Bank lending to small and medium-sized businesses continues to accelerate. C&I Loans outstanding are up at a 15.2% annualized rate in the past 3 months, and have risen 12.3% over the past year. Since the recent low in Oct. '10, C&I Loans have grown by $174 billion, or about $2.5 billion per week on average; in the past 3 months the pace has picked up to $3.7 billion per week on average.
M2 growth has also been robust, fueled in part by increased bank lending. I think it's rather astonishing, actually, to see in this chart that the M2 measure of our money supply has risen by almost $3 trillion in the past 5 years. The increase since early 2007 works out to $10 billion per week on average. Surely there is no shortage of liquidity in this economy. In fact, M2 has grown over 20% more than nominal GDP since the end of 2006. So far, it would appear that the major driver for M2 expansion has been increased money demand: people simply want to have more "cash" on hand because they are worried about the economy. Savings deposits now represent about 63% of M2, and they have contributed the lion's share of M2 growth in recent years.
One of the biggest changes we should expect to see in the economy and the markets over the next year or two will likely come from the unwinding of all this demand for cash. I seriously doubt whether the Fed will be able to soak up all the money that may be unleashed by a public that is no longer willing to hold a mountain of zero-interest-bearing cash, and wishes instead to exchange that cash for all manner of more interesting things. Stepped-up bank lending and a reversal of cash hoarding could unleash a wave of liquidity into the market and the economy, boosting nominal GDP, boosting corporate cash flows, boosting commodity prices, and yes, likely boosting inflation.
Each night, on bended knee, I genuflect to the Satanic Inflation Deities, and I earnestly pray the Scott Grannis' worst nightmares come true, and that we have (gasp!) even four percent inflation. For material gain, I would even lust for five percent inflation.
ReplyDeleteThese evil desires of mine are spurred by my lust for material profits, for hedonistic good times, for the thrill of lucre and enjoyment money can bring. I admit it: I want boom times! There, I said it!
I know that true nobility is found in causes that do not reward those who only love money. The ascetic lifestyle of the anti-inflationist---the material sacrifices necessary to maintain stable prices---are truly noble. Those who worship gold and sound currency find their rewards in price stability, even deflation, and material sacrifice. Not in Fat City, where I long to be.
I only want to make a lot of money. I have sold my soul to money and inflation.
Even so, I am not sated. We never see this inflation Grannis keeps promising. Indeed, we have seen record low inflation for years, and falling unit labor costs. Inflation has a long, long way to go. I am deeply saddened.
We are suffering, but evidently not for any reason. The Theo-Monetarists and Econo-Shamans must approve.
There must be a reason for flat interest rates year after year. Pending hyper-inflation? That doesn't seem to add up. No one buys long-term bonds for nothing if they expect any inflation.
Could it be we are becoming a Japan? And I will never know (nor most of my countryman) the thrill again of Fat City, of huge profits, of greasy meals and women of dubious sentiments, and trips to Las Vegas to blow the wad?
These are dark times indeed.
Here is another first-rate buffoon, stocking his nose into monetary policy.
ReplyDelete"Representative Kevin Brady, vice chairman of the Joint Economic Committee, said in a statement his "Sound Dollar Act" aims to "maintain the purchasing power of the dollar in order to foster long-term economic growth and stability." He plans to formally introduce it in early March."
Japan, here we come.
The Fed will have no difficulty "soaking up" any excess liquidity. All it will have to do is raise interest rates. Just ask Paul Volcker.
ReplyDeleteDramatic inflation is essentially impossible at this point -- all hands in both monetary and fiscal policy are busy hammering out any inflation remaining in the economy -- the only exception is in commodities, the prices of which are not governed by monetary and fiscal-policy alone -- what is coming is near zero inflation at best, and deflation at worst -- that's the deal folks -- we should all be talking about how to make money in stagnation or deflation environment -- we can talk about how to make money during inflation times after 2020 or later -- now is the time to think like a 1930's landlord and high professional -- the winners in the 1930's were those with world-class skills and cash -- my advice is do not miss this opportunity to build yoiur equity portfolios now (both in property and skills) -- that's reality today -- tomorrow will come soon enough...
ReplyDeleteScott,
ReplyDeleteThoughts on ECRI's insistence that a recession is a done deal by the summer? They say that industrial production, among other things, is flat or declining and this bodes ill for the economy. It seems, however, that the said one was imminent back in September. I suppose if imminent means within 3-4 years they may be right?
Please consider the merits of these arguments!
ReplyDeletehttp://dailycapitalist.com/2012/02/15/is-this-recovery-part-ii/comment-page-1/#comment-25833
Hans-
ReplyDeleteHere is what I posted at Daily Capitalist.
