Saturday, October 04, 2008

Really Extraordinary Monetary Statistics

Yesterday's and thursday's weekly monetary statistics from the Fed was quite extraordinary in many ways. I already told you about one part, namely the massive purchases of U.S. government bonds by foreign central banks yesterday, so

First of all, my preferred money supply measure, MZM was roughly unchanged. That's of course not really extraordinary. What however was extraordinary was how the different components moved. Currency in circulation rose from $777.7 billion to $781.4 billion, a 0.6% increase, or more than 30% at an annual rate. But that's nothing compared to the increase in demand & checkable deposits, so M1 rose 4.3% in a week, from $1411.3 billion to $1472.2 billion, and M2 which rose 2.1%, from $7734.5 billion to $7900 billion. However, since $9.3 billion of that increase consisted of an increase in time deposits and since Instititutional Money Market Mutual Funds fell $2254.6 billion to $2098.2 billion, MZM was almost unchanged (it fell a marginal $0.2 billion).

The decline in institutional MMMF:s was of course the result of increased distrust of them after one who had invested in Lehman papers said it would no longer allow those with money there immediate access to them. The increase in other components of MZM could to some extent reflect that people who used to have money in institutional MMMF:s instead chose to have them in demand- and savings deposits. But it is also likely a result of the massive increase in bank reserves as a result of Fed actions to boost liquidity.

Speaking of which, the last few weeks has seen an unprecedented increase in the Fed balance sheet, which will likely also translate into an unprecedented increase in the monetary base. As late as the week ending September 10, the average size of the Fed balance sheet was just $888.3 billion. A mere three weeks later, that number had risen by more than 55%, to $1388.6 billion. Yeah, that's right, the Fed balance sheet is up more than 55% in just 3 weeks! And if you look at the absolute level on October 1, the Fed balance sheet was $1481.1 billion.

You can accuse the Fed of many things, but not for being inactive in trying to reignite inflation. So far, this has not resulted in actual inflation because the general financial distress that have caused them to take this action have had a strong counteracting deflationary effect. It will be very interesting to see the coming monetary releases.

Finally, bank credit continues to expand, to a new high of $9576 billion, up 0.25% in the latest week and nearly 2% in 3 weeks. Commercial & Industrial loans in particular increases very fast. Given what we saw in the monetary statistics with contraction in MMMF:s and increase in bank deposits, that is however probably not indicative so much of a general credit expansion as a shift of loans from money markets to bank balance sheets.


Anonymous Anonymous said...

Verry interesting Stefan!

This will most likely lead to a recovery for the stock market over the next year.

After that it will continue it´s long term bear market for two more years and become verry cheap.

At a later date FED & Co will "reflate" all over the world and the resultant inflation will lead to a least double interest rates (at least above 10%).

Jolly good,


10:14 AM  
Anonymous Anonymous said...

"This will most likely lead to a recovery for the stock market over the next year".

Nope. The FEDs actions have failed. Everything that has been put in the system has been killed by the black hole effects of credit deflation. The FED tried the same thing in 1929-30 and it FAILED then to. By the time of January 1931 rolled around, the economy had contracted 17.7 percent and was already in depression. They then decided to switch policy and purge the economy of excesses leading toward the eventually recession ending in 1933 and boom between 1945-73.

The ignorance of the Friedmanites knows no end.

1:22 AM  

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