Money Supply Growth Fell to a 104-Month Low in May

By: Ryan McMaken

Last month, the money supply growth rate in the United States fell to a 104-month low, rising by 5.91 percent. This is the lowest growth rate recorded since July 2008 when the growth rate was 5.24 percent.

Given the imprecise nature of these estimates, however, it is fair to say that the rate of growth is essentially unchanged since March, and for the past three months, money supply growth has been at eight-year lows. 

In March, we reported that money supply growth had fallen to a 103-month low. In April, the growth rate increased slightly to 6 percent, but fell again in May. 

The M2 measure also showed a downward turn in recent months, although not to the same extent as the “Austrian” measure. In May, however, M2 growth had moderated to the point of matching our money-supply growth measure with both now being at 5.9 percent. 

Historically, drops in money supply measures tend to accompany worsening economic conditions, as was the case in the lead up to the 2008 financial crisis and prior to the dot-com bust. The Austrian measure tends to be more sensitive than M2 to changes in these conditions. 

In recent years, money supply has been affected by swings in total treasury deposits at the fed (for more, see here), and by declining loan activity. Indeed, looking at industrial and commercial loan activity, measured year over year, we see that growth in loan activity has dropped back to levels similar to those experienced in the recessionary period of 2009. 

The Austrian money supply measure (AMS) used here is a measure of the money supply pioneered by Murray Rothbard and Joseph Salerno and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on this metric and its growth.

The “Austrian” 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). 

Given a large number of confused comments by readers to these money-supply articles in the past, it may be necessary to clearly state that a measure of the money supply is not a measure of price inflation, and movement in money supply growth should not be interpreted as an index of price changes in the general economy. As Frank Shostak explained in a recent article: 

[I]ncreases in the money supply need not always to be followed by general increases in prices. Prices are determined by both real and monetary factors. Consequently, it can occur that if the real factors are pulling things in an opposite direction to monetary factors, no visible change in prices might take place. In other words, while money growth is buoyant, prices might display low increases.

… If the growth rate of money is 5% and the growth rate of goods is also 5% then there will not be any increase in the prices of goods. If one were to follow that inflation is the increase in the CPI then one will conclude that despite the increase in money supply by 5% inflation is 0%.

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