Money Supply Should Grow In-Line with Economy

Nov 2, 2022 | Macro Insights, No Bull Economics

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Money growth (as measured by M2) is important to feed a growing economy. In fact, we can see from this chart that the Fed usually increases money growth during recessions (indicated by the gray-shaded areas) as a higher level of liquidity is considered beneficial during times of economic stress. Added liquidity is particularly important to consumers and banks that typically suffer from a higher probability of defaults driven by recessions. This practice by the Fed reflects a consensus that a contraction in the money supply is what instigated the Great Depression. In the end, the goal is not to set off deflation which provides consumers an incentive to hold off their purchases because of expectations that future prices will be lower.

So, why is it that we currently see such a sharp decline in M2? This question is especially relevant given that there is good reason to believe that we are already in a recession (notably, McDonald’s management says their base case for the economy is a recession). Just like our economy would benefit from an increased supply of energy & food, right now we will also benefit from positive M2 growth.  

Money Supply Graph
M2 & Recession Graph

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