Cliff-like contraction! The growth rate of US currency supply has continuously plummeted, comparable to the Great Depression era.

The sharp contraction of the US money supply may signal an economic recession.

According to public data released by the Federal Reserve, the growth of the US money supply fell to a negative value again in April this year, and the growth rate continued to decline for the second consecutive month to the level of the Great Depression.

The amount of money supply decreased by 12% YoY, which is a further decline from -9.75% in March and much lower than 6.6% in April 2022.

The Mises Institute, an independent economic research institute, pointed out that "with the growth rate approaching or below -10% for the second consecutive month, the contraction of the money supply is the most severe since the Great Depression." Prior to this, for at least sixty years, the decline in the money supply in any month did not exceed 6% YoY.

The TMS, a measure of money supply used in the above figure, was developed by Murray Rothbard and Joseph Salerno. This money supply indicator differs from M2 in that it includes the Federal Reserve's holdings of government bonds (excluding short-term deposits and retail money market funds). The Mises Institute regularly tracks this indicator and believes that it provides a better measure of monetary supply fluctuations than M2.

The Mises Institute pointed out that in recent months, the growth rate of M2 has followed a similar process to that of TMS, although the decline rate of TMS is faster than that of M2. The growth rate of M2 in April 2023 was -4.6%, which is a decrease from the growth rate of -3.8% in March. The growth rate in April 2023 is also much lower than 7.8% in April 2022.

"The growth of money supply is usually a useful indicator of economic activity and an indicator of the upcoming recession," said the Mises Institute.

During economic prosperity, as commercial banks issue more loans, the money supply often grows rapidly. On the other hand, before an economic recession, the growth rate of the money supply often slows down.

The Mises Institute stated that negative growth in the money supply itself is not a particularly meaningful indicator, but the recent sharp decline in the supply still indicates a problem:

"Before an economic recession, the growth rate of the money supply often slows down, and the money supply does not necessarily have to actually contract to trigger a depression. However, the recent negative growth we have seen in the past few months does help to illustrate the degree and speed of the decline in money supply growth. This is usually a dangerous signal for economic growth and employment."

Although the money supply has experienced a significant decline, the trend of money supply is still much higher than the level between 1989 and 2009.

The Mises Institute pointed out that to return to this trend, the money supply needs to be reduced by at least $4 trillion, or 22%, and the total amount should be reduced to below $15 trillion.

The US economy still faces a large surplus of currency, which is partly why the labor market has not slowed significantly.

However, leading indicators have continued to deteriorate - the Philadelphia Fed's manufacturing index is in a recessionary area. The New York State Manufacturing Survey is also the same.

The Mises Institute pointed out that personal bankruptcy applications in May increased by 23%. Temporary job positions have declined YoY, which usually indicates an impending economic recession.