The supply of US dollars accelerated during late 2016 with October’s year-over-year percentage increase in the money supply hitting a 46-month high of 11.2 percent.
The YOY growth rate fell slightly to 10.3 percent in November.
This comes after a long period of relatively sedate growth in the money supply through most of 2013, 2014 and 2015.
The recent surge in money supply growth suggests that the likelihood of an economic contraction in the near future has been reduced, with the next downturn being pushed out further into the future.
In recent decades, money supply growth has slowed significantly prior to — and during — recessionary periods, as can be seen prior to 2001 and 2008:
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.1
Since 2014, money supply growth has ranged from about 7 percent to 8.5 percent. In October of last year, money supply growth hit a seven-year low of 6.8 percent, although this proved not to be an indication of any new trend. Overall, until recently, money supply growth had been quite stable over the past two years.
In July, however, money supply growth hit a 36-month high, reaching a year-over-year growth rate of 8.6 percent. This growth rate has since increased, reaching rates near or above ten percent in September, October, and November 2016.
Under these conditions, it is more likely we will — in the short term — continue to see asset price inflation, including inflation in real estate and in the stock market.
The fact that we saw supply growth being to accelerate in September and October makes the surge in stock prices in November less surprising.
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).
The fact that we see higher growth rates in AMS than in M2 is being driven partly by historically large increases in treasury deposits at the Fed. The federal government has become increasingly liquid in recent years, with unusually large amounts of spend-ready dollars available. Looking at total deposits at the fed, for example, we can see that totals are now well beyond what has been seen in the past:
As of November 2016, there were 394 billion dollars in deposits at the Fed, which is an increase of 194 percent over November 2015. October 2016’s growth rate in treasury deposits reached an 84-month high at 547 percent. The last time deposits grew by as large an amount was during 2009 in the most active days of Fed stimulus following the 2008 financial crisis.