Thursday, 11 July 2013

U.S. Money, Credit & Treasuries Review (as of 26 June 2013)

The U.S. Monetary Base (or Base Money) declined by USD 37.4 billion for the bi-weekly period ending 26 June according to the most recent numbers released by the St. Louis Fed. The decrease is an occasional one-off however as the Fed's plan is to continue buying treasuries and MBSs at a monthly pace of USD 85 billion for some time yet.

The latest money supply numbers, except the M2+IMF+LTD*, continue to show a slowing growth rate. All the money supply measures reported in the tables below were lower than two weeks ago and the increase this year for all is minimal (e.g. M1 is up by 0.3% compared to year-end last year, while MZM is up by 0.9%). All the money supply measures have however increased significantly on last year, but the pace of growth is nonetheless slowing down. Bank Credit shows a similar development.

From what I read, the media tend to be obsessed with the monetary policies related to the Fed's asset purchases, which affects the monetary base, while largely ignoring changes in the broader money supply. Though the former serves to keep interest rates for treasuries and MBSs artificially low, help the U.S. Treasury increase its debt through the Fed being a marginal buyer of treasury securities and through increasing banks' reserves, it is the latter (the broader measures of money supply, which banks affect directly) that ultimately will affect price inflation and credit induced investments and consumption - key ingredients in the Austrian Business Cycle Theory, which helps explain the boom and the bust of the business cycle. This is the main reason we monitor money and credit developments in this bi-weekly report. Austrian economist Dr. Pat Gunning explains the bust of the business cycle briefly as follows (from a recent discussion in the Austrian Economics group on Linkedin):
It begins with an increase in the money supply that cause temporary increases in spending and investing. Entrepreneurs react as if these changes are permanent because they do not know that they were the consequence of a money supply increase. The entrepreneurs MALINVEST. The bust begins when they cut their losses by ceasing their investments. The bust continues until they are able to identify new profit opportunities from investment.
The most interesting development during the last two weeks was yet again the further increase in the 10-Year treasury yield as we've reported for some time (see the previous bi-weekly reports), which has now increased from 1.71% on 1 May this year to the current 2.37% - an increase of 66 basis points in less than two months. This has resulted in an increase in the spread between the 1-Year and the 10-Year treasuries as the former only increased by 2 basis points during the same period.