Thursday, 7 February 2013

U.S. Money, Credit & Treasuries Review (as of 23 Jan-13)

As we have reported for quite some time, money supply and bank credit in the U.S. have both been expanding steadily for quite a few years now and in the aftermath of the financial crisis of 2008/9. At the same time, interest rates and yields on U.S. Treasury Securities have been pushed down as the Federal Reserve has bought treasuries in the market (QE1, 2 and 3) and kept the Federal Funds Rate near zero. 

This report, the U.S. Money, Credit & Treasuries Review, includes data and charts on all these three key economic statistics in one report. Money supply, credit and treasury rates are crucial to keep track of in the U.S. economy (and many other economies) where the Fed manipulates the financial markets and as such has the power to artificially create booms and busts, inflate and deflate asset prices, in tandem with banks being able to create money through fractional reserve banking. Fed policy and bank lending hence affect all sectors of the financial markets, including the value of the dollar, bond markets and stock markets, e.g. (real) interest rates driven lower will normally, other things being equal, result in an increase in both bond and stock prices. Furthermore, increases in money supply will also normally help inflate stock market prices as there is more money available (some of the newly created money is likely to be allocated to the stock market). Finally, the three statistics are crucial ingredients in the Austrian Business Cycle Theory which helps explains peaks and troughs in an economy. As opposed to the Movements in the U.S. Monetary Base and Money Supply (bi-weekly) report, this report focuses on the broader measures of money supply. The date are the bi-weekly figures published by the Federal Reserve Bank of St. Louis (FRED). 

U.S. Money, Credit and Treasuries Review as of 23 January 2013
All broad measures of money supply continue to increase substantially on last year, from 6.06% for M2+IMF+LTD* to 8.04% for MZM, but they were all lower than two weeks ago. Bank Credit increased 5.43% on last year, but declined 0.41% from two weeks ago. All money supply measures and bank credit are near all-time highs.

The 1-Year and 10-Year U.S. treasury yields both remain extremely low in a historical perspective, but compared to same time last year the 1-Year treasure rate has increased 0.03 percentage points (from 0.11% to 0.14%). During the last two weeks the yield has however declined by 0.01 percentage points. The 10-Year treasury rate declined by 0.11 percentage points compared to same time last year, but is up by 0.02 percentage points compared to two weeks ago. The spread between the 10-Year and the 1-Year treasury yield is currently 1.73 percentage points, which is a slight decline from one year ago and a slight increase from two weeks ago. 

*The Federal Reserve stopped publishing its M3 Money Supply series back in 2006. As an incomplete substitute, the M2+IMF+LTD money supply is a broader measure than M2 and consists of M2 + Institutional Money Funds + Large Time Deposits, data series which used to be included in the M3 series and which are still reported on a regular basis by the Fed.

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