A Very Odd Growth Spurt in the True Money Supply
The growth rates of various “Austrian” measures of the US money supply (such as TMS-2 and money AMS) have accelerated significantly in recent months. That is quite surprising, as the Fed hasn’t been engaged in QE for quite some time and year-on-year growth in commercial bank credit has actually slowed down rather than accelerating of late. The only exception to this is mortgage lending growth – at least until recently. Growth in mortgage loans is still very slow though, especially compared to historical growth rates. It cannot really account for the recent surge in money supply growth either.
Year-on-year growth rates of TMS-2 (11.19%, black line) and total loans and leases at commercial banks (7.7%, red line) as of October. In absolute terms money TMS-2 has soared by a staggering $840 billion since the beginning of the year – click to enlarge.
Usually lending by commercial banks will tend to lead growth in the broad true money supply, but this lead-lag relationship has become a lot less straightforward after the 2008 financial crisis (in fact, it actually reversed for a while). As a result of the Fed’s heavy debt monetization activities, the pace of money supply growth is nowadays influenced directly by two major sources.
Prior to the crisis, the Fed would mainly affect commercial bank lending growth by setting overnight interbank lending rates (i.e., the federal funds rate) and maintaining its rate target by supplying or occasionally draining reserves. QE by contrast creates new deposit money directly (as well as bank reserves to the same extent), which adds to the fiduciary media commercial banks conjure into being by means of fractionally reserved lending. QE has fundamentally altered the way the system functions – this remains the case even now, with the Fed’s QE type activities reduced to reinvesting the proceeds from maturing bonds.
The growth rate of the more volatile narrow money supply measure AMS (adjusted money supply) calculated by Dr. Frank Shostak has recently even spiked to a new high (it has decreased a bit again since the end of October). Its greater volatility relative to the broader measure TMS-2 is mainly due to the fact that it doesn’t include savings deposits.
Savings deposits that can be withdrawn on demand are the largest component of TMS-2 and their growth rate as a rule exhibits greater inertia than that of many other components. Obviously this is reflected by the lower volatility of overall TMS-2 growth rates (note: de iure, banks could invoke fine print which allows them to delay payment of money in savings deposits by up to 30 days. This doesn’t happen in practice though, as a bank doing so would very quickly find out what a bank run feels like).
A fairly recent chart of the y/y growth rate of money AMS – a narrower money supply gauge than TMS-2 (see below for a link to comprehensive background information). The recent spike is quite remarkable, considering bank lending has not accelerated.
For a detailed list of the components included in different “Austrian” money supply measures and a succinct explanation of these measures were created and are superior to official money supply aggregates, see our friend Michael Pollaro’s excellent summary here. Michael provides a number of links to the associated academic literature as well for readers inclined to delve more deeply into the subject.
Naturally we were curious to find out what was going on, so we took a close look at individual components of the money supply aggregates and various bank credit measures. We suspected that the recent growth spurt very likely had something to do with the new money market fund regulations that have recently come into force. It seems this is indeed the case.
We already observed a similar oddity after the end of “QE2”. Commercial bank lending growth had turned positive again following an outright credit contraction phase during the recession, but its growth rate had begun to flatten out. With the Fed no longer monetizing $60 bn. per month, it stood to reason that money supply growth would slow down quite sharply. Instead, it started moving sideways at a historically still very high level.
A major reason for this were the actions of regulators. The FDIC had instituted a temporary blanket deposit guarantee, i.e., it guaranteed deposits without size limit at the time. This attracted large amounts of dollars that were previously deposited in accounts located in Europe.
These inflows boosted demand deposit growth at US based banks just as QE2 ended in mid 2011. As the euro area debt crisis moved into its acute phase in the second half of 2011, there was a strong incentive for holders of large dollar deposits in Europe to shift their funds to accounts with US domiciled banks where they would be insured.
Note in this context that the deposit money components of the money supply aggregates we discuss here consist only of domestic deposit money. Currency is the only component of the aggregate money supply that includes dollars regardless of where in the world they are currently located. The y/y growth rate of demand deposits has indeed shot up to a new interim high in recent months (13.15%). Once again, this cannot possibly account for an acceleration in TMS-2 growth from around 8% to more than 11% by itself, or for the concurrent spike in AMS growth to more than 16%.
The same is true of other large money supply components. Savings deposits grew by 7.7% y/y as of the end of October and currency grew by 6.15%. As it turns out, another component that is shared by TMS-2 and money AMS is the main culprit behind the recent surge in money supply growth rates. For many decades this component has been so small, one could almost safely ignore it – not anymore.
A Noteworthy Shift in Fed Liabilities
Many of our readers are probably keeping an eye on the monetary base – after all, in recent years the S&P 500 Index has displayed a strong correlation with the monetary base. As John Hussman once pointed out, the correlation between the US monetary base and the price of beer in Iceland was even stronger. In view of QE a strong case can be made though that the surge in base money and the concomitant rally in stock prices was not just a coincidence.
It is time to become a bit more cautious about looking at the monetary base as a leading (or sometimes coincident) indicator of stock prices. As the chart above illustrates, base money and stocks have recently parted ways. The monetary base has in fact declined quite a bit. As of October, it was shrinking at an annualized rate of -12.31%. By contrast, stock prices have recently reached new highs. They may well “follow” the base again, but there are reasons to believe that the correlation is no longer as strong as it once was.
