For the first time since the Great Depression, the money supply in America has contracted, triggering a massive deflationary depression warning. Experts are drawing comparisons to three other instances in U.S history when similar contractions occurred, all of which resulted in a banking crisis and skyrocketing unemployment rates. Now, America is witnessing some of its biggest banks collapse, with Silicon Valley Bank being the first to fail, followed by First Republic. If the Federal Reserve continues to withdraw money from the system, more banks will follow suit, and the potential for a full-blown depression with double-digit unemployment rates will significantly increase.
This vicious cycle involves fewer bank loans, resulting in a decrease in the money supply, which then causes lower deposits and increased bankruptcy. The cycle continues as reduced lending leads to further economic downturns, eventually culminating in a full-blown depression. Deflation, which might initially seem beneficial due to resulting lower prices for goods and services, is often accompanied by high unemployment rates and corporate bankruptcies.
The recent contraction in money supply is undoubtedly a cause for concern. Banks like First Republic have already faced issues, and there is speculation that US Bank Corp may also encounter similar problems in the future. US banks have aggressively extended their loan books, leading to a liquidity crunch. While banks like US Bank Corp are not currently in significant trouble, they could experience similar difficulties if their deposits begin to drop.
Moreover, a liquidity and credit crunch is affecting corporate Wall Street real estate investors, leading to a decline in mortgage-backed securities. Historic data on the correlation between money supply, inflation, and GDP predicts a deflationary depression unless there is an increase in liquidity and banking. However, this seems unlikely given the tightening lending standards and the prediction that the Fed will hike rates in May.
A third possibility for increasing the money supply could occur if other countries abandon the dollar and push excess dollars back onto US shores. While this could end the dollar’s hegemony, it may also lead to a deflationary recession or depression scenario over the next two to three years. This would impact home prices, rent, and commodity prices, with a further decline in the Dow Jones commodity index confirming this deflationary outcome.
The dollar has lost some ground over the past few months, but it remains at its highest level compared to other currencies in the last 20 years. Consequently, other countries and institutions may find it challenging to deleverage from the dollar, which is deeply entrenched in banks and financial institutions worldwide.
Historically, significant contractions in the US money supply have resulted in financial crises, such as the Panic of 1819, the Great Depression, and the 2008 Financial Crisis. In each of these instances, factors such as bank failures, reductions in bank lending, and the Federal Reserve’s decisions contributed to the decline in the money supply, which in turn worsened the economic downturns and led to high unemployment and falling prices.
Given this historical context, the current contraction in the US money supply should be treated as a serious economic warning. With the potential for a deflationary depression looming, it is crucial for policymakers and financial institutions to address the issues at hand to prevent further economic fallout and to protect the well-being of the American people.
