Why You Can't Afford to Ignore "The Money Supply"

Welcome to Chart of the Day. I'm Robert Folsom.

Why You Can't Afford to Ignore "The Money Supply"

Here's a trendline you may not recognize, yet its relevance will be quickly become ... all-too-clear.

As financial charts go, this timeline is very long-term -- from 1868 thru March 2023. That's the 'when.' As for the 'what,' this graph shows the M2 annual growth rate.

What the heck is 'M2'? Well it's the most common measure of the money supply, as in currency in circulation. M2 includes physical cash held by households, most checking and savings accounts, plus short-term vehicles like money markets and CDs.

Again, this does not show the amount of M2; instead it shows in percentage terms, if the money supply is expanding or contracting, and how quickly. Note the all-important zero line, which makes clear that the annual growth rate for M2 is nearly always positive ... but not always.

So let's take a quick look at the "not always," starting with the negative M2 growth rate from 1873 through 1878. Known as the Long Depression, this Gilded Age collapse saw 89 U.S. railroads go bankrupt.

Next was 1893, the low point of another Gilded Age depression that lasted three years. A negative M2 growth rate came briefly in 1921, the low of a two-year depression that is all but forgotten, in part because of the far more dire and extreme turn in the late 1920s: The Great Depression low was in 1932, when the growth rate in M2 fell to nearly negative 12 percent.

In turn, that brings us not quite to today: from January 2020 thru January 2021, the M2 growth rate saw an epic spike upward, to an all-time high of nearly 25 percent.

As for what followed, please recall that it had been 90 years since M2's annual growth rate fell decisively below zero: virtually no one who was an adult then is alive now. Nevertheless, from that record high, the M2 growth rate saw its biggest collapse since the Great Depression.

There is a reason for the recent bank runs, closings, and collapse of prices in financial sector stocks, which this graph does help explain. Yet there's more to the story: this graph and much more on the bond market, the Fed, the money supply and beyond is in the analysis and forecasts of the May issue of the Elliott Wave Financial Forecast.

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