U.S. money supply is falling at its fastest rate since the 1930s, a red flag for the economy and financial markets.

Money supply has now been shrinking year-on-year since December, an unprecedented development in modern times that should make investors sit up and take notice – growth, asset prices and inflation could all weaken.

It is largely a consequence of the reversal of the liquidity generated by massive post-pandemic fiscal and monetary stimulus, the Federal Reserve shrinking its balance sheet via quantitative tightening, falling bank deposits, and weak demand for and provision of credit.

Fed data on Tuesday showed that M2 money supply, a benchmark measure of how much cash and cash-like assets is circulating in the U.S. economy, fell a non-seasonally adjusted 2.2% to $21.099 trillion in February from the same period a year earlier. hat was before the March failures of Silicon Valley Bank and Signature Bank – both in the top 25 banks in the country – which fanned fears of a credit crunch, stoked market volatility, and prompted temporary emergency liquidity measures and backstops from the Fed worth hundreds of billions of dollars.

Shrinking money supply is rare but has been buried this year in the blizzard of market volatility around the Fed’s aggressive interest rate hikes, and more recently, the banking shock that has rocked rates and bond markets, and the central bank’s expectations.

The post-COVID stimulus surge and the Fed’s equally dramatic push to tighten policy – mainly via super-charged rate hikes, but also QT – has had a profound effect on banks’ customer deposits, reserve balances, and general liquidity in the system.

The banking sector shock intensified some of these trends. By some measures, retail deposit outflows from U.S. banks have been the biggest on record, particularly from smaller and regional banks.