How Money Supply Metrics Can Warn Us About Recession

Stacks of coins and piggy bank representing money supplyMoney supply metrics can provide some warning signs of a potential recession by indicating changes in economic activity and financial conditions. Here are a few examples:

1. A decrease in M2 and M3 money supply growth rates: If the growth rate of these broader measures of the money supply begins to slow down or decline, it could signal that consumers and businesses are becoming less active in their spending and investment, and that economic activity may be slowing down as a result. This could be a warning sign of a potential recession.

2. An increase in the velocity of money: This refers to the speed at which money changes hands within the economy, and is calculated as GDP divided by the money supply. If the velocity of money increases, it can indicate that people are spending money more quickly, which can lead to an increase in inflation. However, if the velocity of money decreases, it can indicate a decrease in economic activity, as people are spending less and holding onto their money for longer periods of time.

3. A decrease in interest rates: If the central bank reduces interest rates in response to a slowing economy, this can lead to an increase in the money supply as borrowing and lending become cheaper. However, if interest rates are already low and the economy continues to struggle, it can indicate that the central bank is running out of tools to stimulate growth, and that a recession may be looming.

Of course, money supply metrics should be interpreted in conjunction with other economic indicators, such as GDP growth, employment, and consumer confidence, to get a complete picture of the economy’s health.

Nonetheless, changes in money supply metrics can provide important early warning signs of economic turbulence and potential recessions.

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