Money Supply Growth Slows Enough to Pop the Everything Bubble but Not Enough to Cure Inflation

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by Peter Schiff, Schiff Gold:

According to the seasonally adjusted data, M2 increased by $23B in May. This was the smallest monthly increase in M2 since the start of Covid aside from the contraction last month, which was the first monthly reduction in adjusted M2 in 12 years!

Despite extremely small growth, money supply is still expanding which is going to make it very hard for inflation to get back to 2%. Even though inflation is unlikely to come down, the stock market and economy are built on a rapidly expanding money supply. With such sluggish growth, it will be very challenging for the stock market to hit new highs and the economy to avoid recession.

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Figure: 1 MoM M2 Change (Seasonally Adjusted)

The chart below shows non-seasonally adjusted money supply. The current slowdown can be seen very clearly when compared to the growth since Covid. Three of the last six months have seen reductions in the money supply. This is clearly not enough to reverse the massive increases in the money supply that took place in 2020 and 2021.

Figure: 2 MoM M2 Change (Non-Seasonally Adjusted)

The table below shows this slowdown more clearly. Over the past three years, M2 growth has averaged 14.1% annualized. In the past year, that has fallen to 6.5%, dipping to 3.9% over the last 6 months, and falling to 1.3% in the most recent month. This is a dramatic slowdown.

Figure: 3 M2 Growth Rates

When looking at the average monthly growth rate by month before Covid, May historically expands at an annualized 6.3%. This compares to 1.3% for the current month.

Figure: 4 Average Monthly Growth Rates

The Fed only offers weekly data that is not seasonally adjusted. The chart below shows that May probably avoided being negative by a $106B expansion in the most recent week.

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. His analogy was that in order to know what to wear outside, he wants to know the current weather, not temperatures that have been averaged throughout the year.

The objective of the 13-week average is to smooth some of the choppy data without bringing in too much history that could blind someone from seeing what’s in front of them. The 13-week average growth rate can be seen in the table below. Decelerating trends are in red and accelerating trends in green.

Growth has now reached 3.02% which is the lowest reading in more than 60 weeks and is the 19th straight week of decelerating money supply.

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

The plot below helps show the seasonality of the Money Supply and compares the current year to previous years. It shows the current trajectory moving down quite steeply. Money supply growth is now at the slowest growth for this time of year going back to at least 2013.

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