Monday, 28 April 2014

U.S. Money, Credit & Treasuries Review (as of 16 April 2014)

The U.S. monetary base is now just USD 4.41 billion short of hitting the USD 4 trillion mark the most recent bi-weekly monetary stats released by the Fed shows. Since 25 December last year, the base has now increased USD 244.65 billion, or 6.52%. 

Here's a quick reminder of just how significant the expansion in the base have been during the last six years and counting: at the beginning of 2000, the base stood at USD 646.86 billion. At the beginning of 2008, the base had increased 33.97% to USD 866.63 billion. Today, the base is USD 3.9956 trillion, having increased 361.05% since the beginning of 2008!

As the Fed is tapering, and as the denominator is larger, the growth rate in the monetary base is now slowing fairly rapidly. Today the growth rate on the same period last year is 31.03%, a 8.36 percentage point (or 21.21%) decrease compared to the 39.39% year on year (YoY) growth rate at the end of last year. 

As I keep pointing out in the various money supply reports, U.S. banks now need to step in and increase bank credit (which consists predominantly of loans & leases and securities) to avoid a significant drop in the money supply growth rate. If they don't, and if the Fed doesn't again increase its asset purchases, then the negative effects of prior monetary inflation will become obvious for all to see, first and foremost through a large drop in stock market prices (and many other asset prices). Do note that I am not advocating further money supply growth. If anything, I'm advocating an unchanging money supply as monetary inflation does not increase prosperity (in fact, it does the opposite). 


The YoY growth rate in M2 money supply came in at 6.08% for the bi-weekly period ending 16 April. This was lower than both the 52-week moving average of 6.39% and the 6.81% average for 2013. It has however picked up pace since hitting an intermediate trough at 4.94% at the beginning of this year. 

Since hitting 1.14% at the end of last year, the Bank Credit YoY growth rate has since increased to the current 2.87%. This growth rate is however extremely low, and rare, in a historical perspective: since 1985 it has averaged 6.42%. Removing the period since 2009, this average increases to 7.39% as the average since 2009 was only 2.00%. 

The increase in the growth rate of Bank Credit this year has been driven by an increase in Loans & Leases, an item that currently makes up about 73% of bank credit (average since 1985 is 74.79%). Since hitting 1.86% at the beginning of the year, the Loans & Leases growth rate has since increased to the current 3.74%, indicating that the demand and/or supply of loanable funds has increased. 

The 1- and 10-year treasury yields increased one and four basis points respectively on two weeks ago. Compared to one year ago, the 1-year yield is down one basis point while the 10-year yield is up 99 basis points. The spread between the two, currently at 2.61 percentage point, is therefore currently 100 basis points higher than a year ago. This spread, though not unusual since the end of 2008, is high in a historical perspective driven by the ultra low 1-year yield  - since 1985 it has averaged 150 basis points.  

The tables below summarise the most recent monetary and treasury yield data discussed in this report.