Roadmap To Recession
This is the most important trend in money today.
It’s something that hasn’t happened since the 1930s.
It could lead to a crippling recession and, if it continues long enough, completely upend the U.S. financial system.
As you’ll see below though, the worst case is still avoidable.
And investors who understand it and see the potential impact, could set themselves up to be in a good position regardless of it.
Less Money, More Problems
The most important trend in financial markets today is money supply.
There are many gauges of money supply, but we use the standard M2 Money Supply.
This encompasses mainly cash and checking accounts.
It’s basically a measure of the total money that’s in the system.
Here is a chart of the M2 Money Supply from the Federal Reserve going back to the late 1960s:
You can see the overwhelming trend in money supply.
It grows.
Going back to the 1960s in the chart it has only gone one way - up.
The only times growth even slowed a bit were recessions.
But again, that was merely a slowing of growth.
Today growth hasn’t just slowed, but completely reversed.
You can see in the chart from 2020 to today a massive surge after the pandemic when trillions of dollars were created.
That led to inflation and a massive speculative bubble in everything.
That has since turned down.
The contraction in money supply is directly responsible for downturn in stocks, banking collapse (which happen because they ran out of money), and decelerating inflation.
A major decline in money supply has only happened once before and that was in the early 1930s.
And that decline could mean major troubles ahead.
Inflation Nation
The current financial system relies on expansion of the money supply.
That’s why you’ve likely been told “a little bit of inflation is good.”
Everything goes up and everyone’s happy.
Revenues go up. Earnings go up. Stocks go up.
Banks keep making more and more loans.
The massive debts that major companies and governments are sustained by the inflationary impact of expanding money supply..
The current system works with a little bit of inflation.
The current drop in the money supply is the most consequential financial phenomenon in decades.
There’s no guarantee it will lead to another depression.
After all, the Great Depression was exacerbated by massive government interventions and dislocation of resources intended to “fix” the economy.
But even if it’s not that bad, there aren’t many scenarios in which it’s good.
Hope for the best and prepare for the worst would be the wisest move in the current environment of falling money supply.