This is exactly the wrong direction to go. We need an expansionary monetary policy, not a Bank of Japan-style suffocation.
A peevish fixation on inflation---really an unhealthy obsession---does not make a monetary policy. We have seen what the Theo-Monetarists and Econo-Shamans have done to Japan. In 20 years they have had tight money, and real wages down 15 percent, industrial production down 20 percent, property values down 80 percent and the stock market down 75 percent. You like those apples? Why?
The yen soared---yippee. They have a "strong yen." Big whoop. They had mild deflation all the way. The facts are that even mild deflation is a growing cancer on a modern economy--that is the empirical record, not a theory.
Tight money---tight enough to cause deflation---is an epic failure. It just does not work.
The Market Monetarists have the right take--you need a monetary policy that supports growth and expansion. Moderate inflation is hardly the end of the world, if you can obtain steady growth. I'll take the deal any day.
From 1982 to 2008, USA industrial production doubled, and all the while we had inflation in the 2 percent to 6 percent range. Oh, such misery--I wish for such misery all the time. Our lowest inflation in recent times was from 2008-2011, at less than 1.5 percent on the CPI. Great times, no? Such are the glories of deflation and very low inflation.
Rather than freakishly obsess on a nominal index, become obsessed with what causes growth. Do not genuflect to gold or worship "sound" currency. Worship growth, robust growth and more growth.
Add on: The Chicken Inflation Littles rant about inflation---but how does one even measure inflation? Hard core righties like Don Boudreaux of George Mason have written the CPI and other measures are geared to overstate inflation.
We live in a world of rapidly evolving goods and services. I have a camera that can take 1000 digitals and then send them to Thailand immediately, for zero marginal cost. A generation ago, that would have cost thousands for developing film and airfreight. People and business easily outperform the government, and the government's stodgy measurements of inflation.
You guys are trapped in a room filled with your own inflation farts. Get out of doors, and see the real world. Growth is the goal, not a slavish to devotion to stability of an artificial and inaccurate index of prices.
"The best customer of American industry is the well-paid worker." - FDR
ReplyDeleteI recently read a summary of 4 different management styles. One of them essentially considers workers the enemy. It's a shame and amounts to economic cannibalism. Bon apetite.
Speaking of bank loans ...
ReplyDeleteEarly estimates of February auto sales are looking VERY interesting.
- Edmunds is projecting an SAAR of (gasp!) 14.4 million units.
- TrueCar is projecting 14.3 million units.
- JD Power is at the low end with 14 million units.
January was 14.13 million units.
All 3 seem to think a larger % in February were retail sales, whereas January sales were tilted more to fleet sales than usual.
For reference, Oct-Dec SAAR figures were 13.2, 13.59 and 13.48 respectively for an average Q4 figure of 13.42 million units. If February hits TrueCar's mark and March repeats the same number, Q1 will average 14.24 million units. That's gotta be a nice addition to Q1 GDP. Boy, it's gonna be fun watching ECRI squirm!
Auto sales have had a pretty good correlation with monthly job creation the past year, so if the upper end of the estimates turns out to be the actual numbers when they come out on Thursday, don't be surprised at another better-than-expected jobs report on the 7th.
"don't be surprised at another better-than-expected jobs report on the 7th."
ReplyDeleteOops, I meant the 9th.
Hyper-inflation after WWI, then deflation of -16% in 1921-1922. Inflation was very, very low during Roarin' 20s. We also had very low inflation during the highly prosperous 1950s.
ReplyDeleteWe have not had a decade of consistently low inflation since LBJ brought us the Great Society.
Sure, inflation has averaged around 3% over the past 20 years but nothing like the 20s or 50s.
Benj, we don't have to have high inflation to have strong growth. I'm sure you already know that, so why continue longing for high inflation?
Unknown,
ReplyDeleteYou may be right on auto sales. I bought my first car in 11 years on Friday. The dealership looked busy and the salespeople all seemed pretty happy. I hope ECRI is wrong although they seem to have a pretty good track record.
Ben Jamin, who is supporting a tight monetary policy? The money supply continues to grow at near normal rates...Regarding Nippon, their governmental spending sure has not been tight either, with a massive explosion of debt...
ReplyDeleteI view Japan as an anomaly, as it has misdirected spending into nearly worthless public spending and a political system controlled by one party for thirty years...
Moreover, I do not worship at the shrine of deflation or inflation, as a means of economic advance, both of which can be ruinous..
We have had thirty years of "Fat City" and now the debt issuers are demanding payment...As Uncle Milton has so stated, there is no free lunch, despite what the MMT'ers will tell you...
The accounting gimmickry will not work either, only a prudent fiscal and sound money policy will...
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