Friday, July 15, 2011

Money supply growth alert (cont.)



Over the most recent two-week period, the M2 measure of money supply has surged by $165 billion. Such rapid and sizable growth is highly unusual, and has happened in the past only during periods of panic-driven demand for cash liquidity (e.g., following 9/11 and in the wake of the financial market panic of late 2008). As I noted in my first post on this subject, normal M2 growth would be about $10 billion per week. From the Fed's data, we see that about $100 billion of this growth has come from increased savings deposits at commercial banks, $55 billion has come from increased demand deposits, and all the growth has occurred in the non-M1 portion of M2. What's going on? It's tempting to think that this is somehow a reflection of the end of QE2 and the beginning of Treasury's need to juggle funds since the debt limit is approaching, but I honestly don't know. Stay tuned.

UPDATE: (Aug. 4th) It now appears that this surge in M2 was the product of panic-driven demand for safe-haven cash as Europeans attempted to escape the potential contagion of PIIGS defaults.
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9 comments:

  1. broderoJuly 15, 2011 at 1:39 PM

    Scott...I think that is a good guess...debt limit machinations...

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  2. PerformanceSpeaksForItselfJuly 15, 2011 at 6:16 PM

    Take a look at MZM (M2 - small denomination time deposits + institutional MMF)...maybe just a move away from yield-chasing in the Euro-zone?

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  3. FullcarryJuly 15, 2011 at 6:19 PM

    Mr Grannis,

    I will continue to make excuses for this run up in M2. But I am pretty sure the increase in M2 is about what you suggested in your post. End of QE2 and the debt ceiling problems are leading to an increase in demand for FDIC insured deposits. The spread between General Collateral and Fed Funds also give me confidence that is the case.

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  4. Benjamin ColeJuly 16, 2011 at 12:26 PM

    Let's hope some of this supply gets spent, and into the real economy.

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  5. AnonymousJuly 17, 2011 at 11:26 AM

    Not sure, just a guess, but could it be a last surge of non-banks selling USTs to the Fed before the end of QEII?

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  6. AnonymousJuly 17, 2011 at 11:27 AM

    This comment has been removed by the author.

    ReplyDelete
  7. Salmo TruttaJuly 20, 2011 at 4:53 PM

    ZEROHEDGE: Stone McCarthy explains M2's surge is due to: "the REPEAL OF REGULATION Q WHICH HAS RESULTED IN A SURGE IN SMALL TIME DEPOSITS INCLUSIVE OF MONEY MARKET DEPOSIT ACCOUNTS...coupled with an ACCELERATING SHIFT OF DOLLAR DEPOSITS BACK TO BANKS DOMICILED IN THE US."

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    Reg Q removal backfired? Confusing to me because DDs have 10% reserve requirement whereas MMDAs don't. But then confirmation is that required reserves just exploded.

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  8. Salmo TruttaJuly 21, 2011 at 4:26 AM

    “REPEAL OF REGULATION Q (explained here) WHICH HAS RESULTED IN A SURGE IN SMALL TIME DEPOSITS”
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    If the effective date of the repeal is July 21, 2011, how can any substantive deposit shifts already be in place?

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  9. Salmo TruttaJuly 21, 2011 at 12:03 PM

    PerformanceSpeaksForItself:

    Institutional MMMFs aren't classified in M2. IO MMMFs withdrawals could account for 40% of M2's rise.

    ReplyDelete