U.S. money printing machine stopped turning, the first time in 70 years!

In the past two days, checking the M2 data released by the Federal Reserve, I found a surprising piece of information.

(a) As of December 2022, the supply of broad money M2 in US dollars was 21.21 trillion Yuan.

Corresponding to December 2021, the dollar broad money M2 supply was $21.49 trillion.

Instead of growing over the past year, the dollar M2 figure has fallen by $280 billion or -1.31%.

As I just discussed earlier, the RMB M2 data skyrocketed by 28.14 trillion in the past year, while the USD M2 data, actually declined!

“28 trillion Yuan added, why didn’t that translate into economic growth?”

The U.S. money printing machine stopped spinning, which is really groundbreaking. Because, this is also the first time since 1959, when the Federal Reserve counted dollar M2 data, that data has seen an annual decline.

When you think about it, just 20 months ago, the annualized growth rate of dollar M2 was still as high as more than 20%, which was still near the highest growth rate of M2 in the United States since the data was recorded; it was like a lifetime ago.

It took just under 2 years to go from the highest growth rate in history to the lowest growth rate in history.

Slightly different from the People’s Bank of China’s M-series statistics, the statistics for U.S. dollar currency issuance are as follows.

M1= cash outside the U.S. Treasury, Federal Reserve banks and deposit money institutions + commercial bank demand deposits + traveler’s checks + other immediately payable deposits.

M2= M1 + savings deposits + small time deposits + retail shares of money market funds.

M3 = M2 + Eurodollars + money market funds held by institutions + large time deposits.

……

Since March 2006, the Federal Reserve no longer publishes M3 data on the grounds that M3 does not reflect more information than M2. Because M3 data are no longer published and M2 covers essentially all deposits within the US, it is usually considered a broad money indicator for the US.

As I have emphasized before, in a contemporary credit-money society, every piece of money, at birth, carries debt and interest, so the broad money growth rate of any economy cannot be lower than the overall borrowing rate of the economy in the long run, otherwise the economy will not be sustainable.

According to statistics, the annualized average growth rate of dollar M2 over the past 63 years is 7.1%, with most of the time the growth rate is above 5%. In comparison, the average yield of the 10-year U.S. Treasury bond over the past 63 years is 5.8%, which is significantly lower than the long-term growth rate of M2.

Data from 1959 to date do not show negative growth in M2. However, if we go back further to the period prior to 1959, the U.S. has actually experienced negative broad money growth.

According to Milton Friedman’s A Monetary History of the United States, co-authored with Anna Jacobson Schwartz, excluding those short-term negative growth periods of one or two months, there were four periods of broad money contraction of more than three months in the U.S. from 1914 to 1958, after the establishment of the Federal Reserve, including.

March 1921-August 1922

September 1929-January 1935

November 1937-February 1939

March 1948-July 1949

Under the credit-money system, since every new money comes with interest and debt, the credit contraction brought about by the normalization of monetary policy after the super-high growth rate of the monetary flood almost inevitably brings about a super-low growth rate of broad money, a process that can be seen, in a way, as the stretching and contraction of a spring.

The ultra-high growth rate of broad money in 1916-1919, which brought about a sharp contraction 2 years later in 1921-1922

Ultra-high rate of broad money growth in 1941-1945, which brought about a sharp contraction 3 years later in 1948-1949

The ultra-high rate of broad money growth in 2020-2021, coupled with the Fed’s rapid rate hikes, brought about the current sharp contraction.

It was the Fed’s unrestricted QE, which opened in March 2020, that brought about the ultra-high M2 growth rate from the second half of 2020 to the first half of 2021, and it is this historically high growth rate that, after the Fed’s rapid rate hike, brought about this current 60+ year low growth rate.

What are the possible effects of the Fed’s money printing machine stopping this time?

The first possible impact is that the U.S. inflation rate will fall rapidly, and the magnitude and speed of its decline will likely exceed the Fed’s estimates.

According to Friedman, inflation is a monetary phenomenon wherever and whenever it occurs, and according to his further research, the growth rate of broad money issuance, is about 12-24 months ahead of inflation.

A comparison of dollar M2 growth rates and U.S. CPI inflation over the past few decades is broadly consistent with this pattern.

Now, when the U.S. broad money shows a negative growth rate not seen in 70 years, then it also means that the current high inflation in the U.S. will most likely fall rapidly in the coming year.

The past year or so quite hawkish Federal Reserve St. Louis Fed President James Bullard has said that.

“The M2 money supply exploded during the epidemic and correctly predicted that we would see inflation. Now, the growth of the M2 money supply has declined. This portends a receding inflation.”

More importantly, the history of the past 100 years or so proves that once this contraction in broad money occurs, it means that a recession will follow.

The second possible effect is the probability that the U.S. economy will fall into recession in 2023.

According to the previous narrative, there have been four significant contractions of U.S. broad money in the past 100 years of history, and all four of these contractions were invariably accompanied by subsequent recessions: the 1921 recession, the 1929-1934 Great Depression, the 1937-1938 recession, and the 1948-1949 recession.

Of these, the Great Depression of 1929-1934 – both in terms of duration and magnitude of contraction – was the most severe recession in U.S. history.

A third possible effect is that the Fed, under the shadow of rapidly falling inflation and recession, could stop raising interest rates early, possibly even cutting them in the second half of 2023.

If M2 contracts, bringing about an unexpected drop in inflation and hinting at an approaching recession, there would be no need for the Fed to continue raising rates at all, and it would even open the way for a rate cut when the recession arrives.

Interestingly, both the decline in medium- and long-term Treasury yields, or the recent performance of U.S. stocks, seem to reflect this, in the previous phase of the Fed continued to release hawkish rhetoric, that high interest rates will continue for quite some time, but the market did not pay any attention to the Fed’s warnings – from U.S. stocks to gold, have recently made from U.S. stocks to gold, have made considerable gains recently.

In a showdown between the market and the Fed, the stoppage of money printing could tip the scales in favor of the market.

 

 

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