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.

 

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.

 

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.

 

The upshot of the above is that the ice on which the asset bubble is skating continues to become ever thinner. In the US the 2.7% y/y low in TMS-2 growth reached in February is the decisive figure (growth in the more volatile narrow measure TMS-1 even fell below 2% y/y). The lagged effect of this slowdown will become noticeable almost regardless of what happens next (the 12-month moving average helps with capturing this lag to some extent).

Risk asset prices and the economy were extremely resilient so far, but that is actually quite normal. As the long term chart above reveals, the lag between a slowdown in money supply growth and its effects on economic activity and asset prices can be substantial and is by no means “fixed”. The shift in relative prices that begins with a rise in the rate of change of CPI near the end of a boom is subject to leads and lags as well. Usually a surge in CPI precedes an eventual decline in asset prices from market peaks, while it lags the subsequent upturn in asset prices from bear market lows.

Given the recent sideways move in TMS-2 growth, what has actually changed?

 

For the First Time Since the Beginning of “QT” Net Fed Credit Declines

Michael has pointed a recent new development out to us that looks potentially quite important. As long-term readers are probably aware, the fall in the y/y growth rate of TMS-2 since the November 2016 interim peak was largely driven by declining bank lending growth. After all, from the end of QE3 until September 2017, the Fed kept the size of its balance sheet stable, neither adding to the money supply nor decreasing it.

We neglected to keep an eye on outstanding reverse repos in recent months. The Fed has actually stopped publishing charts on total reverse repos outstanding as of June 13. Since the total amount has recently converged with reverse repos with foreign official and international accounts, we suspect there are no longer any open reverse repo agreements with domestic institutions. Here is the chart:

 

Reverse repo agreements with the Fed: all maturities in red, foreign official accounts in blue.

 

The Fed also no longer charts the item “securities held outright” separately. At first we thought that this would make it difficult to follow the changes in its holdings as a result of QT, but if it no longer has any reverse repo agreements with domestic banks, there is presumably no need to report these items separately (we will keep our readers posted on this). It is precisely these two items that are actually important to the subject at hand.

As a reminder: the Fed started to enter into reverse repo transactions with domestic institutions in early 2014, while QE3 was still underway. Initially this was declared to be a test designed to ascertain that the eventual draining of excess liquidity would go smoothly. We believe though that commercial banks, primary dealers and the Fed were also getting antsy over the sizable surge in delivery fails at the time, as QE increasingly created shortages in certain off-the-run treasuries.

For banks it was apparently a case of having too much liquidity and not enough high quality securities. Reverse repos kept growing with large spikes occurring at the end of every quarter – a strong hint that they were associated with balance sheet window dressing and/or settlement periods. This changed with the beginning of “QT”: with the Fed lowering its monthly repurchases of maturing securities, the shortage of securities was gradually alleviated, and reverse repo agreements were increasingly no longer renewed.

As a matter of fact, reverse repos decreased faster than the Fed’s outright holdings of securities purchased under QE. The result was that net Fed credit outstanding was still USD 95 billion higher at the end of May 2018 than at the beginning of “QT” in September 2017!  This is now beginning to change: in July year-on-year growth in total Fed credit outstanding turned negative for the first time since the birth of Methuselah. Here is a table that shows developments since the beginning of “QT”.

 

Change in reverse repos, securities held outright and net Fed credit outstanding. We have highlighted the first three month-on-month declines and the first y/y percentage decline in the latter in red. Note that the change in total Fed credit outstanding since the beginning of “QT” still stands at a positive USD 49.5 billion in absolute terms as of July to date. By the end of the month this figure should be smaller and sometime in August it should turn negative as well.

 

In short, QT should begin to exert a far more noticeable impact on excess liquidity and the money supply from now on. The only countervailing trend is the recent acceleration in the pace of bank lending, but total bank credit growth actually still seems to be quite anemic. We have a feeling most market participants are not aware of these developments – at least we haven’t come across any discussion of how close the impact in terms of an outright decline in liquidity actually is. Note also that money supply growth is set to weaken even faster in real terms (i.e., adjusted for CPI). Something will have to give sooner or later – and it increasingly looks sooner rather than later.

 

Addendum: China Follows Suit

Since we mentioned Japan and the euro area in passing above, we should probably also point out that there was recently a rapid slump in the growth rate of China’s narrow money supply M1, as if to add an exclamation mark to the broader money supply measure M2 reaching new multi-decade lows.

 

Both narrow (M1) and broad money supply (M2) growth rates in China have plummeted.

 

Recently the PBoC has begun to try to reverse this trend by lowering minimum reserve requirements (a much more important policy tool in China than elsewhere) and occasionally injecting liquidity into overnight interbank lending markets. However, it finds itself in a delicate situation in view of the escalating trade dispute with the US.

Regardless of the background noise, China should begin to feel the lagged effects of this slowdown in money supply growth as well. Chinese stock prices have in fact already weakened quite a bit this year.

