The Money Supply Logjam May Finally Be Loosening

For those of us seeking relief from the hot air in Washington and the rest of the country, it comes in a little noticed bounce in the money supply statistics. The Fed’s latest estimates for M2, in its H.6 release on July 21, shows the growth rate for the past 3 months at 8.2 percent; the past 6 months at 6.8 percent; and the past 12 months at 6.0 percent. These numbers are a welcome increase from the 5 percent level they were all stuck at throughout the recent round of quantitative easing.

The Fed’s bond purchases fed the banks’ appetite for excess reserves, but didn’t give them enough to stimulate sufficient lending and investing to push up the rate of money growth. They were sufficient to produce 5 percent money growth, but not more. That doesn’t mean they did no good since one must presume banks would have held onto their reserves even tighter had the supply not been increased.

Measured by short term interest rates, Fed policy has been super easy “for a considerable period.” Measured by money growth, however, Fed policy has been overly tight for the circumstances. The recent pick-up in money growth is a welcome sign that banks are finally beginning to use their excess reserves to make money- creating loans and investment. If money growth continues its acceleration for a prolonged period it will finally trigger the beginning of the long awaited exit strategy of withdrawing reserves to offset the growth of the money expansion multiplier. But, meanwhile, let’s enjoy the long overdue stimulus to the economy.

Comments (4)

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  1. SethM says:

    Money supply growth is sorely needed, so that is great news. I’m highly skeptical though that the presence of reserves as a result of QE2 or otherwise has any bearing on this growth at all.

    The BIS has a recent paper that discusses just this reality. From the paper: “the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. The aggregate availability of bank reserves does not constrain the expansion directly.”

  2. Benjamin Cole says:

    July 28, 2011 at 8:09 pm
    The Hong Kong Monetary Authority recently issued a study in which is determined that mainland China’s central bank favored growth over fighting inflation, when targets were at odds.

    Meanwhile the Bank of Japan has favored–it’s so-called implied policy–is zero inflation

    Look that the record for the last 20 years. China has boomed, and Japan has gloomed.

    Really, it ain’t even close. I’ll take some inflation with my growth, thank you. It frees up sticky wages, it give Dutch courage to lenders and borrowers (and we need optimism). A long slug of moderate inflation will help America deleverage.
    Yes, we need to balance the federal budget–that is not the same as having a stimulative monetary policy.

    Bernanke should maintain a QE program until we see some growth, and then inflation, as Friedman predicted. We cannot let some little anal money gnomes, obsessed with minute inflation rates to the point of fetish, to put a monetary noose around our economy.

    The worst threat now is that we do a Japan.

  3. Mr. McTeer,

    Many economists argue that Fed purchases of Treasury securities can overcome the depressive, ‘crowding out effect’ of excessive US Treasury debt.

    Fed purchases of Treasuries, however, are not the same as permanent retirements and/or cancellations of Treasury debt. For starters, Treasury must still pay interest on the debt, even when it is held on the Federal Reserve’s Balance Sheet.

    Furthermore, a large inventory of bonds on the Fed Balance Sheet represents an overhanging threat of future bond sales from the Fed. That threat of massive sales of Treasuries from the Federal Reserve Bank exacerbates the risk averse physchology of the markets, rather than having the stimulative effect that is intended by the Fed purchases.

    Wouln’t the Fed’s monetary stimulus, through open market operations, be more productive if the purchases were treated as permanent retirements of US Treasury Debt, rather than temporary holdings that can and will be sold in the future?

    Is it legally possible for the Fed to effect ‘permanent retirements’ of US Treasury debt and thereby reduce such fears of future sales, and the interest payment obligations of the US Treasury? Have such measures ever been contemplated, or used before, in US history?

    Jonathan L. Gal
    Algae Fuels Entrepreneur
    Rockwall, TX

  4. Linus Huber says:

    SCARE 20.12.2012

    (Stop Corruption And Repression Effective 20.12.2012)

    Banks were given a very important privilege to create money in the form of extending credit. This function requires diligence and careful consideration in regard to individual credit risks as well as to overall credit levels in the system. The financial crisis revealed that the banks were operating at too high a leverage and with too much risk. They were used to be saved by the Central Banks and certain that in times of difficulties the Central Banks were there to save them. They were like trained dogs and their master Greenspan or Bernanke would always be there to rescue them when unforeseen difficulties arose.

