Red Flag: Negative True Money Supply Growth Signals Economic Concerns

Here is what we will be getting into today:

1. True Money Supply Is Contracting

2. Juxtaposition of Silver & Other Commodities

Let's Dive In!

US True Money Supply Growth Drops Below 6%. A Red Flag for Economic Growth and Employment

Money supply growth in the US has fallen further into negative territory, dropping below 6% in February 2023, according to the True Money Supply(TMS) money supply measure (also called the Rothbard-Salerno money supply). The TMS is a more comprehensive measure that includes not only the traditional measures of money, such as cash and checking account deposits, but also other forms of money such as savings deposits, money market funds, and other liquid assets that can be easily converted into cash.

What does money supply growth have to do with the economy?

Money supply growth can often be a helpful measure of economic activity and an indicator of coming recessions. During periods of economic boom, money supply tends to grow quickly as commercial banks make more loans. Recessions, on the other hand, tend to be preceded by slowing rates of money supply growth. Since April 2021, money supply growth has slowed quickly, and since November, the US has been seeing the money supply contract for the first time since the 1990s. The last time the year-over-year change in the money supply slipped into negative territory was in November 1994.

The fact that the money supply is shrinking at all is so remarkable because the money supply almost never gets smaller. This all points toward rapidly declining economic activity in an economy where real savings and investments have been hollowed out by more than a decade of easy money. Without an economy geared toward real savings and increased productivity, ongoing monetary inflation will increasingly make price inflation worse.

So where should we be spending money and where should we be cutting back?

According to a survey by the Associated Press-NORC Center for Public Affairs Research (AP-NORC), 60% of Americans believe that the government is spending too much money overall. However, when asked about specific areas of government spending, the majority of respondents expressed a desire for more investment in social security (62%), Medicare (58%), healthcare (63%), education (65%), and assistance to the poor (59%). Military spending was more divisive, but more Americans favored an increase rather than a decrease. Over 80% of the 2022 U.S. Government spending goes towards the categories favored for increased investment.

People tend to see generic government spending as a category full of waste and inefficiency, but apparently, they don't feel that way about specific policy areas such as health or education. Foreign aid is one of few specific categories of government spending which is unpopular, but many Americans would include the cost of sending armies to Afghanistan and Iraq as (wasteful) foreign aid.

One way politicians could solve this issue is by assigning taxes to specific purposes, such as using one tax for healthcare and another for education. This would help voters understand where their tax money is going. However, some tax experts don't like this idea because individual tax revenues can be unpredictable, and it's better to stabilize spending. Overall, it's important to limit voter input in referendums because we don't always have enough information to make informed decisions about complex issues.

Global Nickel Market Faces Surplus Amidst Broader Economic Downturn

Demand For Silver Skyrockets.

The global demand for silver hit an all-time high of 1.16 billion ounces in 2022, representing an 18% increase from the previous year. The increase in demand was driven by a combination of factors including physical silver investment, industrial demand, and silver jewelry fabrication. Physical silver investment rose for the 5th consecutive year to a new high of 332.9 million ounces. Meanwhile, industrial demand recorded a new high of 556.5 million ounces.

How has the Supply Side of Silver changed?

While demand and investment has increased, production from primary silver mines increased only by 0.1% to 228.2 million ounces due to lower by-product output from lead and zinc mines, particularly in China and Peru.

What is the current surplus/deficit outlook for silver?

Despite the increase in demand, the global silver market experienced a deficit of 237.7 million ounces in 2022, the second consecutive annual deficit, due to a lack of supply. The shortfall was described as possibly the most significant deficit on record by the Silver Institute, which noted that the combined shortfalls of the previous two years offset the cumulative surpluses of the last 11 years. With strong silver demand expected in 2023 and supply growth expected to be limited, the Silver Institute is projecting a deficit of 142.1 million ounces, the second-largest deficit in more than 20 years. By the end of this year, global silver inventories are expected to have fallen by 430.9 million ounces from their end-2020 peak.

Silver vs Other Commodities

In contrast to the silver market, the World Bank predicts that overall commodity prices will decline this year at the fastest clip since the COVID-19 pandemic struck in late 2019.

Oil Demand

The pandemic has had a significant impact on the global economy, leading to a drop in oil demand and causing major corporations to allow office workers to work from home. As the pandemic deleveraging phase re-collapses oil demand back down to pandemic lows, it appears that we have achieved peak oil without even realizing it.

Nickel Surplus

The global nickel market is currently facing a supply-demand surplus of 239,000 tonnes, the largest in at least a decade, according to the International Nickel Study Group (INSG). This oversupply has been caused by a new wave of supply from Indonesia, which has put prices under pressure.

What is happening with China’s industrial firms? (China is largest consumer of many commodities)

China's industrial firms' profits fell by 21.4% in the first quarter of 2022 compared to the same period last year, according to data released by the National Bureau of Statistics. While the decline was slightly slower than the 22.9% slump in the first two months of the year, it still highlights the challenges facing China's factory sector as global demand slows. The petroleum, coal and other fuel processing industry reported the heftiest fall at 97.1%.

For more analysis on these topics, check out these articles:

1. US Money Supply Growth Drops Below 6%

   1. Money-Supply Growth Fell To A 50-Year Low In Feb. Will The Fed Panic?

   2. The very good reason not to hold referendums

   3. Global money market funds see big inflows in the week to April 26

   4. Money Supply Growth Went Negative for the Third Month in a Row, and Is Near a Thirty-Five-Year Low

2. Silver & Nickel

   1. Largest Supply Glut In A Decade Crashes Nickel Prices

   2. Silver Demand Set Records In Every Category In 2022

   3. China Jan-Mar industrial profit slump underlines patchy economic recovery

   4. Denial Is Deflationary

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