Excessive Money Supply Growth Creates Secular Stagnation

Authored by Daniel Lacalle,

Most economic commentators ignore monetary aggregates and the negative effects on growth and investment of the constant increase in government spending. However, the reality is that we live in a world where the economic impact of new units of currency is diminishing and generating negative results in many cases.

In developed economies, anemic economic growth requires more monetary stimulus, and government spending absorbs most of the new credit, leading to weak productivity, poor growth and unproductive expenditure.

The U.S. M2 money supply rose to a record $22.02 trillion in June 2025, up from $21.94 trillion in May. Year-on-year (YoY) growth stands at 4.53%, reflecting an acceleration compared to last year’s 1.36% growth. This renewed monetary expansion is not leading to inflation because money velocity is not rising, and money supply growth is lower than the 10- and 20-year annual averages of 6.8% and 6.2%, respectively.

The government must understand that higher spending is not going to drive stronger growth. When a 4.5% money supply growth delivers a 2.5% real GDP estimated growth, it is showing that the economy needs more, and a 6.8% increase delivered just 2% with a $2 trillion increase of government spending between 2021 and 2024; it shows that more money only bloats government and creates persistent inflation.

In 2021, money supply growth soared to 26.6%, and economic growth was only 5.7% during a massive reopening. In 2022, money supply grew 5% and the economy barely lifted 1%. This means that money supply generated no multiplier effect on GDP between 2021 and 2024.

The trend in the United States is concerning unless the government really acts and cuts spending. The risk, if the administration does not reduce spending, is to follow the euro area and the UK into a stagnation spiral.

According to the latest Bank of England data, the UK’s M3 money supply reached £3.65 trillion in June 2025, posting a YoY growth of 3.19%. The economy is expected to grow less than 1% in 2025 and some estimates assume no growth at all. Why? Bloated government spending is crowding out credit and productive investment.

The euro area exhibits a similar pattern. As of June 2025, the M2 money supply is €15.71 trillion, an increase from €15.29 trillion a year earlier, reflecting a year-over-year growth of 2.76%. However, the five-year average M2 growth rate in the euro area is 5.94%, which has resulted in almost no real GDP growth. Furthermore, unfunded committed government liabilities mean that the money supply growth is likely to remain three times above GDP growth only to remain in stagnation.

Estimates for total global circulating money (M2 and equivalents) suggest roughly $123 trillion worldwide in 2025, to deliver the worst economic growth since the 2008 crisis. While this figure has ballooned over recent decades, YoY global money supply growth remains at around 4%, reflecting that central banks’ priority is to keep the debt bubble afloat. It is, therefore, no surprise to see that global public debt has soared recently.

Global public debt reached a record $102 trillion in 2024, up from $97 trillion in 2023, according to UNCTAD. This shows a much faster pace than pre-pandemic levels, with more than a third of countries—accounting for 80% of global GDP—now carrying higher and faster-rising debt than before COVID-19.

The reality shows that central banks are fuelling the fire of higher government debt and increasingly irresponsible fiscal policies, leading to a crowding-out of the private sector, higher taxes, persistent inflation and weak growth. The COVID-19 excuse does not work. Keynesians estimated that the response to the pandemic would drive stronger and more productive growth and what it has delivered is secular stagnation… However, persistent inflation remains a concern.

The lesson for the United States is simple. If you copy European and UK policies, you experience the same stagnation they created. The United States must cut spending faster and allow the money supply to flow to productive private investment.