 

Running on empty – lately no-one seems to be able to find the Ctrl-P key combination anymoreIllustration by Walery Kachaev

 

Charts and data by: acting-man.com, Michael Pollaro, St. Louis Fed

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • A Golden Renaissance – Precious Metals Supply & Demand
      Battles for Civilization A major theme of my work — and raison d’etre of Monetary Metals — is fighting to prevent collapse. Civilization is under assault on all fronts.   Battling the barbarians at the gate... [PT]   There is the freedom of speech battle, with the forces of darkness advancing all over. For example, in Pakistan, there are killings of journalists. Saudi Arabia apparently had journalist Khashoggi killed. New Zealand now can force travelers to...
  • The Federal Punch Bowl Removal Agency
      US Money Supply and Credit Growth Continue to Slow Down Not to belabor the obvious too much, but in light of the recent sharp rebound, the stock market “panic window” is almost certainly closed for this year.* It was interesting that an admission by Mr. Powell that the central planners have not the foggiest idea about the future which their policy is aiming to influence was taken as an “excuse” to drive up stock prices. Powell's speech was regarded as dovish. If it actually was,...
  • The Non-Expiring Hedge - Precious Metals Supply and Demand
      The “Risk Asset” Dip Not Worth Buying is on its Way The prices of the metals rose, gold by +$11 and silver by +$0.25. The question on everyone’s mind (including ours) is: what will cause a change in the gold price trend, or what will make gold go up in a large and durable way? And that leads to another way of looking at this question.   Here is a very good technical reason to adopt a constructive attitude toward gold despite the fact that its nominal price in USD terms...
  • A Global Dearth of Liquidity
      Worldwide Liquidity Drought - Money Supply Growth Slows Everywhere This is a brief update on money supply growth trends in the most important currency areas outside the US (namely the euro area, Japan and China)  as announced in in our recent update on US money supply growth (see “Federal Punch Bowl Removal Agency” for the details).   Nobody likes a drought. This collage illustrates why.   The liquidity drought is not confined to the US – it is fair to...
  • The Zealous Pursuit of State Sponsored Wealth Destruction
      How to Blow $9 Billion The life cycle of capital follows a wide-ranging succession. It is imagined, produced, consumed, and destroyed. How exactly this all takes place involves varying and infinite undulations.   The Stroh Brewery in Detroit. The company provided an example of how wealth that has been accumulated over generations can be completely destroyed due to just a handful of really bad decisions. [PT]   One generation may produce wealth, while the...
  • Debt, Death, and the US Empire
      Yosemite Sam Gets Worried About Federal Debt In a talk which garnered little attention, one of the Deep State’s prime operatives, National Security Advisor John Bolton, cautioned of the enormous and escalating US debt.   Deep State operative John Bolton, a.k.a. Yosemite Sam [PT] Photo credit: Mark Wilson / Getty Images   Speaking before the Alexander Hamilton Society, Bolton warned that current US debt levels and public obligations posed an “economic...
  • The Bien Pensants Agree: The World Doesn’t Need Gold – Precious Metals Supply and Demand
      The Last Thing to be Left Standing – Alas, Not Yet  The price of gold was about unchanged this week, whereas that of silver fell another nine cents. All Serious Right Thinking people agree that the world does not need gold. Indeed our monetary system produces Great Moderations that are totally unlike the incredible volatility of the gold standard era. They wish they could kill all memory of gold as money.   Ben Bernanke, the inventor of the “Great Moderation” fairy tale,...
  • How To Give Thanks Like Socrates
      Political Correctness Indoctrination [ed note: we are posting this belatedly as it was originally supposed to be published on Thanksgiving Day. Unfortunately your editor was out of commission... but MN Gordon's article is still worth reading. - PT]  Ordinary ideals of Americana range as far and wide as the North American continent.  The valued conviction of one American vastly differs from that of another.  For example, someone from the Mid-Atlantic may have little connection...
  • Trump or Seasonality: Which One is Going to Prevail in the Dollar's Late Year Surge?
      A Plethora of Headaches We hope the recent market turmoil is not giving our readers too much of a headache. As you are no doubt aware, the events of the last few weeks have made maneuvering around global markets rather difficult.   A less than happy NYSE floor trader [PT] Photo crdit: Brendan McDermit   The US faces uncertain economic times, as Trump and Xi Jinping remain locked in a bitter trade dispute that is likely to go on for some time, creating uncertainty...
  • Paper Lanterns
      Mud Volcanoes There are numerous explanations for just what in the heck is going on with the economy.  Some are good.  Many are bad.  Today we’ll do our part to bring clarity to disorder...   Two data series it is worth paying attention to at the moment: the unemployment rate (U3) and initial claims. As the chart at the top shows, when the former makes a low it is time to worry about the economy. Low points in the U3 UE rate slightly lead the beginning of recessions....

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!