EC US Money Supply And Fed Credit – The Liquidity Drain Becomes Serious

US Money Supply Growth Stalls

Our good friend Michael Pollaro, who keeps a close eye on global “Austrian” money supply measures and their components, has recently provided us with a very interesting update concerning two particular drivers of money supply growth. But first, here is a chart of our latest update of the y/y growth rate of the US broad true money supply aggregate TMS-2 until the end of June 2018 with a 12-month moving average.

(Click on image to enlarge)

US TMS-2: y/y growth rate with 12-month moving average. Since the short-term spike in March (we believe this was largely driven by repatriation), broad US money supply growth has stalled and currently stands at 4.4% y/y. Traces of the repatriation effect remain in evidence, as US Treasury deposits with the Fed remain at around USD 348 billion, a historically still very large amount. The 12-month moving average of TMS-2 growth continues to decline and has reached a new multi-year low of 3.7% (the lowest reading in the 12-month ma since February 2008).

Bank credit expansion in the US has recently recovered a little further, with commercial and industrial loans growing at 5.33% y/y as of the end of June and total US bank lending growth reaching 3.91% y/y (which is still nothing to write home about). The rise in C&I lending is consistent with the scramble for capital associated with the late stages of a boom: it comes amid rising interest rates, a rapidly flattening yield curve and rising CPI.

However, the sum of demand deposit liabilities in the US banking system plus outstanding currency was recently growing at an anemic 3.2% y/y (which shows the strong effect of Treasury deposits on domestic TMS-2 growth – mainstream money supply aggregates do not include this item). At the same time, CPI has recently jumped to 2.9% y/y – this continues to be highly reminiscent of the convergence between these growth rates in 1987, early 2000 and 2007-2008.

Here is an update of G3 TMS growth (US, Japan, and euro area) until the end of May; money supply growth in the euro area bounced back slightly to the 7% level in June after reaching a new low for the move of 6.5% y/y in May.

(Click on image to enlarge)

G3 TMS growth rates as of the end of May (US, Japan, euro area). Money supply growth has slowed sharply in all three major currency areas – a combination of base effects and the reversal of QE in the US and the slowdown of QE in Europe and Japan have contributed to this trend. Bank lending growth is generally recovering but remains anemic by historical standards.

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Zev Bannett 9 months ago Member's comment

Insightful article. The big question we all are wondering is, how explosive will it be when the asset bubble actually does pop? The excesses of 2007 in the credit sector aren't really being repeated in a visible way. The major excess we're seeing is the exceedingly low interest rate environment, and the subsequent inflated asset prices. These dynamics are more reminiscent of other market declines and swings in the economy, like 2000-2001, and earlier swings in the 1970's. The distinction means that instead of another recession, we'll just experience a 2-3 year downswing in the economy cycle.

Thanks for the interesting article!

James Dean Samuels 9 months ago Member's comment

Good question Zev, but what's the answer?

Moon Kil Woong 9 months ago Contributor's comment

Decreasing the money supply is ok as long as the economy is growing, especially given the pickup in the deficit through tax cuts. The issue is, a trade war can end growth rapidly but also causes inflation. Cutting money supply slows inflationary ramifications but leads to a dampening of economic activity which can be deadly combined with monetary tightening.

The sad fact is, it is dangerous tightening this late in the cycle and the Federal Reserve knows it. It is a travesty they tightened this late in the cycle and shows they have absolutely no self control anymore. Rather than smoothing out cycles they are contributing to bigger and more nasty cycles and they probably know it. Sadly, it gives them power.

Gary Anderson 9 months ago Contributor's comment

There also is danger in emerging markets with tightening.

Moon Kil Woong 9 months ago Contributor's comment

Yes in any tightening the first ball to drop is usually some debt stricken emerging market country.

Gary Anderson 9 months ago Contributor's comment

This is definitely a must read article.