Monday, 2 September 2013

U.S. Money, Credit & Treasuries Review (as of 21 August 2013)

The U.S. monetary base continues its climb toward regular new highs in accordance with the Fed's "quantitative easing" program. During the last two weeks the base increased by USD 23.6 billion, or 0.7%, to reach yet another record high at USD 3.4039 trillion.

On average this year, the base has increased USD 86.4 billion on a four week basis, largely in line with Fed policy to purchase USD 85 billion in assets on a monthly basis (USD 45 billion in longer term treasuries and USD 40 billion in agency mortgage-backed securities).

What about tapering? Two weeks ago we mentioned that one problem with tapering would be the resulting increase in interest rates the U.S. government would have to pay on its new debt. There are obviously other obstacles to tapering as well. A couple of days ago Thorsten Polleit wrote the following,
Given the deceleration of money creation through bank credit expansion [viz. which has dropped off, see below] as from the middle of 2012, however, it is hard to see that the Fed will be in a position to “tapering” its QE policy anytime soon, let alone abandon it altogether.
This is because phasing out QE at this point will most likely dampen economic activity, or could even result in outright recession – as rising interest rates will reveal malinvestments which have been built up under a regime of artificially lowered interest rates.
A recession is a painful but necessary process through which the free market system cleanses itself of unsound investments. However, there is typically a fairly strong political incentive to employ policies for keeping the artificial “boom” going, such as QE.
Polleit is here pointing out a key component of the Austrian Business Cycle Theory, namely the inherent danger of keeping interest rates artificially low. Someone once said that a government can print itself into problems, but never out of them. This is where the the U.S. government and the Fed find themselves following the USD 2.5318 trillion, or 290%, increase in the monetary base since the beginning of August 2008.

The money supply, in true inflationist fashion, also continues to increase. But it is increasing at a slowing pace as we've pointed out for quite some time. The M1 money supply for the bi-weekly period ending 21 August increased at its slowest year on year (YoY) pace since 29 December 2010. At 8.31%, it was 1.5 percentage point lower than the 9.8% average YoY growth rate during the most recent six weeks and 3.3 percentage points lower than 11.6% average during the most recent 52 weeks.

The M2 money supply is also expanding at a slower pace than the 52 week average, but it has been fairly stable around the 6.7-6.8% mark during the last six weeks or so. This is however a full 1.7 percent point lower than the 8.5% average YoY growth rate in 2012.

The growth rate in the short version of the "Austrian" True Money Supply is declining even quicker than the M2 money supply.

The plummeting of the growth rate in bank credit is clearly a factor in the reduced growth in money supply. After expanding 6.0% in 2012, the YoY growth rate has now dropped to just 2.1% - the lowest growth rate since the bi-weekly period ending 16 November 2011. Looking at the longer term trend, the 10 year annualised growth in bank credit hit a new record low last week at 6.81%, a direct result of the declining growth rates in recent months.

The 1- and 10-year treasury yields both increased slightly compared to two weeks ago. Compared to the end of last year, the 1-year yield is down 3 basis points while the 10-year is up 100 basis points. As a result, the spread between the two has widened by 103 basis points.

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