Money Supply Grew 13.1% in 2021 – Is It Enough to Keep the Bubble Going?


by Peter Schiff, Schiff Gold:

M2 increased by $201 billion in December.

This represents a 0.94% MoM increase which annualizes to 11.9%. For the entire year of 2021, M2 grew by an incredible $2.5 trillion or 13.1%!

This is extremely rapid money supply growth! The Fed can taper their asset purchases, but shrinking the Money Supply is the only way to rein in inflation.

Despite this being extremely fast growth from a historical perspective, based on the most recent period, this recent deceleration could make it harder for the market to keep making new all-time highs. More on this below.


Figure: 1 MoM M2 Change

Comparing M2 and the CPI

Looking at a much longer historical perspective the chart below shows the YoY growth rate for each December dating back to 1960 and how it may impact the CPI. It also puts into context how extraordinary the last two years have been.

The current YoY 13.1% is behind only 2020 (24.8%), 1971 (13.4%), and 1976 (also 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

The chart above shows how far behind the Fed is on the inflation curve. They have never been this far behind in 60 years (the difference between black and blue lines). The Fed is currently 7.1% behind inflation. The next closest was when they were 3.6% behind in 1974.

More concerning is the delayed correlation between expansion in the money supply and inflation. This is particularly visible in the 1970s when two years of rapid money supply growth would be followed by 2+ years of rapid inflation (the correlation has fallen as the CPI has been re-engineered). In each case, not only did Money Supply slow in the subsequent years, but the Fed had rates above the rate of inflation. Neither of these two headwinds exists today to restrain inflation.

The table below shows a more detailed look at the current money supply.

Figure: 3 M2 Growth Rates

While the most recent month is below the 6-month, 1-year, and 3-year trend, 11.1% is still very rapid growth. As shown in the chart below, this is still greater than the average monthly growth rate in any month from 2010 to 2019.

Figure: 4 Average Monthly Growth Rates

Zooming into the weekly view shows the noisier data that is not seasonally adjusted by the Fed (the charts and table above are seasonally adjusted).

The most recent week available, ending Jan. 3, showed a slight dip of -$26.8B. That represented the first weekly drop in the money supply over a 10-week span.

Figure: 5 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.

The objective of this analysis is to normalize the choppy data and get a better sense of the general Money Supply trend. In the table below, decelerating trends are in red and accelerating trends in green. Money Supply growth on a 13-week annualized basis has now been accelerating for 16 weeks in a row. But is it enough?

Figure: 6 WoW Trailing 13-week Average Money Supply Growth

The plot below helps show the seasonality of the Money Supply and compare the current year to previous years. The range of the y axis has been capped at 25% so that the massive spike in 2020 up to 60%+ does not skew the graph.

As shown, the current year is now on par with 2020. Is this a new normal? Money Supply will have to keep growing at higher rates to keep a floor under the market.

Figure: 7 Yearly 13-week Overlay

Historical Perspective

The charts below are designed to put the current trends into a historical perspective. The orange bars represent annualized percentage change rather than the raw dollar amount. As can be seen, even the recent periods remain quite elevated compared to pre-Covid.

Figure: 8 M2 with Growth Rate

Taking a historical look at the 13-week annualized average also shows the unprecedented growth seen over the past 24 months. This chart overlays the log return of the S&P. Mr. Wenzel proposed that large drops in Money Supply could be a sign of stock market pullbacks.

His theory, derived from Murray Rothbard, states that when the market experiences a shrinking growth rate of Money Supply (or even negative) it can create liquidity issues in the stock market, leading to a sell-off. While not a perfect predictive tool, many of the dips in Money Supply precede market dips. Specifically, the major dips in 2002 and 2008 from 10% down to 0%.

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