Has money supply growth stalled in the United States? After initiating an unprecedented and extraordinary money-printing scheme, the Federal Reserve’s money printer go brrr campaign has taken a breather, despite continually bailing out Wall Street and monetizing the debt. The recent snail’s pace expansion in the money stock has had an impact on the financial markets, with some of the leading stock indexes hitting the snooze button. Imagine what would happen if the U.S. central bank eventually tapered its aggression and removed the training wheels: Bedlam on Wall Street.
Money Supply Growth Stalls?
At the height of the coronacrisis, the Eccles Building printed a few trillion dollars and pumped the freshly created cash into the financial system to ensure ample liquidity – at home and abroad. With Fed Chair Jerome Powell promising to buy anything and everything to support the economic rebound, the printing press was supposed to work overtime. And then the United States welcomed the summer solstice.
Since the middle of June, money supply growth has slowed down. In the final week of July, the M2 money stock even contracted. This might be the most surprising development in the Fed’s astronomical expansionary approach to monetary policy, but you should not anticipate it to be permanent. The Fed plans to engage in more inflation, potentially raising the target rate to around 4%.
But while inflation can affect our everyday lives, the supply is having an impact on the equities arena. As Liberty Nation reported last month, there was a correlation between the central bank’s surprise dip in the balance sheet and the temporary slump in the S&P 500. The event was comparable to when the Fed had its taper tantrum a few years ago and caused a steep drop in the stock market. This time, Powell giving the printing presses a much-needed rest has affected your grandfather’s index. For example, the Dow Jones Industrial Average’s tepid performance since June has been trading sideways.
Why Does Money Supply Matter?
Legendary economist Ludwig von Mises wrote in 1952's Monetary Reconstruction, "The first step must be a radical and unconditional abandonment of any further inflation. The total amount of dollar bills, whatever their name or legal characteristic may be, must not be increased by further issuance." But why such an urgent and dire warning about increasing the supply of money in the economy?
The godfather of the Austrian School of Economics pontificated that inflation – the classical definition is the artificial boost in the money supply – was essentially the root of all evil. According to Mises, the economic concept produces malinvestment, creates recessions and depressions, and leads to diminished freedom since economic crises typically lead to cries for state interventions.
In this regard, however, changes in the quantity of money affect the business cycle and market conditions. When there is an injection of cheap money, and those closest to the vaults of the Eccles Building get first dibs – usually finance and tech – stock exchanges witness immense asset inflation, comparable to what we have seen since the 2008-2009 Great Recession. Who can forget about the symptom of moral hazards?
In the 19th century, economist Jean-Baptiste Say came up with Say’s Law, which tells us that the total supply of goods and services will be equal to the aggregate demand for goods and services. Or, as John Maynard Keynes famously wrote, “Supply creates its own demand.” When the Fed prints vast sums of money, it inevitably produces demand in the financial markets, leading to investors accepting this liquidity and then spending it on equities. This, of course, spawns distortions of fundamentals and throws the entire economy out of order, which then requires a recession to restore that order.
There is a lot of debate as to whether stock valuations, especially in today’s world, are justified or not. Instead of engaging in an academic debate, perhaps your time would be better utilized by monitoring the St. Louis Federal Reserve Economic Data (FRED) series and paying attention to the stock tickers.
Vindication of the Austrians
The Fed is about to engage in an astounding inflationary blitzkrieg to rescue the world’s largest economy from the doldrums of corrections and contractions. The program, which is expected to be officially announced at the September Federal Open Market Committee (FOMC) meeting, will be bad news for the U.S. dollar and good news for equities – and gold. We live in a time when the talking heads on Bloomberg and CNBC concede how much stocks depend on the Fed, a fact that had been dismissed as nothing more than poppycock. The Austrians are being vindicated – and rewarded – in real-time.
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Read more from Andrew Moran.
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