U.S. money supply shrinking at unprecedented rate, economist warns

Steve Hanke, professor of applied economics at Johns Hopkins University, said a recession will be right around the corner with the U.S. money supply contracting at an unprecedented rate.

What Happened: Money supply changes are first transmitted with a lag of about one to nine months into changes in asset prices and real estate prices, as well as changes in the stock market, according to Hanke, told Capital.com.

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He added, With another lag of a little longer, about six to 18 months after the signal changes, after the money supply substantively changes, we get changes in real economic activity. That gets into the recession issue. The fight against inflation that resulted in aggressive rate hikes by the Federal Reserve has resulted in a decline in M 2 money supply, which is the central bank's main measure of the country's money stock. It fell for a fifth consecutive month in December, declining by $147.4 billion to a seasonally adjusted $21.2 trillion from the month before.

Hanke also highlighted the decline in money supply over the last nine months. It shrunk by about 2.5%. This is unprecedented. He explained that you have to go back to 1929 and 1937 to find shrinkages like this.

The professor believes that the Federal Reserve might pivot and reduce rates more quickly if the market starts to go into a recession if there was a crisis in the U.S.

That is an outlier. We could have a liquidity crisis. That is a possibility with the money supply shrinking like this. He said that it was a very dangerous way to be flying an airplane because they were focused on interest rates, not money supply.