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Title: Monetary Watch December 2010: The Money Supply, a triple from here?
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URL Source: http://blogs.forbes.com/michaelpoll ... ney-supply-a-triple-from-here/
Published: Dec 22, 2010
Author: Michael Pollaro
Post Date: 2010-12-22 17:29:57 by Capitalist Eric
Keywords: None
Views: 1531
Comments: 1
The U.S. money supply aggregates based on the Austrian definition of the money supply, what Austrians call the True Money Supply or TMS, were mixed in November, with our shorter-term one and three-month rate of change metrics continuing their recent surge while our longer-term twelve-month rate of change metrics showing some moderation. Focusing on TMS2, THE CONTRARIAN TAKE’s preferred money supply measure, we find that it increased at an annualized rate of 15.6% in November, bringing the three-month rate of change to an annualized 15.2%. That’s up from October’s 14.5% rate and 13.3% rate, respectively. In contrast, the twelve-month rate of change metric on TMS2, the measure we watch most closely, went the other way, ending November at a rate of 9.8%, down from October’s 10.5% rate, and marking the end, albeit barley, of 22 consecutive months of double digit increases. As has been the case throughout 2010, M2, the mainstream’s favorite monetary aggregate, continues to show subdued growth, in November posting a year over year rate of increase of 3.1%, down from October’s 3.2%. As readers of this site are aware, THE CONTRARIAN TAKE posits M2 as a grossly misleading measure of the money supply, meaning the gap between the true and the perceived rate of monetary inflation is a healthy 6.7 percentage points. A Return to Double Digit Increases in the Offing? We must say that we were a bit surprised by that 9.8% twelve-month rate of change print on TMS2. As we argued in last month’s Monetary Watch, we were expecting TMS2’s 22-month string of double digit rate of change increases to continue well into 2011. Yes, it fell short by only 2 bps, but double digits it was not. We do think though that a return to double digit rate of change increases are in the cards, for three reasons… First, the recent surge in TMS2 – up an annualized 10% the past six months and 15.2% the past three – should be supportive of higher twelve-month rate of change increases over the coming months. Second, the full impact of the Federal Reserve’s QE II asset purchase program was not felt in the money supply aggregates. Coming as it did mid-month, plus what appears to be a larger than projected draw-down in the Federal Reserve’s Agency portfolio, QE II yielded an annualized impact of just $600 billion in November instead of the projected $900 billion. Third, and most important, private banking institutions are not only continuing to print money, but appear to be doing so at an accelerating rate. In fact, Uncovered Money Substitutes, i.e., bank deposit liabilities not covered by bank reserves, the issuance of which is the result of the banking systems’ efforts to lever up its loans and investments on top of what is currently a mountain of excess reserves, is growing at a year over year rate of 19.9%, a post credit crisis high. Here’s the 10 year record of TMS2 by inflation source, depicting the trend in Bank-Issued Uncovered Money Substitutes vs. Federal-Reserve-Issued Base Money: And here’s the 10 year record in excess reserves: If these trends continue, it seems to us that the money creation activities of private banking institutions could become the most important dynamic on the monetary inflation front going forward. What’s more, those double digit increases may be just a start. To that subject we now turn… A Willing Banking System Can Always Expand the Supply of Money As we have discussed several times in this space, nothing supercharges a money supply more than a banking system willing to create money by pyramiding loans, investments and deposits on top of its excess reserves. The operative words here are willing banks, for a willing bank can always increase the supply of money. It’s a common misconception that the banking system needs willing borrowers in order to expand the supply of money. We hear it every day, from one deflationist after another. It’s not true. It’s not willing borrowers we require but willing banks, for while it is true that even a willing bank can not create money by making loans without willing borrowers, it can always create money by buying securities. The fact is even in the depths of a recession a banking system flush with excess reserves is always in a position to pyramid up its deposit liabilities, to create Uncovered Money Substitutes, regardless of the demand for