Friday, April 17, 2009

Monetary Base Up-Money Supply Down

The Fed is really turning up the heat in its inflating. The Fed balance sheet continued to grow in size, with the weekly average rising $29.2 billion, from $2,069.6 billion to $2,098.8 billion. And the increase was even bigger if you look at the level at the end of the week, with the balance sheet rising to 2,169.4 billion on April 15.

If you look at the particulars, "securities held outright" continues to increase fast, while most other posts (particularly "central bank liquidity swaps"). Among securities, it is particularly mortgage backed securities that are increasing, though they are also increasing their holdings of Agency debt and Treasuries.

This inflating from the Fed however have in recent weeks been counteracted by increased deleveraging. Though the (in America) ultra-narrow M1 measure of money supply soared in the most recent week, broader aggregates like M2 and MZM fell back in the week to April 6, continuing a three week long decline since the week to March 16. For the first time since September last year, M2 fell below its 13-week average, with MZM falling back only slightly less.

While it is possible that part of this drop is due to over-zealous seasonal adjustment, and while it is also possible that this trend is just an aberration for other reasons, we should certainly watch how money supply develops in the coming weeks. If the trend continues, then this would make the economic outlook less inflationary.

However, the most likely scenario is that this recent trend will not continue and that money supply growth will be reignited. The main reason for believing so is the relentless inflating by the Fed.


Blogger Celal Birader said...

could the drop in M2 be connected in some way to the decrease of $139 billion in bank loans since the week ending 11 March as per , THIS report ?

12:49 AM  
Blogger stefankarlsson said...

Yes, given the link that exists between bank credit and money supply in a fractional reserve banking system, that seems likely.

8:11 AM  

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