Money supply growth alert (cont.)

This is a follow up to some posts from last month, in which I noted the surprising jump in M2 growth. As this chart of the M2 measure of money supply shows, it has gone on to experience a gigantic surge in the past seven weeks. M2 has risen almost $420 billion since the week of June 13th, on average almost 60 billion per week. To put this in perspective, annual M2 growth has averaged about 6% per year since 1995, and growth at this rate would translate into about $10 billion per week. In other words, M2 normally would have grown by $10 billion a week, but instead has grown six times faster. M2 has never grown this fast in a seven week period for at least the past 50 years. No matter how you look at it, this is a major event.

Where is the growth in M2 coming from? Virtually all of the increase can be traced to savings deposits (up $267 billion) and checking accounts (up $148 billion). Now we know why several large banks have announced they will now begin to charge customers who have over $50 million on deposit—they don't know what to do with all the money coming in.

The last time M2 growth approached these levels was in the first quarter of 1983, at a time when inflation was still very high but starting to collapse, the dollar was booming, and the economy was just beginning its first of what would prove to be seven years of exceptionally strong growth. Rapid M2 growth back then was driven by a surge of confidence in the U.S. economy, but that is clearly not the case today. The recent growth of M2 surpasses even the explosive safe-haven demand for money that accompanied 9/11 and the financial crisis of late 2008. Something big is going on, and it can only be the financial panic that is sweeping Europe, as money flees a banking system that is loaded to the gills with PIIGS debt. In short, it looks like there is a run on the European banks, and the U.S. banking system is the safe haven of choice.

Given the lags between real time and when data hit M2, it's quite likely that Europeans already have shifted substantially more than half a billion into U.S. banks in the past two months. I suspect we haven't seen the end of this story either.