Monday, October 31, 2011

Bank lending and money supply update


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.

5 comments:

Dr William J McKibbin said...

I hope that Scott is right and that the money supply is sufficient -- in the mean time, I am personally experiencing a huge spurt in service sales overseas -- clearly, the US economy is in a long-term improvement path, but the fast track to growth is overseas where firms have money to spend at this point -- the current "bully economy" in the US is too hard to navigate and there's simply too much work involved with making a sale and therefore a buck -- overseas firms are the place to find firms with money and new sales right now.

Charles said...

M2 is growing but it doesn't seem to be the result of any policy on the part of the fed. They seem to ignore M2 for the most part.

The fed seems to be acting like a giant government sponsored SIV - funding massive financial asset purchases with subsidized excess reserves. It is hard to say what this accomplishes except to muddy the financial waters.

Left alone the economy will slowly recover. This process must take time because of the severe distortions created by government policy. The Dr. McKibbins of this world must and will discover the path forward.

Ed R said...

"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."

- - - - and they remain about 15% below where they were in early 2008.

What is seen and unseen . . . .

Scott Grannis said...

Ed R: the unseen is very important, to be sure. But in this case the level of business lending relative to where it was in the past is not relevant, and besides it is very obvious. The change on the margin is relevant, and not very obvious. The economy is not as strong in this recovery as it has been in others; that too is irrelevant, and it is something that is well known. What matters is whether things are improving on the margin, and they are.

Benjamin said...

I never understand what Scott quotes gold prices. Sheesh, even in yen gold has exploded in the last year (until falling of late) That does not mean we have had an easy yen.

Commodities and gold have become global markets, pushed by 3 billion people with rising incomes in China and India. This is good news.

We can put a monetary noose around our necks to tamp down commodities, but it will be neither effective nor economically salubrious.

The more I think about global trade, the more I sense the supply-side argument, to which I adhered for decades, is growing very weak.

Today in the USA, we can source globally. and do.
Compared to the 1970s, the supply side has exploded, with labor, capital, goods and services pouring into the USA. Structural impediments have been radically reduced---if there is a domestic industry with structural impediments, it has been wiped out by imports or competition.

The problem today is not with the globalized supply chains---it is with demand. Not enough demand.

The world has changed in the last 40 years. Inflation is not the threat it was, and supply is not bottlenecked.

We have to step outside partisan blinders and seek solutions that work in the here and now.