This article was originally published by Frank Shostak at The Mises Institute.
There is a high likelihood that, due to the past large decline in the yearly growth rate of the money supply, the US economy is heading towards an economic bust. Note that the yearly growth rate of money supply fell from 79 percent in February 2021 to minus 7 percent by May 2023.
The sharp decline in the yearly momentum of money supply is starting to hurt various activities that emerged on the back of the huge increases in the money supply between August 2019 and February 2021, from minus 1 percent to 79 percent. It is likely that the effect of this massive increase is still dominating the present state of economic activity (see chart).
As time goes by, however, the effect of the huge decline in money supply growth is increasingly likely to assert itself on economic activity.
As a result, various bubble activities are likely to crumble. The reason for this is that the diversion of savings to them from wealth-generators will weaken due to the decline in money supply growth. Consequently, various bubble activities will be deprived of the funds they have relied upon in order to grow and survive.
Projects that have emerged because of the expansionary monetary policy of the central bank and the resulting money creation by the commercial banks might be impressive in nature and scale—such as the artificial intelligence (AI) capex boom—but these projects might not be affordable. What determines the affordability of these ventures is the state of the subsistence fund.
The Essence of a Subsistence Fund
Most goods that individuals require to support their lives and well-being are not readily available from nature. These goods have to be produced by transforming various things in nature into goods that individuals can use. This transformation undergoes various stages.
In an economy that operates in the framework of the division of labor, some individuals are employed in the extraction of various raw materials such as coal and iron. Some other individuals are employed in the alteration of raw materials into various tools and machinery. Whereas some other individuals are employed in the transformation, by means of the tools and machinery, of various goods into consumer goods.
Individuals employed in the various stages of production must have access to savings to support them while producing in those stages. This investment in capital goods comes from private savings.
If private production and saving increase, all other things being equal, this would permit an expansion of productive infrastructure. An expanded subsistence fund enables individuals to introduce new stages of production which, prior to the expansion of the fund, could not be undertaken. This, in turn, permits the production of a greater quantity and a greater variety of consumer goods.
In addition, once there has been an adequate increase in savings, individuals would then be in a position to aim at further enhancing their well-being by seeking things such as entertainment and services related products, such as medical services, etc. The size of the subsistence fund—comprised of private savings—sets the limit on the projects that can be implemented. On this, Richard von Strigl wrote:
Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides laborers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year. . . . The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be. It is clear that under these conditions the “correct” length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices.
According to Bohm-Bawerk:
The entire wealth of the economical community serves as a subsistence fund, or advances fund, and, from this, society draws its subsistence during the period of production customary in the community.
The size of the subsistence fund constrains the affordability of various projects, such as AI. An enhanced structure of production is what sets in motion an increase in economic growth, all other things being equal. The improvement in the infrastructure, in turn, takes place as a result of the increase in the subsistence fund. Hence, anything that weakens the subsistence fund undermines the prospects for economic growth. Consequently, regardless of how impressive various projects are, what determines whether these projects are viable is the state of the subsistence fund.
Introducing Money
Money’s main function is to fulfill the role of the medium of exchange. Money does not sustain or fund economic activity, but, without the medium of exchange, neither the division of labor nor the market economy could have emerged. (The existence of money enables individuals to specialize).
Individuals pay with goods and services they produce—they do not ultimately pay with money. Money only helps to facilitate payments. Money enables the goods of one specialist to be exchanged for the goods of another specialist. On this Mises wrote,
Commodities, says Say, are ultimately paid for not by money, but by other commodities. Money is merely the commonly used medium of exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities.
By means of money, an individual can channel savings to other individuals as capital investment, which, in turn, permits the widening of the process of wealth generation.
As things currently stand, it is likely that the yearly growth rate of private savings is under pressure. The key reason for this is the ever-growing government outlays and the relentless central bank tampering with financial markets (see charts below). In April 2026, government outlays increased by almost 400 percent versus January 2000.
The erosion of the savings through decades of money printing and distortion of market signals means that individuals in the economy are currently not wealthy enough to pursue the current level of investment in activities. If the central bank were to aggressively lower the interest rates and increase the money supply, this would make things much worse. Expansionary monetary policy further undermines saving, depreciates the value of money, and distorts the structure of production. Furthermore, expect the yearly growth rate of banks’ inflationary credit to weaken in the months ahead. As a result, this is expected to put more pressure on bubble activities as they are starved of inflationary money and credit.
To alleviate the likely economic crisis, what is required is a reduction or cessation in the central bank’s tampering with financial markets and a large curtailment of government spending.
Conclusion
As a result of the decline in monetary growth from February 2021 to May 2023, it is quite likely that the US economy is heading towards an economic bust. Various projects that have emerged on the back of the previous expansionary policy from August 2019 and February 2021 might be of an impressive nature, but these projects are likely not demanded to that extent by an undistorted market. Regardless of how impressive these projects are, they are bubble activities and therefore are likely to burst.
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