Saturday, 4 January 2014

Recap of 2013: U.S. Money, Credit & Treasuries Review (as of 25 December 2013)

Recap of Money & Credit developments in 2013
The final bi-weekly money supply supply and bank credit statistics for 2013 was published today the Federal Reserve. Before the standard commentary in this bi-weekly report, here is therefore a quick summary for the year for the various measures compared to previous years going back to 1985:

The table reveals a couple of interesting developments in 2013:
  • The U.S. monetary base expanded the most since 2008 and the annual growth was the second highest recorded based data since 1985.
  • The M1 money supply increased at the slowest pace since 2009, but increased substantially more than the 5.5% average since 1985.
  • The M2 money supply increased at the slowest pace since 2010 and at 5.3% increased less than the 5.6% average.
  • The yearly growth rate in the broadest measure of money supply in this report, the M2+IMF+LTD, dropped once again and have expanded relatively modestly during the last five years compared to earlier years.
  • Bank Credit posted the second lowest growth rate during the last 29 years in 2013, beaten only by 2009 (the only year with negative growth).
  • Ignoring 2009, the yearly growth rate in Loans & Leases was the lowest since 2001. 
  • Since February 1984, the M2 money supply has expanded a grand total of 415%, from USD 2.1488 trillion to USD 11.0566 trillion on 25 December 2013.
The M2 money supply increased a total of USD 559.0 billion in 2013. Of this total, only USD 104.8 billion, or 18.8%, were generated through Bank Credit growth from U.S. commercial banks. This compares to an average of 98.7% since 2001 (median: 91.8%). The rest of the increase in M2 money supply in 2013 were hence generated through other depository institutions and especially through the Federal Reserve monetizing government debt.

Mises, Hayek and others have demonstrated how a reduction in money supply growth will lead to the business cycle heading downwards, sometimes leading to a crash and of course a banking crisis (a necessary outcome of fractional reserve banking). Therefore, unless U.S. commercial banks start investing and lending more once again, the Fed together with the government (through deficit spending) will be the principal drivers of money supply growth again in 2014. If not, the stock market (and other financial markets) will plummet and the economy with it. This is why it's so difficult for the Fed to taper, even modestly - it needs to ensure new money is injected into the economy so that everything measured in dollars keep rising to keep the illusion of a "recovering" economy going. More dollars in circulation naturally does not necessarily mean real value creation has increased (if it did, it would actually be possible for the Fed to improve the economy simply by printing even more money). As the table above demonstrates, the quantity of US dollars (as measured by the M2 money supply) has increased every single year since 1985, increasing a grand total of 375.3% during the last 29 years! Few would however argue the U.S. is better off today than it was in 1985 (remember the federal debt). 
U.S. Money, Credit & Treasuries Review (as of 25 December 2013)
The monetary base declined slightly on two weeks ago to finish the year on USD 3.7510 trillion (bi-weekly data), an expansion of 39.39% for the year.

All the money supply and bank credit measures ended the year at all-time highs. The year on year (YoY) growth rates for all are however slowing down and all dropped quite sharply during the final two weeks of the year as the charts below demonstrate. The YoY growth rates for Bank Credit and M2 money supply therefore completed the year having dropped more or less consistently throughout the whole year. Other than through patches in 2010, the last time the two dived together in a similar fashion was in the run-up to the Lehman bust in September 2008 (when bank credit growth dropped from 10.8% on 26 March 2008 to 3.8% on 10 September 2008 while the M2 growth rate fell from 7.3% to 4.8% during the same period). Unless this trend reverses relatively quickly, especially for the money supply, the next "financial crisis" could be approaching quicker than many seem to think.

The 10-year treasury yield increased a full 11 basis points on two weeks ago to finish the week on 3.00% (3 January 2014), the first weekly close on 3% or above since July 2011. The yield has now increased some 124 basis points since the end of 2012. As the 1-year yield decreased 1 basis point, the spread between the 10- and the 1-year yield widened by 12 basis points on two weeks ago. The current spread of 2.88 percentage points is among the highest ever recorded based on bi-weekly data going back to early 1984. Since 13 July 2012, the spread has increased from 1.32 percentage points to the current 2.88%, more than doubling in less than 1.5 years.