M2 money supply is shrinking

[FIREd_2015]

Interesting article about M2 and the possible effect it may have on the economy.

"...Declining money supply in combination with above-average inflation is generally bad news for the U.S. economy. If the cost for goods and services keeps climbing at an above-average pace, and there are fewer dollars and coins in circulation to pay for these goods and services, something typically breaks, leading to a period of deflation and an economic downturn..."

https://www.fool.com/investing/2023/04/30/money-supply-90-years-signal-big-move-for-stocks/

Another article in Reuters

https://www.reuters.com/markets/funds/us-money-supply-falling-fastest-rate-since-1930s-2023-03-29/

 

[lawman]

I guess I'm too dumb to understand why shrinking money supply would fuel inflation..Seems to me like it would do just the opposite and that is cool an overheated economy by slowing growth and lower the rate of inflation by having fewer dollars chasing goods thereby making a dollar more valuable..

 

[plex]

It isn't that the shrinking money supply fuels inflation, it is meant to do the exact opposite. But the economy tends to be designed to go in only one direction.

Looking at history, the money supply has gone negative in the past before, notably it last occurred in the Great Depression, and some of the depressions in the 1800's that preceded it. It is a phenomenon that we haven't seen in awhile, but it starts with a huge spike in inflation, the money supply going negative, then a brief spike of deflation, along with 12 to 25%+ unemployment.

I believe the Fed, based on their statements, intends to re-stimulate the economy at that point to keep the deflationary period extra short, and lessen the recession/depression period that comes with it.

 

[Markola]

Both articles focus on the RATE of M2 contraction lately but ignore just how much money was printed (inflated) in recent years. Zoom out. Is it simply a coincidence that inflation spiked precisely when M2 mushroomed in 2020?

 

[Montecfo]

The money supply MUST contract if we are going to get back to normal economic footing. This is just the flipside of all the recent money supply growth.

YES, there is risk to the economy. Same reason I believe the Fed should pause and let the economy digest the massive runup in interest rates over the past year plus.

And same reason we should not be surprised by recession and further market downdraft. This would be normal in these conditions.

 

[lawman]

Is it simply a coincidence that inflation spiked precisely when M2 mushroomed in 2020?

 

[Markola]

^^^^^ That’s what I think is obvious but some others, even on the Forum, argue that the correlation is difficult to prove that shoving vast sums of conjured cash into circulation (monetary inflation) yields price appreciation (inflation of goods, services and, especially, financial assets).

Pick something simple to compare, like the price of eggs over time. Had M2 stayed flat over the decades, would egg (and other) prices have stayed flat? Keynesians say the economy would have stayed flat, too, while Austrian School economists, gold bugs and hard money advocates argue that monetary inflation through endless money printing encourages public and private debt, risky investing to keep up with inflation and is corrosive to savings and society as a whole.

 

[Chuckanut]

Given avian flu problems I don’t think egg prices prove much of anything in regards to the cause of inflation. But I do get your point.

 

[lawman]

"Keynesians say the economy would have stayed flat, too, while Austrian School economists, gold bugs and hard money advocates argue that monetary inflation through endless money printing encourages public and private debt, risky investing to keep up with inflation and is corrosive to savings and society as a whole."

Can't both be true?

 

[MichealKnight]

There is a great, robust, optimistic economy - that continues to devise things to flourish for itself. I will refrain from describing and naming what that is....

Then there is the economy of the plurality, whose American dream is, simple put:
"I paid my bills this month".

 

[Exchme]

For a great explanation, I encourage you to visit scottgrannis.blogspot.com (retired economist). He shows how the M2 growth leads inflation by about a year and so he predicted the 2021-22 bout of inflation due to the COVID related spike in the M2 and he has lately been calling for the FED to stop raising rates as the M2 is rapidly falling back to its long term trend.

 

[copyright1997reloaded]

1933 here we come?