    That may be true but that does not absolve them from their obligation to monitor overall debt levels in the system as well as being diligent in evaluating the debtors ability to not only service a debt but to be able to repay it over time. The banks clearly failed in this function that is the core function of banking but focused mainly on their compensation packages. The way these bankers enriched themselves in the process of driving the financial system into a wall was appalling and the average income earner was never able to comprehend their schemes but preferred to simply ignore them. Of course, the bankers explained their outrages income levels with free market principles of supply and demand, where the best simply could be hired with those kinds of benefits only. In hindsight those superior managers seem to have missed their mark considerably. The most interesting aspect of all of this is the fact that, after we have been more than 3 years in this financial crisis, the bankers continue to loot the system as if nothing ever happened.

    True to form the Central Banks “saved” the financial system by saving those great financial institutions without whom the system would have collapsed, as was argued. Hardly were we out of the danger of collapse, the banks immediately went back to their old ways and were certain that this was a problem that would occur just once in a lifetime and now all was clear again. The real problem, however, had not been addressed but had simply been muddied.

    In actuality, the losses produced of extending unsustainable levels of credit by the banks have been transferred to the public. Different ways were chosen to achieve this task in the form of free money for the banks, injection of government funds into some institutions, increase of basic money supply and so on.

    The threat of system collapse would have been labelled blackmail if it would have occurred in another setting. However the bankers were able to influence the media, the legislators and regulators in their favour with all the financial resources available to them. Nobody was made to take any responsibility and no one was taken to account.

    This represents a serious violation of the spirit of the Rule of Law that is the basis of western society. It seems that now the new rule is Might is Right. This changes many parameters in the compass of the social system within the western world. No one can be sure on what level and when one will be subjected to the financial abuse of those elites. Presently, the people in charge are trying to enhance financial repression of which one form is to keep interest rates below the level of inflation which affects mainly those that lived within their means over the past many years; another clear violation of the spirit of the Rule of Law as it transfers losses from bad investments to the innocent and decent part of the population. In addition, the increased level of government debt puts in doubt all those benefits promised by governments the world over.

    It is interesting how the banks were able to confuse the public who was/is unable to grasp the actual situation. But considering the banker’s great financial resources, it seems not that much of a miracle to influence the media and the legislator and having politicians do their bidding. The question is what the heck can WE, THE PEOPLE do about it.

    Usually, we could address such things on a political level as we are a democracy, right? But it seems that the system has been corrupted by all the money sloshing around and it is extremely difficult to find any electable person that will act against those powerful interests. In addition, it will take many years until sufficient numbers of persons with the new thinking and with integrity not to be corrupted by those lobbying efforts will be elected to office that will implement the changes needed. So, what should we do? Start a revolution?

    Well, the blackmail used by the banks may be the only way to address the injustices that have occurred over the past few years. They showed us how to leverage one’s limited resources to achieve one’s goal. Therefore the following proposal to start the movement “SCARE 20.12.2012” should be seen in this context. The idea is that if by that time (20.12.2012) some serious injustices have not been removed from the system, people will start to withdraw their money from all financial institutions driving them into default. And it might work, because those who hesitate to support this threat may be left with no money as the banks will have to close down before all has been paid out.

    Now, what demands are made if that scenario is to be avoided.

    1. Bankers and past Bankers (all those working in the financial industry that earned in excess of $500k plus annually for more than 2 years during the past 15 years and this without any downside risk i.e. risk of financial losses, except the possibility of losing their job) have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes regulating agencies and politics) before 20.12.2012.

    2. Present and past regulators have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes financial institutions and politics) before 20.12.2012.

    3. Politicians that accept any financial support from institutions that are involved in the money creation and lending aspects of the economy will have to face a jail term of no less than 2 years without the possibility of parole.

    When these 3 points are implemented before 20.12.2012, we the public will not destroy the financial system but support the way to find back to the RULE OF LAW and away from the idea of MIGHT IS RIGHT.