About This Week's Monetary Statistics
If we start with foreign central bank purchases in the week ending October 8, they totaled some $19.5 billion (they purchased $32.5 billion of Treasuries while selling $13.0 billion of Agency bonds.) While that is less than last week, it is still very high (if that rate sustained it would be more than a trillion dollar in a year) and explains the continued strength of the dollar. I'll return to that issue in a separate post later this weekend.
Continuing with base money, we could see that Reserve Bank Credit rose another $103.6 billion to $1494.7 billion in the week to October 8, creating a 4-week gain of 66.3%(!). The monetary base rose a relatively more moderate $74.4 billion in the two weeks to October 8, to $985.9 billion. Even so, this means that the 2 week average monetary base is up 16.8% compared to 4 weeks earlier. Although currency in circulation has increased unusually fast too in recent weeks, what really drives the increase in the monetary base are increases in bank reserves, which are up to $179.9 billion, up from $47.1 billion in the two week period 4 weeks earlier.
Despite the sharp increase in the monetary base, MZM actually fell by 0.28% to $8693.3 billion in the week to September 29. MZM is down 0.42% in the latest 8 week period, indicating that monetary conditions are actually deflationary (undoubtedly one of the factors behind the combined stock- and commodity price rout) despite the Fed's aggressive moves to reignite inflation. So far it seems that the deflationary effects of the financial distress is slightly more powerful than the inflationary effects of the various Fed schemes they have launched. If we look at the various components, we can see that M1 continues to soar, seeing a weekly 2.1% gain to $1510.4 billion with demand & checkable deposits up another $29.1 billion and currency in circulation up another $2.4 billion. However, this was more than cancelled out by a $49.5 billion drop in savings deposits and a $6.9 billion drop in institutional money funds.
Bank credit on its hand, had a very different message from MZM this week. Bank credit soared nearly 3% in the week to October 1 to $9864.4 billion, creating a 4 week gain of 5%. This may seem puzzling. While the financial media may exaggerate the credit crunch, surely there is no massive credit expansion around, particularly not at that very high rate (A gain of 5% in 4 weeks implies an annual rate of nearly 90%!). What is going on here is not a general credit expansion, but a shift in credit transactions from money markets to bank balance sheets. Because at the same time as bank balance sheets expand rapidly, money market mutual funds and commercial paper is contracting. This means that one should not interpret the bank credit numbers as indicating a massive credit expansion. But this also means that one should not as Larry Kudlow did in his most recent column, interpret the sharp decline in commercial paper as indicating a massive credit contraction. Overall credit are probably stagnating or declining slightly, while at the same time increasingly being on rather than off bank balance sheets.