Sunday, 28 October 2012

Movements in the U.S. Monetary Base and Money Supply (as of 17 Oct-2012)

The Federal Reserve Bank of St. Louis reported the Monetary Base and Money Supply (Stock) figures for the bi-weekly period ending 17 October on 26 October 2012. The data series used in the report below starts in 1984 and are the bi-weekly, end of period figures ending Wednesday.

The monetary base increased by 2.41% for the bi-weekly period ending the week on USD 2,652 billion. This was 3.67% lower than the all-time high set in February this year. The M1 money stock for the week was the highest ever recorded, while the M2 hit a new all-time high for the 8th straight session in a row.

The M1 Money Multiplier (M1MM) remains substantially lower than normal (as measured by the median), but compared to last year it continues to increase quite substantially (up 15.03%) driving growth in the money supply. The monetary base in USD terms continues to remain largely unchanged (USD 2,559-2,753 billion range) as has been the case now for about a year, but it remains at an unprecedented high level in historical terms. The M2/Base ratio increased yet again quite substantially on last year (up 9.13%) leading to a 7.22% increase in M2 on last year. If the two ratios (M1MM and M2/Base) start approaching their historical normal levels, the increase in M2 money supply will be substantial unless there is a corresponding decrease in the monetary base.

As reported some weeks ago, if M2 was to increase substantially, there will be a real risk of consumer price inflation increasing dramatically further down the line (see
here for more on this). This is why we monitor these developments closely, especially given the unprecedented high level of the monetary base combined with the large excess reserves of depository institutions in the U.S. (read more on that subject here). The Fed has ways to keep the M1 and M2 money supply down once the money multipliers start to increase, such as raising the federal funds rate and the interest rate paid on both required and excess reserves, increasing the required reserve ratio and through selling bonds (which reduces the monetary base). But there are limits to what and how much the Fed can do (we're in uncharted territory) to reduce money supply without it having adverse effects in some other areas of the economy, e.g. large scale selling of treasury securities would normally lead to prices on those securities being pushed down and yields going up - this would pop the bond bubble possibly creating financial panic.

Monetary Base
The current monetary base increased 2.41% on the previous week to USD 2,651.80 billion. Compared to the same period last year it declined by 1.74%. The current monetary base is 3.67% lower than the highest ever reported (February 2012).

M1 Money Supply
The M1 figure increased 3.05% on the previous week to USD 2,430.30 billion and was up 13.94% compared to the same period last year. The current M1 money stock is the highest ever reported.

M2 Money Supply
The M2 figure increased 0.16% on the previous week to USD 10,211.30 billion which was 7.22% higher than reported for the same period last year. The current M2 money stock is again the highest ever reported.

M1 Money Multiplier
The reported M1 money multiplier ended the week on 0.911 which was 55.84% lower than the median (2.063) since 1984 and 70.90% lower than the highest ever reported (3.131). The multiplier increased 15.03% on last year and continued the trend of double digit percentage increase on last year for the 15th week in a row.

M2/M1 ratio
The ratio for the week was 4.202 and was 2.26% higher than the median (4.109) and 24.76% lower than the highest ever reported (5.584).

M2/Base ratio
The ratio for the week of 3.851 was 52.33% lower than the median (8.078) and 68.17% lower than the highest ever reported (12.097).



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