Demand for US Debt and Interest Rate Environment

Key Concepts

• Money Supply Growth Rate: The percentage change in the total amount of money circulating in an economy over a specific period, typically year-over-year.
• Year-over-Year (YoY): A comparison of a metric from the current period to the same period in the previous year.
• Money Printing: Refers to the expansion of the money supply, often through quantitative easing or other monetary policy tools.
• Quantitative Easing (QE): A monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to inject money into the economy.
• Trend Line: A line on a chart that represents the general direction of a series of data points.
• Interest Rates: The cost of borrowing money or the return on lending money.

Money Supply Growth in the US: Historical Trends and Recent Developments

This section details the fluctuations in the US money supply growth rate, highlighting periods of significant expansion and contraction, and contextualizing current trends within historical norms.

1. Historical Context of Money Supply Growth:

• December 2018: The US money supply grew by 3.66% year-over-year. This represents a baseline for more typical growth rates.
• 2020-2021 ("Out-of-Control Printing"): A period of unprecedented money supply expansion.
  • February 2021: The US money supply experienced a dramatic 26% year-over-year growth. This surge is attributed to significant monetary policy interventions, often referred to as "money printing" or quantitative easing.

2. Recent Contraction and Recovery:

• April 2023: Following the record growth, the money supply experienced a significant decline.
  • The money supply had shrunk by over 4.5% compared to the previous year. This contraction was a notable event, with many unaware of its occurrence.
• Impact on Absolute Money Supply: Despite the contraction, the absolute level of money in the US money supply did not return to pre-surge levels.
  • The money supply peaked due to the prior expansion and then shrunk, but it remained significantly above its prior trend line.

3. Current Trend and Projections:

• Recovery in Growth Rate: Since bottoming out at a negative 4.7% growth rate, the US money supply growth rate has been consistently climbing.
  • As of the video's recording, the growth rate is just under 5% year-over-year.
• Record High Total Money Supply: This renewed growth has pushed the total US money supply to a new record of over $22 trillion, surpassing its previous peak in 2022.

4. Long-Term Historical Perspective (Since 1960):

• Typical Growth Range: Historically, the typical range for US money supply growth has been between 5% and 10% per year.
• Periods of Deviation:
  • Below 5%: Observed in 1970, the early 1990s (following the Great Financial Crisis), and notably in 2023.
  • Exceeding 10%: Occurred in the early and late 1970s, the early 1980s, and the significant surge in 2020 and 2021.
• Current Trajectory: The current growth rate of just under 5% is approaching the historical typical range of 5-10%.
• Future Outlook: The expectation is that the growth rate will re-enter this 5-10% range soon, especially with anticipated declines in interest rates.

Conclusion

The US money supply has experienced a dramatic cycle of expansion and contraction. After an unprecedented surge in 2020-2021, it underwent a significant decline in 2023, though not enough to erase the prior gains. Currently, the money supply growth rate is recovering and approaching its historical typical range of 5-10% per year, pushing the total money supply to a new record high. This trend is expected to continue, particularly with anticipated interest rate reductions.