Monday, October 31, 2011
People continue to complain that banks are not lending money to small and medium-sized businesses (the ones too small to tap the credit markets directly), but the facts continue to say that is not the case. As this chart shows, Commercial & Industrial Loans at all U.S. banks have been rising for the past year, and the rate of growth has been accelerating of late.
Over the past year, C&I loans are up 8.9%. Over the past six months they are up at a 10.9% annualized pace, and over the past 3 months they are up at a blistering 14.5% annualized pace. At this rate, banks are expanding their business lending by about $3.4 billion every week. We're starting to talk about some serious money here.
Meanwhile, the broad money supply (M2) is up at an unprecedented annualized pace of 15.7% over the past three months. In recent years, despite the severe economic slump and the painfully slow recovery, M2 has greatly exceeded its 6% average annual growth rate since 1995, thanks to the Fed's willingness to accommodate the extraordinary demand for safe-haven cash in the wake of the Lehman and Eurozone panics. I would note that the "bulge" in M2 growth that began last June, when the Eurozone sovereign debt crisis really started to heat up, has stopped getting bigger. I estimate the extra demand for M2 was on the order of about $400 billion. That suggests that the panic flight out of Eurozone banks is not accelerating, and that is at least one bit of good news.
In any event, it's worthwhile noting that since just before the Lehman crisis and subsequent global financial panic, the M2 money supply has increased by $1.83 trillion. On average, that works out to $11.3 billion every week, or about $1.6 billion every day.
So far, all that new money has not had the impact on U.S. inflation that many would have expected, and that's due to the fact that the world's demand for money has expanded roughly in line with the Fed's willingness to supply additional money. But there continue to be important signs that the Fed's monetary policy is on balance accommodative (e.g., $1700 gold, the extremely weak dollar, and very strong commodity prices), and thus that higher inflation awaits us. That will especially be the case if and when the Eurozone panic subsides and the demand for safe-haven cash begins to decline. If the Fed doesn't soak up all the excess liquidity that will be the by-product of better economic times, then we could be looking at a significant rise in inflation even as economic growth picks up.
Posted by Scott Grannis at 6:44 PM