Sunday, August 14, 2011

Money supply growth alert (cont.)

This is a follow up to some posts from last month, in which I noted the surprising jump in M2 growth. As this chart of the M2 measure of money supply shows, it has gone on to experience a gigantic surge in the past seven weeks. M2 has risen almost $420 billion since the week of June 13th, on average almost 60 billion per week. To put this in perspective, annual M2 growth has averaged about 6% per year since 1995, and growth at this rate would translate into about $10 billion per week. In other words, M2 normally would have grown by $10 billion a week, but instead has grown six times faster. M2 has never grown this fast in a seven week period for at least the past 50 years. No matter how you look at it, this is a major event.

Where is the growth in M2 coming from? Virtually all of the increase can be traced to savings deposits (up $267 billion) and checking accounts (up $148 billion). Now we know why several large banks have announced they will now begin to charge customers who have over $50 million on deposit—they don't know what to do with all the money coming in.

The last time M2 growth approached these levels was in the first quarter of 1983, at a time when inflation was still very high but starting to collapse, the dollar was booming, and the economy was just beginning its first of what would prove to be seven years of exceptionally strong growth. Rapid M2 growth back then was driven by a surge of confidence in the U.S. economy, but that is clearly not the case today. The recent growth of M2 surpasses even the explosive safe-haven demand for money that accompanied 9/11 and the financial crisis of late 2008. Something big is going on, and it can only be the financial panic that is sweeping Europe, as money flees a banking system that is loaded to the gills with PIIGS debt. In short, it looks like there is a run on the European banks, and the U.S. banking system is the safe haven of choice.

Given the lags between real time and when data hit M2, it's quite likely that Europeans already have shifted substantially more than half a billion into U.S. banks in the past two months. I suspect we haven't seen the end of this story either.


MaggotAtBroad&Wall said...

Wouldn't European bank runs lead to LIBOR and EURIBOR rates going crazy like they did in 2008 during the run on money market funds and banking crisis? While they're up a bit, they are not even close to 2008 levels.

Mark Holder said...

Just another stat showing the extremes of this August panic that surpass 2008. Incredible considering the economic data has generally improved since Q3 started suggesting the issues were nothing more than a soft patch.

Also, its a sign that investors are fearing a 2008 repeat though very unlikely. Might lead to a sharp rebound.

Benjamin Cole said...

I think you may be right. We have a hair-trigger investing public, at least at the margins. The Internet and computer program trading etc.

The Chicken Inflation Littles and right-wing doomsters have darkened the public's outlook, as well as mediocre DC leadership. I suspect this picture will improve.

Unknown said...

is that San Clemnte CA Califia?

Scott Grannis said...

Calafia beach is at the southern end of San Clemente CA, about one mile north of Nixon's Western White House.

burmanhands said...

We recently made a move into Eurostoxx 50 hoping to catch a rally and gain from a Euro rally at the same time as our fund is based in Ireland. Looks like the crisis is too deep for that. What is the downside of Germany agreeing with a Eurobond. Surely in the long run its the only way to create their cherished ubereconomic zone and stabilise the mess at the same time.

John said...

When cash is king (and a safe haven), deflation is good, right?

My dad grew up during the Great Depression. He said the best thing to have then was CASH. Buy up all kinds of stuff for next to nuthin.

That's why we don't like inflation.

DS said...

If there is a run on the european banks, why isn't the euro falling?

Scott Grannis said...

DS: It's true that the euro isn't falling against the dollar, but both are falling against gold, the swiss franc, and the japanese yen. With currencies, everything is relative.