Seasonally adjusted money supply decreased in April by $167 billion. As the chart below shows, this is the ninth consecutive monthly decline. This is also the second largest decline ever, behind only last month.
Figure 1: Monthly M2 change (seasonally adjusted)
Here are the unadjusted raw numbers that are slightly ahead of the adjusted numbers. The orange bar is aligned with the same time period as the orange bar above.
April came in with a decrease of $196 billion which is very close to the revised number. May only shows one week so far, but it’s already negative by $36 billion. At the same time last month, April was positive by $55 billion, so it’s possible May is preparing for another big drop.
Figure 2: Change of MoM M2 (not seasonally adjusted)
Looking at the seasonally adjusted numbers shows that Money supply decreased during the month by -9.2% y/y which is lower than the trend for both 6 months and 12 months (-7% and -4.6% respectively).
Figure 3 M2 growth rates
The average for March (pre-Covid) was 5.1%. The money supply has historically been increasing typically at this time of year but is now falling further into negative territory. This can be seen more clearly with the following dataset below: 13-Week Money Supply.
Figure 4 Average monthly growth rates
First, it is interesting to see the weekly raw data shown below. Negative drops are becoming larger and more frequent. This data is used to calculate the 13-week running money supply.
Figure 5 WoW M2 change
Money show “Wenzel” for 13 weeks
The late Robert Wenzel of the Journal of Economic Policy used a modified algorithm to track the money supply. He used an average of a 13-week sequential growth rate year on year as outlined in his book The Fed Flunks.
He specifically used the weekly data that was no seasonally. His analogy was that in order to know what to wear outside, he would want to know the current weather, not the temperatures averaged over the course of the year.
The goal of the 13-week average is to facilitate some spotty data without entering too much history that might blind someone to seeing what’s in front of them. The average growth rate for 13 weeks can be seen in the table below. Lagging trends in red and accelerated trends in green.
The 13-week average is now at a new all-time low of -7.2%. The growth rate slowed for 14 consecutive weeks and remained negative for 45 weeks. This kind of slowdown is absolutely unprecedented.
For almost a year now, I’ve been marking the huge drop in the money supply. So far, only cryptocurrency and a few regional banks have been hit, but there is no doubt that a storm is brewing.
This collapse in the money supply is much worse than what was seen in 2000 and 2008. With the market more reliant on cheap money now, it’s only a matter of time before something big happens.
Figure 6 F. Average money supply growth over 13 weeks
The chart below can put the current decline into perspective. Seasonally, this is when the money supply usually drops. If the historical trend continues, the 13-week money supply could drop another 3-6% before bottoming out in August. This will bring the negative rate to double digits!
Figure 7 Annual overlay of 13 weeks
behind the inflation curve
Incredibly, even with the money supply shrinking, the Federal Reserve still isn’t doing enough to solve the inflation problem. This is due to the amount of money created over the past few years. Undoing this money creation would require a further decline in the money supply for an extended period.
The Fed won’t make that long.
Figure 8 Annual change of M2 with CPI and Fed Funds
The charts below are designed to put current trends into historical perspective. The orange bars represent the annual percentage change rather than the raw dollar amount. The current deceleration can be clearly seen on the right side.
Despite the massive decrease in the money supply over recent months, it can still be contextualized against what happened in 2020 and 2021. There is no doubt that the current decrease in the money supply will not be able to remove the inflation generated during the pandemic. The drop would be enough to remove all support from the economy though.
Figure 9 M2 with growth rate
A historical look at the 13-week annual average also shows the current predicament. This chart overlays the return of the S&P 500 index. Mr. Wenzel suggested that large declines in the money supply could be a sign of a stock market downturn.
His theory, derived from Murray Rothbard, states that when the market experiences a contracting (or even negative) money supply growth rate, it can create liquidity problems in the stock market, leading to selling.
Although it is not a perfect predictive tool, many declines in the money supply precede market declines. Specifically, the main declines in 2002 and 2008 from +10% to 0%. The economy is now grappling with a growth rate peak of 63.7% in July 2020, crashing into deep negative rates just a few years later.
effects of this step will Feel sooner rather than later.
Please note that the chart only shows market data through May 1st to align with available M2 data.
Figure 10: 13-Week Annual M2 and S&P 500
Another consideration is the huge buildup in the reverse repo market at the Federal Reserve. This is an instrument that allows financial institutions to exchange cash for instruments on the Federal Reserve’s balance sheet.
The current reverse repo peaked at $2.55 trillion on December 30. This broke the previous record from September. Value usually tops out at the end of the quarter. Last March 31st, it had a value of $2.37 trillion which was a bit shy of the December record. The value is currently $2.27 billion.
Figure 11: Federal reverse repurchase agreements
I may sound like a broken record, but the Fed has already done more than enough to crash the economy…it’s just a waiting game at this point. There is no way an economy addicted to cheap money, which also received a huge additional dose in 2020 (see Figure 5 above), can survive as the money supply continues to contract at current rates. Economy Need More cheap money to keep going.
It takes time for these events to pass, but it also takes time for any bailout policy to have its effect. The Fed is about to learn this firsthand. Once they are forced to cut, they will find out that all their politics are delaying. The cuts will do little to mitigate the coming crisis. This will force them to go to the other extreme and rekindle the flames of inflation.
You better prepare before that happens!
Data source: M2 as well as WM2NS and RRPONTSYD series. Historical data changes over time, so numbers of future articles may not match exactly. M1 is not used because the calculation was recently changed and dated to March 2020, distorting the graph.
Data updated: Monthly on the fourth Tuesday of the month over a 3-week delay
Latest data: May 01, 2023
Interactive charts and graphs can always be found on the Exploring Finance: US Debt Analysis dashboard
Editor’s note: The bullet summary for this article was selected by a search for Alpha Editors.