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Money Supply Growth Accelerates

Ekosj
@Ekosj
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I've been following developments in the Money Supply and the impact on inflation/inflation expectations. It appears that back in 2022, the Fed slammed the brakes on the Covid-era growth of the money supply to combat rampant inflation. And for a bit over a year, they were actually draining the massive excess of dollars from the system. That ended in October 2023. See, one of the assets whose price had been inflated by that waterfall of cash was the stock market. The Fed's reduction of the money supply started to negatively impact the market, and, by month-end of October, enough was enough. They started increasing the money supply again. Based on pre-pandemic growth rates in money supply, there continues to be about 2 Trillion dollars more in the system than we really need.

The market's decline stopped, and we went into the election year with the market's advancing again. But there is no free lunch. Milton Friedman assures us that inflation is always a monetary phenomenon. How to keep the resurgent money supply from re-kindling inflation? The Fed used interest rates. They kept rates elevated even though everyone and their brother demanded lower rates... especially the Biden Administration. That ended in September with a 50 basis point ( 1/2%) rate cut.

So now we have both a growing money supply and reduced rates. And the money supply numbers just released on the 22nd of October indicate that the growth in money supply is increasing.

That whiff of something in the air isn't teen spirit... or Halloween brimstone... it's inflation fears. Treasury yields are up at their highest levels since July. Mortgage rates remain high. And it's started to negatively impact the market. This was not a good week for most 401Ks with the DOW down about 1200 points.

Hopefully things will smooth out after the election. But for the moment... hang on to your hats (and wallets)

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Discussion (24)

  • Steve Fast@SteveFast

    The Fed was supposed to control the money supply. But it too has suffered regulatory capture. Now the Fed fears how the markets will react to its moves. So the market controls the Fed, which controls the money supply.

    Or you could look at it as the Fed being supposed to dispense opium in measured quantities to the addicts to keep things from getting out of control. But now the Fed is scared of the addicts, so it dispenses as much opium as they tell it to.

  • Mark Camp@MarkCamp

    A monetary shock* causes a temporary, self-correcting disequilibrium in the market.

    (*A monetary shock is a change external to the market in the supply or demand for money balances.)

    At the moment it occurs, the sum of the cash balances of every actor is more (in the case of an externally created increase, or less in the case of a decrease) than the sum of all the desired individual cash balances.

    In the case of a positive external shock (like the Fed suddenly creating 2T $) some individuals (namely the Fed’s 20-odd anointed Primary Dealers in this case) suddenly have more cash than they desire and will act to relieve their subjective dissatisfaction by lending and spending. Some others for the moment are unaffected and happy and will take no corrective action, and some will be unaffected and dissatisfied and their immediate goal will be to reduce their nominal balances, as it was before the shock.

    But the net effect is a temporary collective desire to reduce money balances.

    Markets immediately react to restore equilibrium by adjusting prices and interest rates (the prices of credit) with the adjustments spreading out from the locus of the shock.

    Once the prices have adjusted throughout the economy, the new money supply is once again just the right amount. Except of course for the changes that are constantly occurring, outside of the shock.

    As Mises explained, any amount of money delivers all the services of money. If the Fed reduced the supply to 1 cent, or increased it to 1 followed by 100 zero units, once prices adjusted on their own, the money supply would be just what we need.

    Ekosj (View Post):
    Based on pre-pandemic growth rates in money supply, there continues to be about 2 Trillion dollars more in the system than we really need.

    For the government to intervene again and deliver another distorting, wealth-destroying shock, because of some irrational desire to restore the trend line of money growth rate, would be foolish. There is absolutely no basis for it in economics.

  • RufusRJones@RufusRJones
    ReplyingtoSteve Fast

    Steve Fast (View Comment):

    The Fed was supposed to control the money supply. But it too has suffered regulatory capture. Now the Fed fears how the markets will react to its moves. So the market controls the Fed, which controls the money supply.

    Or you could look at it as the Fed being supposed to dispense opium in measured quantities to the addicts to keep things from getting out of control. But now the Fed is scared of the addicts, so it dispenses as much opium as they tell it to.

    You nailed it.

    I would love to hear the local inflationist explain why you're wrong. lol

    Inflation is bad and we should have stopped the second the Soviet Union fell. The way they measure it is silly except it's actually damn serious.

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