loans. And since the pyramiding up those reserves is one of the primary ways banks make money, sooner or later, they’ll do it, especially in a system where the Federal Reserve stands ready to bail them out of their mistakes. Guess what banks are doing right now with their excess reserves? That’s right, they are creating money by buying securities. Here’s the 10-year record in Bank Credit, all Commercial Banks, courtesy of the Federal Reserve Bank of St. Louis: Now here’s the record in Loans and Leases: And here’s the record in Investments: The conclusion? In the midst of all the endless talk about the dearth in loan demand, banks are largely creating money by purchasing securities. And the last time we looked, there is a heck of a lot of securities out there for even risk averse banks to buy, even if that only be U.S. Treasuries and Agencies backed by the U.S. government: What’s Next on the Monetary Inflation Front To repeat, nothing supercharges a money supply more than a banking system willing to create money by pyramiding loans, investments and deposits on top of its excess reserves. In other words, if private banks are game, we have the potential for an explosion in the money supply, even if that is affected simply through the purchase of securities. How much of an explosion you say? Potentially trillions. Here’s why… There is currently about $970 billion in excess reserves sitting in the banking system. Bank reserve requirements; that is, the amount of cover the Federal Reserve requires private banking institutions to hold against their deposit liabilities, ranges from zero to 10%, depending on the type and size of the deposit. So… that $970 billion in excess reserves has the potential to fuel a $9.7 trillion addition to the money supply. To put that number in perspective, that would mean a better than twofold increase on our TMS2 metric, from $7.2 trillion to nearly $17 trillion. But there’s more, a little thing called the Federal Reserve’s $600 billion asset purchase program. You see, we are just one month into this eight-month program, not only meaning that there is some $525 billion in reserve and bank deposit liability creation to go, but if the banking system chooses to lever up those reserves, a potential $5.3 trillion add to the money supply via the issuance of Uncovered Money Substitutes. All in, if banks fully lever up, we are looking at a potential money supply of roughly $24 trillion on our TMS2 metric, a stunning 3.3 times its current level. Now, we are not saying a $24 trillion money supply is right around the corner. Far from it. First, banks have to be continually willing to forsake the 25 bps they receive on their excess reserves as well as the cash cushion they provide for higher yielding risk assets. Not a huge obstacle for yield seeking banks, especially if those assets are backed by the U.S government, but an obstacle that could give some banks pause. Second, and more important, if the money supply took that kind of path we suspect it wouldn’t be long before the U.S. Dollar was trashed, making price inflation a national issue and forcing the Federal Reserve to try to save the U.S. Dollar by halting its easy money policies. No doubt, the Federal Reserve has it in its power to thwart this potential money bomb, right now, by implementing it’s much heralded exit plan; namely, to withdraw those excess reserves from the banking system before the banks lever up. But we suspect that unless Congressman Ron Paul, the new chair of the House Monetary Policy Subcommittee, and his Tea Party compatriots get their way, the Federal Reserve will be loath to implement that exit plan, at a minimum, until core consumer price inflation is a lot higher, the unemployment rate is a lot lower and housing is no longer seen as a threat to the banking system. Whether easy money policies can cure unemployment or reinflate the housing market is on our minds a questionable proposition, but something Chairman Bernanke seems to wanting to do.
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#1. To: Capitalist Eric (#0)
Oil hits two-year high, topping $90 a barrel http://latimesblogs.latimes.com/money_co/2010/12/oil-prices-two-year-high-90-barrel-commodities-rally-economy.html When gas hits $4.00 again we will dip way down again. Some stations are at $3.45 for 87 octane in LA right now. Premium is 3.95. http://www.losangelesgasprices.com/Map_Gas_Prices.aspx
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Top • Page Up • Full Thread • Page Down • Bottom/LatestThird, and most important, private banking institutions are not only continuing to print money, but appear to be doing so at an accelerating rate.
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