Economic News Blog
Posted by: Steven Kline, Jr. 11. March 2019

Monetary Base Contraction Accelerates in February

February was the 12th consecutive month of month-over-month contraction in the monetary base, which was $3.368 trillion, its lowest level since July 2013. The rate of contraction has accelerated almost every one of these 12 months, with February’s contraction accelerating to -13.0 percent. That was the fastest rate of contraction since July 1937 and the second fastest since January 1922. In fact, this was the fourth month in a row that the one-month rate of change in the money supply contracted more than 10 percent. The last time that happened was 1937 and 1922. Neither of those time periods were particularly good, as both involved a major recession or depression. While the current contraction is a response to the unprecedented increase in the money supply following the Great Recession in 2008 and 2009 and is completely necessary, it does indicate that there could be unexpected and difficult-to-predict economic events in the future.

As a result, the annual rate of change in the money supply contracted for the fifth month in a row, accelerating to -7.3 percent. This was the fastest rate of annual contraction since April 1938. The annual rate of change peaked in March 2018, indicating that the rate of growth in capital-equipment consumption should peak between March 2019 and March 2020, as there is typically a long lead time of 12-to-24 months between changes in the money supply and changes in capital equipment consumption. That said, the lead time has shortened since the Great Recession due to the dramatic effects of the massive amount of money the Federal Reserve created to pump up the economy.

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