A recent article written by Sean Williams and published by The Motley Fool, pointed out that the money supply just did something that it hasn’t done since the long bygone days of the Great Depression, which is drop two percent from its all-time high. This only happened five times in the last 154 years. The first four times it occurred all did so alongside economic depressions and double-digit unemployment rates.
So does that mean we’re on the verge of another depression? Well, I mean, the signs certainly aren’t good. Just look at the astronomical rate of inflation and how expensive basic goods and services have become over the course of President Joe Biden’s administration.
As you may have noticed, the bulls are in firm control on Wall Street. The ageless Dow Jones Industrial Average (^DJI 1.09%), benchmark S&P 500 (^GSPC 1.02%), and innovation-fueled Nasdaq Composite (^IXIC 1.18%) all recently notched fresh record-closing highs.
But it hasn’t always been this way. In each of the first four years of this decade, the Dow Jones, S&P 500, and Nasdaq Composite traded off bear and bull markets in successive years.
Though all three indexes have risen over long periods, forecasting short-term directional moves is something that investors can’t do with any guaranteed accuracy. Nevertheless, it doesn’t stop investors from trying to guess what the immediate future holds for stocks.
There are several different measures for the U.S. money supply, however, the two most watched are M1 and M2. The M1 money supply takes into account all of the cash currently in circulation, including coinage, along with demand deposits in checking accounts. It’s basically the money that you can access and spend at any moment.
M2 is different in that it includes everything that’s in M1 plus savings accounts, money market accounts, and any certificates of deposit that are below $100,000. It’s money that you can spend somewhat easily, however the capital in M2 needs more work to be accessed.
It’s the M2 that has investors and others chomping their fingernails like a Thanksgiving feast.
M2 has been rising with virtually no interruption for the better part of nine decades. This is what we’d expect to see from a growing economy that relies on more capital in circulation to facilitate transactions. But in those very rare instances throughout history where M2 money supply has notably declined, trouble has followed for the U.S. economy and stocks.
According to monthly reported data from the Board of Governors of the Federal Reserve, M2 money supply peaked in April 2022 at $21.722 trillion. As of May 2024, M2 totaled $20.963 trillion. This $759 billion decline in a little over two years represents a 3.49% aggregate drop. It’s the first time a greater than 2% cumulative decline in M2 money supply has occurred since the Great Depression.
For starters, this 3.49% drop comes after U.S. M2 money supply expanded by more than 26% on a year-over-year basis during the height of the COVID-19 pandemic. Money absolutely poured into the U.S. economy from the federal government via stimulus checks, and the Fed was extremely accommodative with historically low interest rates. The cumulative decline in M2 following a record surge might represent nothing more than a return to the norm.
The M2 money supply is growing on a year-by-year basis. The M2 supply went up by 0.82 percent from the previous year. And this then led to an aggregate drop from what the Motley Fool called a “peak decline” of 4.74 percent back in October 2023 to 3.49 percent.
The bad news is, when you see M2 drop by two percent year-over-year and on a cumulative basis, that means trouble is on its way.
WARNING: the Money Supply is officially contracting. 📉
This has only happened 4 previous times in last 150 years.
Each time a Depression with double-digit unemployment rates followed. 😬 pic.twitter.com/j3FE532oac
— Nick Gerli (@nickgerli1) March 8, 2023
“The post you see above on social media platform X comes courtesy of Reventure Consulting CEO Nick Gerli. Although this post is more than a year old, it serves a valuable purpose in laying out the correlation between declines in M2 money supply and the poor performance of the U.S. economy,” the article pointed out.
“When back-tested to 1870, there have only been five instances when year-over-year M2 money supply has declined by at least 2%: 1878, 1893, 1921, 1931-1933, and 2023. The first four instances match up with periods of depression and double-digit unemployment rates for the U.S. economy,” the report added.
The article points out that things are a bit different today than they were during the 19th and early 20th centuries. During the first two depressions that hit our economy, the Federal Reserve didn’t exist. Our government, at that time, knew absolutely nothing about necessary measures to take in order to fight against economic downturns. That has changed.
What I’m trying to say is that there’s some good news. While the chances of experiencing a depression aren’t zero, they’re still fairly low.
Still, things in this day and age are highly unpredictable, so even if you get a bit of good news that makes swallowing the bad a little easier, you should try and be prepared, always, for the worst case scenario. Ultimately, that will enable us to not only care for ourselves in a sudden emergency, but to lend aid and assistance to others.
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