Analysis Shows US Money Supply Declining for Fifteenth Consecutive Month Amid Disappearing Full-Time Jobs

The growth of the money supply saw another decline in January, remaining deeply negative after turning negative in November 2022 for the first time in twenty-eight years. This decline in January continues a steep downward trend from the unprecedented highs experienced over the past three years.

Since April 2021, the growth of the money supply has decelerated rapidly, and since late 2022, we have witnessed repeated contractions in the money supply, year over year. The last time the year-over-year (YOY) change in the money supply slipped into negative territory was in November 1994. At that time, negative growth persisted for fifteen months before turning positive again in January 1996.

For the past fifteen months, the growth of the money supply has remained negative. In January 2024, the downturn continued with a YOY growth in the money supply at -6.13 percent. This marks a slight increase from December's rate of decline, which was -7.40 percent, and was lower than January 2023's rate of -5.09 percent. With negative growth persisting for over a year and consistently below negative five percent for the past thirteen months, the contraction in the money supply is the most significant since the Great Depression. Prior to this period, there had been no instance in at least sixty years where the money supply fell by more than 6 percent (YOY) in any month.

The metric used here for the money supply—the "true," or Rothbard-Salerno, money supply measure (TMS)—was developed by Murray Rothbard and Joseph Salerno and is designed to offer a better measure of money supply fluctuations than M2. In recent months, M2 growth rates have followed a similar trajectory to TMS growth rates, although TMS has experienced a faster decline than M2. In January 2024, the M2 growth rate was -1.94 percent, down from December's growth rate of -2.47 percent. January 2024's growth rate was also lower than January 2023's rate of -1.61 percent.

The growth of the money supply is often a useful measure of economic activity and can indicate impending recessions. During periods of economic expansion, the money supply tends to grow rapidly as commercial banks increase lending. Conversely, recessions are typically preceded by a slowdown in the rate of money supply growth.

It should be noted that a recession does not necessarily require the money supply to contract. As demonstrated by Ludwig von Mises, recessions are often preceded by a mere deceleration in the growth of the money supply. However, the recent dip into negative territory illustrates the significant decline in money supply growth, which generally signals challenges for economic growth and employment.

The fact that the money supply is shrinking at all is notable because in modern times, the money supply rarely decreases. Since the peak in April 2022, the money supply has fallen by approximately $2.8 trillion (or 13.00 percent). Proportionally, this decline in the money supply since 2022 is the most substantial since the Depression. In spite of this recent decline, the trend in money supply remains well above the levels observed during the twenty-year period from 1989 to 2009. To return to this trend, the money supply would need to decrease by another $3 trillion or so—or 15 percent. Additionally, as of January, the total money supply was still up 32.9 percent (or $4.6 trillion) since January 2020.

Since 2009, the TMS money supply has increased by more than 180 percent, while M2 has grown by 145 percent in the same period. Out of the current money supply of $18.9 trillion, $4.6 trillion—or 24 percent—has been created since January 2020. Since 2009, $12.1 trillion of the current money supply has been created. Nearly two-thirds of the total existing money supply has been created in just the past thirteen years.

Despite these recent drops in the money supply, there has been no indication of deflation in consumer or asset prices. Consumer Price Index (CPI) inflation continues to rise, with no reversal of the 20 percent surge in prices since 2020. According to February's CPI report, CPI inflation accelerated for the second consecutive month. Given that the money supply has stabilized at a post-covid plateau, coupled with ongoing growth in CPI inflation, it is evident that the so-called "quantitative tightening" embraced by the central bank over the past year has not been sufficient to rein in the money supply or CPI inflation.

Nevertheless, calls for more accommodative monetary policies persist from Wall Street and Washington. The regime's dependence on easy access to newly created dollars is evident, as a 20-percent surge in CPI and an additional three to six trillion dollars injected into the economy over the past four years have not been enough to satisfy the demands of Washington spenders or to keep interest rates low for the dominant zombie companies in the economic landscape.

This situation did not arise by chance, and ordinary people are now bearing the brunt of a decade of loose monetary policies advocated by Wall Street and the profligate spending in Washington. The only way to put the economy on a more stable long-term trajectory is for the Fed to cease intervening by continuously injecting liquidity into the regime and its allies. This would entail a return to a declining money supply and the deflation of economic bubbles. However, it also lays the groundwork for a genuine economy—one not built on perpetual bubbles but rather on saving and investment, made possible by naturally determined interest rates and sound money.