Outstanding Commercial & Industrial Loans (a proxy for bank lending to small and medium-sized businesses) have been increasing steadily for the past three years, and are now only a few billion shy of their pre-recession high. This likely reflects increasing confidence on the part of banks and businesses, and as such it points to continued economic growth.
Banks continue to expand their lending activities to business, although the rate of increase in business lending (see second chart above) has slowed down a bit over the past year.
It's true that banks are lending far less than the Fed's super-abundant provision of bank reserves would normally allow. Thanks to the Fed's Quantitative Easing programs, bank reserves have increased almost $2.3 trillion in the past five years. Theoretically, this would have allowed bank lending to increase by about 10 times as much, or $23 trillion. But that hasn't happened, mainly because a) banks are not willing to increase their lending willy-nilly, and b) businesses are not willing to borrow excessively. In short, the Fed's QE efforts have failed to result in an explosion of new money because the private sector remains quite risk-averse. In fact, as I have argued many times over the past several years, the Fed's QE efforts have been primarily directed at satisfying a risk-averse world's craving for safe assets, rather than expanding the money supply.
As the chart above shows, M2 (arguably the best measure of the U.S. money supply) has grown only slightly faster in recent years than its long-term average growth rate. Most of this above-average growth can be attributed to a significant increase in the demand for money. Today, 65% of M2 is held in the form of bank savings deposits (just over $7 trillion, up from $4 trillion at the end of 2008), with the remainder held in the form of currency (10.6%), checking accounts (12.8%), small time deposits (5%), and retail money market funds (6%). With savings accounts paying almost nothing in interest, it's reasonable to assume, therefore, that the vast majority of the increase in money supply has been demand-driven. It's not the interest rate on money balances that is attractive, it's the risk-free nature of bank savings deposits that is attractive.
What's holding back the economy is not a shortage of money, it's a shortage of confidence. Bank lending by itself can't create growth, since growth only results from getting more output from a given amount of inputs. Bank lending can facilitate growth, of course, since many worthwhile enterprises might otherwise be unable to access the private debt markets. If confidence were higher and if banks and businesses were less risk-averse, we arguably might have a much stronger economy. But at least the ongoing increase in bank lending is a step in the right direction. Confidence is slowly returning, and risk-aversion is slowly declining, and those are essential ingredients for a stronger economy in the years to come.
The decline in the price of gold (see chart above) is another way to see how risk-aversion is slowly declining.