- The money supply is nearing record levels again…
- Why the Fed has been cutting rates…
- April 15 is getting close. Before you file, you need to learn about one key loophole in the tax code that can LEGALLY save you thousands in taxes this year.
Dear Reader,
Why does inflation refuse to release its iron grip?
You may find your answer in the supply of money, defined narrowly.
Economist E.J. Antoni:
- In the first week of March, M2 was at its highest level since mid-Apr ’22, almost 3 years ago, and was ~42% higher than pre-pandemic…
- Forget the Fed funds rate — that’s largely a distraction — Powell & Co. are still allowing M2 to rise; in Feb, it was up another 0.4% M/M and 3.9% Y/Y; that’s 40.1% higher than 5 years ago and just 0.4% away from the all-time high, which will likely be eclipsed soon.
The graphic evidence:
Source: Board of Governors of the Federal Reserve System, @realejantoni
What Exactly Is a Dollar?
Today’s dollar is largely an abstraction.
The dollar was once defined by standards of measure.
That is, as 416 grains of a silver coin. Or as 1/20th of one gold ounce.
Perhaps the dollar can be defined as 100 cents. Well then, what is a cent? The answer is 1/100th of a dollar.
Yet what — again — is a dollar?
Thus you embark upon an infinite chasing of your tail.
Imagine a butcher who cannot measure a pound. Imagine a mapmaker who cannot measure a mile.
Now you have it.
Wispy as gossamer, slippery as eels, elusive as quicksilver… the Federal Reserve itself — the dollar’s custodian — cannot even define a dollar.
Thus the Federal Reserve steers by the swaying and erratic lights of varying money supplies.
These include M0, M1, M2, MZM, etc.
There you have money, near money, money at second and third remove, money somewhere in the ghostly ether.
Why M2 Matters
Yet today we limit our discussion to the M2 money supply. What precisely constitutes the M2 money supply?
Investopedia:
- M2 is the U.S. Federal Reserve’s estimate of the total money supply, including all the cash people have on hand, plus all the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs). Retirement account balances and time deposits above $100,000 are omitted from M2.
Why should you pay unique heed to the M2 metric?
- M2 is a more comprehensive calculation than M1 because it includes assets that are highly liquid but are not intended to be routinely used as cash. Consumers and businesses don’t usually use time deposits when making purchases or paying bills, but in a pinch, they could convert them to cash in short order…
- M2 is a critical factor in forecasting inflation. Inflation and current interest rates have major ramifications for the general economy, as they heavily influence job availability, consumer spending, business investment, currency strength, and trade balances.
Why Did the Fed Cut Rates?
And — as we have observed — the M2 supply runs presently to three-year heights.
Yet last September the Federal Reserve imposed a 50-basis point hacking of its target rate.
It announced additional reductions in November and December.
Should not the monetary authority have elevated its target rate… amid the surging money supply?
Why spill kerosene upon a burgeoning fire?
Meantime, markets forecast the Federal Reserve will lower its target rate this year.
They soothsay no rate elevations whatsoever.
Did the Federal Reserve reduce its target rate because it anticipated recession?
I do not know. Yet no language issuing from Mr. Powell and mates suggest recession frights.
It’s the Debt, Stupid
Perhaps Mr. Ryan McMaken of the Mises Institute hold out the answer:
- So, why did the Fed return to pushing down interest rates, even with so much covid-era money still sloshing around in the economy?
- One answer lies in the fact that the US Treasury requires low interest rates to manage its enormous $36 trillion debt.
- The US Treasury is already on track for ringing up a deficit of more than $3 trillion for the 2025 fiscal year. This puts upward pressure on overall interest rates, and especially on Treasurys.
- The US Treasury must offer higher yields on its debt as it floods the market with more and more federal debt. The Treasury expects the Fed to intervene to keep these interest rates from getting out of control. Otherwise, the US Treasury would find itself overwhelmed by interest payments on its ballooning debt.
- The fact that the Fed has chosen to force back down its target interest rate provides the Fed with more opportunities to engage in open market operations and buy up “excess” government debt as is deemed necessary to help put a lid on Treasury rates.
I note that year-to-date yields on the bellwether 10-year Treasury note have reduced nearly 6%.
How much gravity has the Federal Reserve exerted upon Treasury yields?
I do not know — coincidence does not imply causation.
And I remind you that the rooster likes to claim credit for the dawn.
The Fed Fears Being Exposed
As I have argued before, the Federal Reserve wields far less heft than it would have you believe.
It is a false magician bumbling upon a stage.
It fears its skeptical audience will observe the wires holding the levitating subject aloft.
It fears its disbelieving audience knows where the vanished gal is concealed.
It fears its knowing audience will observe the trick up its shirt-sleeve.
It fears most that rotting eggs, tomatoes and related culinary missilery will come raining down upon its head… when its abracadabras fail to produce the magic.
If the M2 money supply continues to expand… and inflation continues to menace…
I hazard the audience will finally open fire.
I intend to join them.
Brian Maher
for Freedom Financial News
