Bank lending update

With the inflationary potential of the Fed's $1.5 trillion injection of reserves into the banking system apparently held in check by 1) banks' reluctance to lend and desire to strengthen their balance sheet with excess reserves, and 2) the world's apparent reluctance to borrow, it's vitally important to keep track of new bank lending. The easy way to do that is to watch the growth of M2, since that should reflect the net impact of any monetary expansion driven by new bank lending. But as my previous post detailed, M2 doesn't reflect any unusual expansion in the money supply to date.

The chart above, which focuses on bank lending to small and medium-sized businesses, is a more narrowly-focused look at bank lending, and it shows a clear and continuing uptrend in lending activity. It's still rather tepid, since this measure has only grown at a 7% annualized pace since December, but it marks an important inflection point and the start of a new lending cycle. Most importantly, it also reflects increased confidence on the part of banks and businesses, and that is a key ingredient for future growth in the economy.