Money Supply Continues to Fall, Economy Worsens - Investors Don’t Care

The money supply continues to fall, but investors don't seem to care. They are convinced that their success is connected to a potential Fed shift in interest rate policy.

Nothing else seems to matter. That is partially attributable to the fact that, as the financial markets continue their upward trajectory, less and less attention is paid to the deteriorating economy. And the deterioration is getting worse.

When worsening economic conditions - especially in the labor market - are pointed out, it is either not noticed or ignored. The wealthy and well-connected don't care; and others don't know enough to care. If stocks are up, things must be okay.

Small business owners care, though. They are the ones most observably harmed by "staff shortages" and liquidity problems (see System Liquidity Risk). This has been a repeating theme since Covid in 2020. Not to go unmentioned, a number of larger firms are experiencing shrinking sales and have announced mass layoffs and closings.

Part of the disconnect is attributable to the extreme shift in investor attention to technology; lately AI. All of this prompts the question "If the money supply is falling, and economic conditions are deteriorating, whence comes the money that is fueling the headlong rush into stocks and other financial assets?" 

An answer comes from Ryan McMaken in his latest article about the shrinking money supply here. In the article, he refers to remarks made by Daniel Lacalle at who explained that "sizable drops in the money supply have nonetheless been repeatedly mitigated by behind-the-scenes efforts at the Fed to make sure that liquidity continues to move into large banks. Even as some sectors of the economy are facing a deflationary bust, the central bank is careful to make sure the politically-connected financial sector is still flush with cash."


The liquidity crisis that is becoming more apparent in ordinary economic circles is growing in size and consequence. Even the "large banks" mentioned above, who benefit from the selective distribution of liquidity, are feeling pains of their own. Conditions are such that the crisis is morphing into a catastrophe as the consequences of non-performing commercial real estate loans litter the balance sheets of already insolvent financial institutions.

When near-worthless CMOs are added to the garbage pile, it starts to smell badly. More bank failures are on the horizon. This is in spite of the fact that there are no reserve requirements for banks anymore and that a disproportionate supply of liquidity is being moved directly into these same banks. The preferential treatment is not helping. Most banks are more illiquid today than they were before fractional-reserve requirements were eliminated.


In addition to commercial real estate, there are potential implosions coming in residential real estate, stocks, bonds, cryptocurrencies, and commodities. It is just a matter of time. The entire financial landscape is characterized by wild speculation and unwarranted anticipation. My favorite example is MicroStrategy (MSTR) stock. The company is a provider of mobile software and cloud-based services. One of its original founders seems more intent on creating his own bubble based on his fanaticism for Bitcoin and the use of maximum debt. Practical fundamentals do not send a stock from 200 to 1800 in less than a year. This was followed by a flash crash to 1200 on the downside. That's great volatility for gamblers but not for true investors.


Investors should not fall prey to FOMO (fear of missing out). The most speculative bubbles in history, whether stocks in 1929 or tulip bulb mania in the 1600s, etc., are most often (always?) followed by cataclysmic declines and incalculable amounts of collateral damage.

Consider what might happen and how you would be affected if your bubble collapsed. "Your" bubble might be your home price, the value of your 401k, or your over-weighted investment in Bitcoin. No matter how good it seems now, it won't last forever. It never does.

Kelsey Williams

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED!