Policy Lags Are Real – Inflation’s Days Are Numbered

There are several measures of the money supply, the most looked at being M2 (cash + demand deposits + time deposits + retail money market funds). That official series goes back to 1959 although there are estimates going back even further. But just looking at this 64-year history, what we find is that the two growth rate extremes (the high and the low) both occurred in the last two years (see chart).

The dashed line shows M2’s growth rate. Note the period of more than a year, especially in 2020, where growth exceeded 20%, peaking at 27% in February 2021 as the Fed monetized the great $6 trillion pandemic cash give-away by the federal government. Then note on the right-hand side of the chart that M2’s growth has turned negative (for the first time in its 64-year history).