The monetary base consists of currency and bank reserves – and only currency (excl. vault cash) is regarded as part of the money supply, as bank reserves on deposit with the Fed are for all practical purposes “outside” of the economy. Since outstanding currency is consistently exhibiting positive growth rates (most recently 6.15% y/y), a 12.31% y/y decline in the monetary base indicates that bank reserves must have fallen rather precipitously. They have indeed done so – reserve balances are currently down by -21.5% y/y.
Normally, the monetary base roughly mirrors the asset side of the Fed’s balance sheet. One would therefore expect that assets held by the Fed should reflect the decline in the monetary base. We know however that the Fed’s current policy is to reinvest all proceeds from maturing bonds in its asset portfolio, so why should the portfolio shrink? Its size has in fact remained quite stable. The next chart shows a comparison of assets held by the Fed and bank reserves:
Fed assets (black line) vs. bank reserves (red line). Reserves are down some $700 billion from their 2014 peak, while the Fed’s asset portfolio has remained steady. Incidentally, the decline in bank reserves has pushed the percentage of covered money substitutes from a peak of approximately 31% to 19% (cover consists of bank reserves plus vault cash – the latter currently amounts to $70 billion).
The growth in outstanding currency definitely cannot account for this discrepancy. This suggests that something else has happened on the liabilities side of the Fed’s balance sheet – something must have taken the place of bank reserves.
Not to worry, the line item “losses due to the Treasury” has not been activated yet (this is the accounting fudge the Fed intends to employ in order to avoid formal insolvency should the value of its securities portfolio decline precipitously). Nevertheless, the Treasury is involved. In October the monthly annualized growth rate of the Treasury’s general account with the Fed peaked at a stunning 538%.
A long term chart of the absolute size of the Treasury’s account with the Fed (see further below) shows why this item could essentially be ignored prior to the financial crisis and why this is definitely no longer the case.
As a rule, the Treasury spends money as fast as it gets it in. Quite precise “just-in-time” budgetary planning takes place, with the Treasury Borrowing Advisory Committee (TBAC) holding regular meetings to help putting it into effect. The TBAC inter alia issues detailed recommendations regarding quarterly funding schedules.
There was presumably never a need to hold very large cash balances, considering that redemption dates are set in stone and that much of the government’s spending is of the “non-discretionary” auto-pilot sort.
As an aside to this, the Treasury also holds deposits and note balances with commercial banks. Once upon a time these were much larger than they are today, both in absolute terms and relative to government revenues (the peak was reached in early 2000, as the government stockpiled banknotes due to the “Y2K” computer scare).
They were never of even remotely comparable size to the amount currently held in the general account though, and nowadays these deposits are tiny. At last count they amounted to a mere $1.4 billion.
The important thing from an analytical perspective is this: while bank reserves are not considered part of the money supply, the funds deposited in the Treasury’s general account at the Fed most assuredly are money. As the official definition of the general account has it:
This account is the primary operational account of the U.S. Treasury at the Federal Reserve. Virtually all U.S. government disbursements are made from this account. Some tax receipts, primarily individual and other tax payments made directly to the Treasury, are deposited in this account, and it is also used to collect funds from sales of Treasury debt.
US Treasury, general account at the Fed: until 2008, it never contained more than a few billion dollars. Ever since, the amount has been much higher on average, but this year it has exploded into the blue yonder – click to enlarge.
In short, the shift in the Fed’s liabilities has involved a transformation, as a result of which there is now considerably more money in the economy than there would have been otherwise.
According to the TBAC funding plans for Q1 2017, the cash balance in the general account is expected to decline by roughly $300 billion to around $100 billion at the end of Q1. As the Treasury spends this money, it will flow into various demand deposit accounts at commercial banks.
So while the balance in the Treasury’s general account will decrease, this will be offset by an increase in demand deposits (note: we are not so sure this planned decrease in the general account balance will actually happen). Demand deposits are money substitutes that are partly covered and partly uncovered. The uncovered portion represent “circulation credit” or fiduciary media.
As noted above, the current ratio between deposit money according to the TMS-2 definition and bank reserves plus vault cash indicates that around 19% of all outstanding money substitutes in the US are currently covered.
Regardless of their precise status though (which usually only becomes obvious when a bank run is underway), these money substitutes can be and are used to effect final payment for all goods and services traded in the market. They are therefore money (or money “in the broader sense”, as Mises put it).
Conclusion and Preview of Part 2
As we will show in Part 2, there are implications beyond the fact that previously inert excess reserves have been transformed into money. In Part 2 we will discuss what exactly has driven the recent shift in Fed liabilities and show why all of this is symptomatic of a further expansion of Anglo-Saxon central banking socialism all over the world.
The so-called “capitalist” Western world has never been further removed from free banking than it is today. The implications are dire, but this outcome was always preordained from the moment a central bank-directed fractionally reserved fiat money system was instituted.
On a more general level, these developments incidentally show that the so-called “mixed economy” was always unsustainable. One day we will have to to decide whether we want central planning or a free market, whether we should adopt capitalism or socialism – we cannot have both.
Charts by St. Louis Federal Reserve Research, Dr Shostak/ Applied Austrian School Economics
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: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
4 Responses to “US True Money Supply Growth Jumps, Part 1: A Shift in Liabilities”
Most read in the last 20 days:
- India: The World’s Fastest Growing Large Economy?
Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to. India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge. The IMF, the World Bank, and the international media have celebrated...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Making America Great Again – How to Judge Policy
A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula: W = rv (w-w – w-l) That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood. When devising a win-win,...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...
- Silver Futures Market Assistance – Precious Metals Supply and Demand
Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday. Taking off for real or not? Photo credit: NASA Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...