The money supply growth rate rose again in January, climbing to a 36-month high. The last time the growth rate was higher was during February of 2017, when the growth rate was 7.9 percent.
During January 2020, year-over-year (YOY) growth in the money supply was at 6.32 percent. That’s up from December’s rate of 5.53 percent, and up from January 2019’s rate of 3.38 percent. The increase in money supply growth in January represents a sizable reversal of the trend we saw during most of 2019. In August, the growth rate hit a 120-month low, falling to the lowest growth rates we’d seen since 2007. If the trend continues, growth rates will need only a few months to reach the heights reached from 2009 to 2016.
The money supply metric used here—the “true” or Rothbard-Salerno money supply measure (TMS)—is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure of money supply fluctuations than M2. The Mises Institute now offers regular updates on this metric and its growth. This measure of the money supply differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits, traveler’s checks, and retail money funds).
The M2 growth rate also increased in January, growing 6.98 percent compared to December’s growth rate of 6.76 percent. M2 grew 4.16 percent during January of last year. The M2 growth rate had fallen considerably from late 2016 to late 2018, but has been growing again in recent months.
Money supply growth can often be a helpful measure of economic activity. During periods of economic boom, money supply tends to grow quickly as banks make more loans. Recessions, on the other hand, tend to be preceded by periods of slowdown in rates of money supply growth. However, money supply growth tends to grow out of its low-growth trough before the onset of recession. If the US enters recession or a significant slowdown during the next two years, this dynamic would appear to still hold.
Moreover, periods preceding recessions often show a growing gap between M2 growth and TMS growth. We saw this in 2006–7 and in 2000–1. The gap between M2 and TMS narrowed considerably from 2011 through 2015, but has widened since then. Even with recent jumps in TMS growth levels, M2 is still consistently growing faster than the TMS.
The overall M2 total money supply in January was $15.4 trillion, and the TMS total was $14.2 trillion.
The growth in the money supply is at least in part tied to the fact the Federal Reserve grew more accommodative in late 2019. The Federal Open Market Committee (FOMC) has cut the target fed funds rate more than once in recent months, but the big change was in the Fed’s late-2019 moves to increase its balance sheet again. Since late August, the Fed added more than $400 billion to its total assets in an effort to provide a “blast of cash” for the repo market. The Fed apparently has concluded that the market requires additional liquidity and has acted accordingly. Fed assets are now headed back to former peak levels, although totals have flattened since late January.
Another change partially driving the increase in the TMS is the large increase in “Treasury deposits at the Fed” that we’ve seen in recent months. In January, this sum reached a 39-month high of $387 billion. The last time Treasury deposits reached this level was during November 2016, when deposits hit $400 billion.