The U.S. money supply, specifically the M2 money supply, is experiencing a decline for the first time since the Great Depression. In April 2022, M2 peaked at an all-time high of $21.722 trillion but has since declined to $20.867 trillion in April 2024, a decrease of nearly $855 billion or 3.94% [c62e1658]. This decline in the money supply suggests a weakening U.S. economy and a potential recession. Historically, whenever M2 has declined by at least 2% from its high, it has correlated with depressions and double-digit unemployment rates. However, the Federal Reserve and federal government are better equipped to handle economic turbulence now compared to a century ago. Patient investors have the advantage of time as an undefeated ally, as economic expansions tend to last longer than recessions and bull markets tend to last longer than bear markets [ac3de599] [f67a4aa4].
The decline in the U.S. money supply, specifically the M2 money supply, has recently declined for the first time since the Great Depression. This decline, which has lasted for the past fifteen months, is the largest contraction in the money supply since the Great Depression [dee33d2a] [02c6fc59]. The decline in the money supply is a concerning indicator of economic activity and can be a precursor to recessions. The recent rapid decline in money supply growth raises red flags for economic growth and employment. Since its peak in April 2022, the money supply has fallen by approximately $2.8 trillion [dee33d2a]. Despite the decline in the money supply, there have been no signs of deflation in consumer prices or asset prices, as CPI inflation continues to rise [dee33d2a]. Calls for more easy money policies persist, but some argue that allowing for a falling money supply and the popping of economic bubbles is necessary to put the economy on a more stable long-term path [dee33d2a] [f67a4aa4].
The decline in the U.S. money supply has coincided with the disappearance of full-time jobs, further exacerbating concerns about economic growth. The decline in full-time employment is a significant challenge for the U.S. economy, as it affects consumer spending and overall economic stability [dee33d2a]. The combination of a shrinking money supply and the loss of full-time jobs poses serious challenges for economic recovery and growth [dee33d2a].
While the decline in the money supply and full-time jobs raises concerns about the state of the U.S. economy, it is important to note that the impact of these factors on the stock market is not yet clear. The stock market has shown resilience in the face of economic challenges in the past, and historical data suggests that long-term investors tend to succeed despite short-term market fluctuations [dee33d2a] [02c6fc59] [f67a4aa4]. Recessions have historically been short-lived, with most resolving in under 12 months, and periods of economic growth following recessions have often led to extended bull markets. While predictive indicators like the M2 money supply can offer insights into short-term market trends, historical evidence suggests a longer-term upward trajectory for the Dow Jones, S&P 500, and Nasdaq Composite, along with the U.S. economy. Investors should maintain a diversified and patient approach when navigating the stock market [02c6fc59] [f67a4aa4].
Some economists are predicting doom and gloom for the U.S. and global economy, but their reasoning is flawed and lacks constructive policy advice. One example is Dan Lacalle, who criticizes the Federal Reserve for deliberately bringing back inflation without offering alternative solutions. Lacalle claims that the increase in M2 money supply is the reason why inflation has not fallen further, but fails to explain how monetary expansion causes inflation. In reality, inflation has remained relatively stable despite the increase in money supply. Lacalle also suggests that the Federal Reserve is on the verge of returning to its 'Quantitative Easing' program, but this is not supported by evidence. The increase in M2 money supply is a result of the Fed's efforts to prevent an interest-rate shock in the market for U.S. government debt. The U.S. banking system is heavily exposed to Treasury debt, and if the Fed were to abandon the market, it would lead to insolvency and a collapse of the U.S. economy. The Fed would then have to finance a bank bailout program by printing inflation-inducing money, which is what Lacalle wanted to avoid in the first place [440a1799].
According to JPMorgan, the United States' money supply has contracted by approximately $200 billion in the current quarter. This follows a period of expansion where the money supply increased by $1.3 trillion from April 2023 to March 2024. JPMorgan had previously indicated that the US liquidity backdrop would become less supportive starting from the second quarter of 2024. The contraction in the money supply aligns with JPMorgan's expectations of a mildly negative trajectory for the remainder of the year. The recent contraction represents a shift from the previous 11 months of expansion, largely due to liquidity injections from a reduction in the Federal Reserve's reverse repo facility. JPMorgan identifies three phases in the trajectory of US liquidity: a mildly contracting phase from 2022 to April 2023, a rapid expansion from April 2023 to March 2024, and a return to a mildly contracting phase from the current quarter onward [f5f6ad41].
The U.S. money supply, specifically the M2 money supply, is experiencing a decline of nearly $855 billion, or 3.94%, in two years, which is the first time it has backed off more than 2% from its all-time high since the Great Depression [ac3de599]. This decline in the money supply has historically correlated with depressions and double-digit unemployment rates. While the Federal Reserve and federal government are better equipped to handle economic turbulence now than in the past, it suggests a weakening U.S. economy in the near future. However, investors with a long-term mindset can take comfort in the fact that economic expansions tend to last longer than recessions, and bull markets typically last longer than bear markets. Patient investors have time as an ally in their investment strategy.