Money Supply is “the entire stock of currency and other liquid instruments circulating in a country’s economy as of a particular time” (as defined by Investopedia).

This includes cash, coins, savings and checking accounts, etc. Basically, it’s a nation’s entire stock of money.

In the simplest of terms, more money in the economy typically means lower interest rates, more investment, an increase in business activity, and more jobs.

When the money supply dries up, the opposite effect takes place. That’s the simplest explanation. For a more detailed overview, click here.


Money Supply is Flashing Red

Jeffrey Peshut at Realforecasts provides a series of charts based on an indicator called the Rothbard-Salerno True Money Supply (TMS).

As you can see below, the TMS shows that in 2016, the money supply begun drying up as the Fed initiated its first of many subsequent rate hikes.

TMS-1-300x199 True Money Supply Flashes Red, Signals Looming Recession?



But here’s something interesting: the current monetary deceleration is comparable to the conditions preceding the 2008 financial crisis.

TMS-2-300x198 True Money Supply Flashes Red, Signals Looming Recession?



We’re expecting three, possibly four, more rate hikes in 2018.

The Fed has approximately $450 Billion to unwind from its balance sheet by the end of the year.

Overall 2017 was a good year for the US economy. Yet the True Money Supply growth rate trend points lower.

What might happen if the money supply slows to a crawl or grinds to a halt, which, by the way, is arguably a “natural” part of the business cycle?

The most we can do is get a glimpse of the past, a look at how history has played out with regard to this measure…and this is what it shows:

TMS-3-300x198 True Money Supply Flashes Red, Signals Looming Recession?



So, where to from here?


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