About This Week's Monetary Statistics
Last week, I told you about how monetary statistics had some really extraordinary features. The same thing is true only to a slightly lower extent of this week's numbers.
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.
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.
5 Comments:
Will commodities still be hot in the next few years? Do you think miners such as Boliden and Lundin Mining are good investments if you by a year from now?
Well, these two companies have suffered greatly on the stock market and they are both extremely cheap if you look at equity and underlying earnings potential, meaning that once the crisis is over their price will rise very fast, so I would recommend them for long-term investors. But since I expect the weak economic conditions that have depressed metal prices to last for a while, I am less certain that they will rise during the coming 12 months.
On the other hand, when the coming short-term rally arrives, they will probably rise a lot. So, they are probably both good investments in the short term and long term, but not necessarily in the medium term.
"Because at the same time as bank balance sheets expand rapidly, money market mutual funds and commercial paper is contracting."
I interpret this to mean that the business of money market financing has migrated (perhaps due to shock created in the moeny markets by the Lehman collapse) over to the banks. Is that correct ?
If so, then this has to be good news for banking,doesn't it, as they are getting more of this business, right ?
"I interpret this to mean that the business of money market financing has migrated (perhaps due to shock created in the moeny markets by the Lehman collapse) over to the banks. Is that correct ?"
Yes, in a formal accounting sense (see more below).
"If so, then this has to be good news for banking,doesn't it, as they are getting more of this business, right ?"
Not necessarily. The reason is that it is often the banks themselves that run these funds.
Dear Mr.Karlsson, how would you save the Hungarian economy from the coming great depression? Do you agree that avoiding a very dangerous slowdown would be more important now than balancing the budget?
Sincerely:
Dr.Magdolna Csath (economist)
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