Money Supply Growth Is Slowing—That Points to a Slowing Economy
According to the popular narrative, the role of the central bank is to navigate the economy along the so-called path of economic stability. By this way of thinking if various shocks cause the economy to deviate from this path, then it is the role of central bank policy makers to offset these shocks. This is done by means of suitable monetary policies. In line with this way of thinking to counter the shocks from covid-19, the US central bank, the Federal Reserve System, pumped a massive amount of money into the economy. This is depicted by the increase in the Fed’s balance sheet from $4.2 trillion in January 2020 to $8.5 trillion by October of this year—an increase of 102.7 percent. Because of this massive increase, the Austrian money supply (AMS) measure climbed from $5.28 trillion in January 2020 to $9.59 trillion by October 2021, an increase of 81.6 percent.
Conventional thinking would suggest that with more money in their pockets, individuals are likely to increase their spending and through the magic of the Keynesian multiplier, the rest will follow suit. By this way of thinking, increases in money supply enable individuals to accommodate increases in their demand for goods and services. It is also held that in response to the increase in demand, producers are likely to oblige by raising supply through the increase of goods and services production. What we have here is that demand creates supply.
Note that in a free, unhampered market economy, individuals pay with goods in their possession for the goods they require to maintain their lives and well-being. For an individual to be able to secure something, he has to have something else. Individuals are trading goods and services for other goods and services. (Note that the trading is also of present goods and services for future goods and services).
The role of money in all this is—among other things—to facilitate trade. Money emerged as a result of the fact that barter could not support the market economy. A distinguishing characteristic of money is that it is the general medium of exchange. Money enables one producer to exchange his produce for the produce of another producer. The means of payment are always goods and services, which pay for other goods and services.
Thus, a baker exchanges his bread for money and then uses the money to buy fruits. The baker pays for the fruits not with money but with the bread produced. Money just allows the baker to make this payment. Also, note that the baker’s production of bread gives rise to his demand for money. By demand for money, what we really mean is demand for money’s purchasing power. After all, individuals do not want a greater amount of money in their pockets but a greater purchasing power in their possession.
On this Ludwig von Mises wrote, “The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in h
Article from Mises Wire