Bank lending stays brisk

Since last March I've been tracking the confluence of a reduction in the growth of bank savings deposits, the pickup in bank lending, and the Fed's tapering of its QE3 program ("Tracking the perfect storm"), looking for signs of declining money demand that the Fed might be underestimating. The Fed recently told us that tapering will finish within 3 months; bank lending continues to be strong; but bank savings deposit growth has not slowed further. Althought there's no evidence of any further significant decline in money demand, these all remain symptomatic of a slow and gradual decline in the demand for money and money equivalents. As such, it is appropriate for the Fed to taper its QE purchases (which were designed primarily to satisfy the world's seemingly insatiable demand for money and money substitutes, since bank reserves are now functionally equivalent to T-bills), and there is no reason at this point to worry about any unexpected consequences from the end of QE3.

The two graphs above show the level and the 6-mo. annualized growth rate of bank lending to small and medium-sized businesses. Since the end of last year, C&I Loans are up by about $130 billion, for a 16.5% annualized growth rate. That's the fastest growth we've seen since the recession. This is a good reflection of increased confidence on the part of banks and businesses, and it is also symptomatic of an important decline in the demand for money. C&I Loan growth had slowed a bit in recent months, but last week's surge in C&I Loans put to rest any notion that bank lending is not moving forward at speed.

The two graphs above show the level and the year over year growth rate of bank savings deposits, which have grown by almost $3.4 trillion since the onset of the 2008 financial crisis. Since the end of last year, this component of the M2 money supply has grown at a 5.5% annualized pace, which is somewhat slower than the 7.1% annualized growth of M2 over the same period; it is definitely slower than what we have seen in recent years. I think this is symptomatic of a world that is somewhat less anxious to accumulate safe assets that pay almost no interest. Money demand today is not what it used to be, but it is still reasonably strong.

Meanwhile, the demand for gold and 5-yr TIPS has been relatively steady for the past year or so, after falling significantly beginning in late 2012/early 2013. Both of these reflect a moderate decline in the demand for safe assets. Gold and TIPS are even better than money, because they can offer protection from inflation that pure money can't.

Not much has changed in recent months, but it's still notable that bank lending is increasing at a relatively brisk pace. At best this is a reflection of increasing confidence; at worst it's a harbinger of some modest inflation pressures.

Fiscal policy update: revenue still strong

Fiscal policy is far from ideal, but there are some things that are moving in a positive direction. Our tax code needs to be drastically simplified, tax rates need to be lowered and flattened, and entitlement programs need profound restructuring. There's a lot to look forward to if Congress ever gets its act together. In the meantime, it is encouraging to see that federal spending has shrunk significantly relative to GDP, and federal revenues continue to march higher relative to GDP—thanks mainly to rising profits, expanding jobs, and increasing incomes. 

The current recovery is the only one in history to occur alongside zero growth in federal spending. Federal revenues, in contrast, have been rising steadily, something that is fairly typical of recoveries. Spending has not increased at all for the past five years, but revenues have climbed by almost $1 trillion. 

Spending as a % of GDP is back down to just over 20%, close to the average of the past several decades. Tax revenues are still shy of their long-term average, but they continue to rise relative to GDP. In the past year, federal revenues have posted growth of 8.6%, and they have grown at an annualized rate of 8.6% for the past four years.

Strong revenue growth in recent months is a good sign that the economy is nowhere near recession, as the -2.8% Q1/14 real GDP growth seemed to suggest. A weak economy simply does not generate this kind of growth in tax revenues. Corporate tax receipts have surged at a 15.7% annualized rate in the past four years. Think how much more they might increase if the corporate tax rate were slashed and trillions of overseas corporate profits were repatriated! As it is, corporate tax receipts totaled only $303 billion in the past 12 months, representing just 10.3% of total federal revenues. We ought to all but eliminate the corporate profits tax, since that would provide a much-needed incentive for more business investment and negative impact on the federal deficit could be recouped handsomely by the expanding jobs and incomes that would flow from increased investment.

The federal deficit has collapsed in the past four years, having fallen from over 10% of GDP to now just 3% of GDP. In dollar terms it has declined by almost two-thirds. Nobody expected this to happen back in 2009 and 2010. We were supposedly facing trillion-dollar deficits for as far as the eye could see. This is a very welcome development.

Wish you were here ... not on your cellphone

A good friend of ours, Kathy Pezdek, penned a column 10 years ago ("Wish you were here ... not here on your cellphone") that seems even more relevant today. Most cellphones today do a lot more than make phone calls—they offer the temptation of being in constant contact with a universe of friends and acquaintances, of being tied into just about anything going on all around the world. The problem, of course, is that checking in with what's going on everywhere else takes us out of the here-and-now, and that's a real shame.