Monday, 18 November 2013

U.S. Money, Credit & Treasuries Review (as of 30 October 2013)

The U.S. monetary base increased USD 28.7 billion for the bi-weekly period ending 30 October according to the most recent monetary statistics published by the Federal Reserve. At USD 3.6281 trillion, the base hit a new all-time high as has become customary this year due to the Fed's ongoing asset purchase program buying treasury and mortgage-backed securities at a pace of USD 85 billion every month.

The M1 money supply increased 8.81% on the same period last year. This was 2.08 percentage points lower than the 10.99% average year on year (YoY) percentage growth rate during the last 52 weeks.

The M2 money supply expanded 7.11% on the same period last year, the highest since week ending 1 May this year, slightly higher than the 7.09% average YoY growth during the last 52 weeks. Though the M2 is expanding rapidly by most standards, the current growth rate is 1.45 percentage points, or 16.93%, lower than the average YoY growth rate in 2012 of 8.56%.

As increases in Bank Credit leads to increases in money supply (all other things remaining the same), there is little doubt that the continuing collapse of the growth rate in bank credit negatively affects the growth rate in money supply. This week, the YoY growth rate fell to 1.69%, a new low since week ending 16 November 2011. A great contributor to this relatively low growth rate was the 3.85% drop on last year in the value of commercial banks' holdings of Treasury & Agency Securities. Part of this decrease is driven by the increase in treasury yields this year, but it also clearly indicates US banks' lacklustre appetite for US treasuries. This development makes it, in my opinion, impossible for the Fed to taper in the foreseeable future. Meanwhile, the YoY growth rate in Loans & Leases, a component of bank credit, also fell this week and at 2.43% was the lowest reported for almost two years. The Fed, through monetizing government and agency debt, remains the main driver of money supply growth. Perhaps more importantly, the above points to the Fed becoming an even more important, and dominant, driver of money supply growth.

Compared to two weeks ago, the 1-year treasury yield increased two basis points while the 10-year yield increased 13 basis points. Compared to one year ago, the 1-year yield is now three basis points lower while the 10-year yield is up 94 basis points. As a result, the spread between the two has widened by 97 basis points during the last year. As banks borrow short-term and lend long-term, this increase in the spread could help boost banks' incentives to lend going forward. Whether this materialises remains to be seen and until proven, the government in tandem with the Fed remain firmly seated at the money supply growth wheel.

In this world of faulty economic doctrines guiding government policies towards the abyss trough recommending more monetary inflation, Michael Pollaro sums up nicely a major risk of this policy in his discussion of the True Money Supply ("TMS2", an alternate money supply measure),
TMS2, which represents our broadest and preferred U.S. money supply aggregate, posted a year-over-year rate of growth of 8.4% in October up from 8.1% in September. While still a robust rate, the U.S. monetary inflation rate is now substantially off its highs and in a decelerating trend. This is something not to be taken lightly. Indeed, as we discussed here, given the size of this our current monetary largesse, any substantive deceleration in the rate of monetary inflation from here ushers in the real possibility of another financial and economic bust, and a monumental one at that.

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