Cash Drain

The U.S. money supply grew by an unprecedented $6 trillion since the pandemic. U.S. policy is reigning in that growth to help curb inflation, but what happens if the money supply declines for the first time in more than 80 years?

• The money supply charted above consists of currency in circulation as well as money in checking, savings, and money markets for consumer and business accounts. Its growth rate is decelerating due to the Fed’s reduction of its balance sheet and interest rate hikes, as well as moderating government expenditures.
• Given that economic growth equals the money supply multiplied by the frequency one dollar is spent to buy goods and services per unit of time, a deceleration in money growth should lead to weaker economic growth. In our view, money supply appears likely to contract in early 2023, which would be the first time since 1938. While slower money growth may bring down inflation, its probable side effect may also slow the economy.
• Slower economic growth does not impact all stocks equally. Companies with less debt and higher margins should do better, as should those whose fundamentals are driven more by market share gains than economic growth.