the growth in M2 is accelerating compared to the recent 6-month, 1 year, and 3-year average growth rates. At the current rate, M2 will eclipse $22T in about 2.5 months!

Figure: 3 M2 Growth Rates

M2 used to be published weekly, so the chart below shows the noisier weekly data that is not seasonally adjusted by the Fed (the chart and table above are seasonally adjusted).

The most recent week available, ending Dec. 6, showed growth of $144B. Growth has been positive for the last 6 weeks in a row, the longest such stretch since April.

Figure: 4 WoW M2 Change

The “Wenzel” 13-week Money Supply

The late Robert Wenzel of Economic Policy Journal used a modified calculation to track Money Supply. He used a trailing 13-week average growth rate annualized as defined in his book The Fed Flunks. He specifically used the weekly data that was not seasonally adjusted.

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