What does experience tell us?
Given the mixed historical data, let’s think things through from basics. From a fundamental perspective, we should see the money supply grow along with the economy, as a larger economy needs more money to function. Last century, this is largely what happened, as the positive correlations between money supply and the economy show.
The reversal of that relationship this century is clearly inconsistent with fundamental expectations, as well as the actual experience of times when monetary policy was less active. The current relationship is therefore an aberration, caused by unusual monetary policies, which in turn were caused by—and not the cause of—recent economic crises.
This is good news. Going forward, we can expect that, as monetary policy normalizes, we will probably return to that positive relationship, where a growing economy needs more money and drives expansion of the money supply—which is exactly what we are seeing. The news isn’t all good, though, as the current growth rate of the money supply is actually slower than that of previous periods—and may well augur slower growth rates. Again, this would be consistent with both expectations and actual experience.
Although slower growth is not the conclusion we might hope for, it’s certainly better than a looming crisis. Based on our analysis, there is no real evidence that the current growth in the money supply could lead to one. Given the alternatives, I'll take continued growth, slow though it may be.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by McMillan.