Collapsed US money supply is a threat to employment, growth, and inflation, Wharton professor Jeremy Siegel says
Douglas Rissing/Getty Images/iStock
- US money supply has seen its longest stagnation since World War II, according to Jeremy Siegel.
- The Wharton professor said the US now faces major recession, unemployment, and deflation risks.
- "You can't really have a growing economy when the M2 money supply is decreasing," Siegel told CNBC.
The US money supply is flashing a major warning to the US economy, according to Wharton professor Jeremy Siegel.
M2 money supply, which includes cash, checking deposits, and other highly liquid assets, bottomed out around $20.7 trillion in April this year amid aggressive rate hikes, according to Federal Reserve data. That's a 4% drawdown from the prior all-time-record of $21.7 trillion, which was recorded in 2021.
Money supply then rebounded through the summer, but has recently returned to its decline, nearing April's low.
Federal Reserve
That marks the the longest stagnation in the M2 money supply since World War II, Siegel said in an interview with CNBC on Monday.
"You can't really have a growing economy when the M2 money supply is decreasing," he warned. "Zero percent growth of money supply means unemployment, recession, and deflation," he later added.
Money supply would need to grow around 5% for the economy to see "decent" growth in real terms, and for inflation to return back to the Fed's 2% target, Siegel estimated.
Signs of a slowdown are already beginning to bubble to the surface. GDP is set to slow to just 1.2% growth this quarter, according to the Atlanta Fed's GDPNow model, which would be the lowest pace of quarterly growth so far this year.
Meanwhile, unemployment edged higher to 3.9% in October. That puts the job market precariously close to triggering the Sahm Rule, a recession indicator that flashes when the three-month average unemployment rate surpasses its 12-month low by at least 50 basis points.
Siegel has urged Fed officials for months to dial back interest rates and lighten its pressure on economic growth. A pullback in rates could cause stocks to rally as much as 20% next year, he previously predicted.
Meanwhile, investors are pricing in a 57% chance the Fed could slash interest rates by March, up from just 25% odds priced in a month ago, according to the CME FedWatch tool.