Inflation Watch: US Money Supply to Stay Elevated Despite Coming Slowdown, Pantheon Says

"Nothing like this has ever happened before," says economist Ian Shepherdson.

Mar 26, 2021 at 6:33 p.m. UTC
Updated Sep 14, 2021 at 12:32 p.m. UTC

The near 40% jump in the U.S. money supply over the past year sparked concerns about rising inflation, especially in bond markets like U.S. Treasurys. In cryptocurrencies, investors have leaned into bitcoin (BTC) as a potential hedge against inflation, as governments and central banks around the world unleashed massive amounts of economic stimulus.

While a sharp slowdown in the money supply's expansion is expected over the coming months, the growth is expected to continue at a breakneck pace relative to historical norms, according to a new report by Ian Shepherdson, chief economist at Pantheon Macroeconomics.

  • By May, the year-over-year growth rate in M2 money supply – perhaps the broadest gauge of the money supply – will fall dramatically, Shepherdson wrote Thursday in the report.
  • "But this would leave it at about 13%, comparable to the fastest growth rates seen during periods of very high inflation in the past," wrote Shepherdson.
  • "We reckon that the increase in M2 this year will be about $2.5 trillion to $3 trillion, depending on what happens to bank lending and bank purchases of Treasurys. This implies that M2 will rise by some 13% to 16% in the year to December."
  • “The current spike in M2 growth will not be reversed, even after the economy recovers. Central banks everywhere are terrified of outright declines in the nominal money supply, because they are rare and are associated with depressions.”
  • He added, "Nothing like this has ever happened before."

“The question then becomes, how far does inflation rise, and how quickly does it increase? [Federal Reserve] officials are confident in their ability to deal with rising inflation, but their tools have not been tested since the early 1980s. Back then, the Volcker Fed crushed inflation, but at a very steep price,” wrote Shepherdson, referring to former Fed chief Paul Volcker.

Chart shows the surge in M2 money supply, without a subsequent rise in inflation.

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