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M2 Goes Stratospheric As Liquidity Deluge Accelerates
One look at the M2 chart below shows that the reliquification of the market by the Fed is proceeding according to plan: having increased for 23 of the past 25 weeks, the M2 has hit another all time high in the final week of 2010 at $8,848 billion, a $14 billion weekly increase, and a $316 billion annual increase (we will present the M2 constituents change next week).
But that is not all: more important to those who believe that the Fed merely creates one and zeroes that never do anything practical, and most certainly do not add to inflation, will be delighted to learn that in addition to the $14 billion increase in M2 liquidity, reserve balances added another $26 billion in liquidity, as the absolute number declined from $1027 billion to $1001, or a gross addition of $40 billion in the week. Of course, adding a few leverage factors, and the last week of 2010 saw a gross liquidity addition of well over $100 billion or so. And there are some who wonder why stocks surged to close the year....
The chart below shows the net liquidity addition from M2 and from excess reserves. Should reserves, which are currently poised just north of the $1 trillion barrier, continue collapsing, watch out below... or above (if one actually cares about things like inflation).
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the heroin is going through the veins - thanks tyler for your sober analysis
Bernanke said flat out on 60 minutes "the money supply is not increasing in any significant way."
What a steaming fattie.
Tyler,
I'm sure it's just a matter of poor communication skills that some people don't understand the effects of $100 Billion of liquidity in a weeks time. I find it helpful to add an analogy to the verbal stew when explaining life's bumps and walls of flame. So I might weave the verbal picture by saying something like this.
"Pour a couple of gallons of lighter fluid on the smoking barbie and we get an open flame and a singed population."
If that doesn't work I add actual pictures such as the one below. Works every time.
If that fails, use liquid oxygen!
http://www.youtube.com/watch?v=sab2Ltm1WcM
do not put liquid oxygen in the microwave
http://www.youtube.com/watch?v=hBiK6Swnh6Q&feature=related
gives new meaning to the word "liquidity trap"
better put out that fire with some Amonium Nitrite
I think you meant Ammonium Nitrate.
The effects of that stuff alone can be impressive.
http://en.wikipedia.org/wiki/Oppau_explosion
I made this exact point in a (rather futile) argument with Redneck some time ago. Despite all the POMOs, the reserves are actually going down! Leverage the difference up by a factor of (what) 10, and it becomes pretty obvious where the capital used for the mystery equity purchases comes from.
http://www.crimethinkerblog.com/wp-content/uploads/2010/10/bank-excess-r...
Another debt pumped bubble... but wait until the retail investors take the bite and just dry up the liquidity. The market takes care of the rest...
Yes, and the trend is even more noticeable for large banks. Project Weimar proceeding as planned.
Stagflation here we go!
The current group is always so much smarter and more sophisticated (in their own minds) than the previous yet the monster always gets loose.
Inflation equals the T-Rex in Jurassic Park.
Gee, I wonder which kinds of folks are best positioned to squeeze commissions, fees and leverage opportunities out of some of the M2 components before currency debasement manifests itself?
I hope everyone is still holding their PM ppositions in spite of the raids. This is going to get very interesting around April 1., coincidentally April Fool's Day.
I'm holding, I'm good. But what happens on April 1st?
The Bernank said he can control it, we'll see.
Oh, he can. Bernanke can control prices. To avoid heavy inflation he just has to let banks and government go bankrupt by removing all the liquidity that he has injected during the crisis.
Chances of that happening -> aproaching 0%. Get ready for heavy rising prices.
EDIT: Now seriously, what Bernanke will do is play with the interest rates that is paying now to banks for their excess reserves to control the amount of credit banks lend to the market., so it can try to control how prices rise and avoid an out of control scalation. It will avoid hyperinflation but will create stagflation.
M2 - as in the nearest forms of money, right? Up to Checking accounts. How ..
check out non seasonally adjusted M1 currency component and demand deposits. currency up 8 bln and DD up 125 bln in 2 weeks.
How about overlaying the money velocity chart....MV is much more important here, imo.
Is there any chance go back to 2006 show velocity and money aggregates M1 and M2 - I think someone does a private M3? I'm less interested in a a series of months in 2010 than I am the entire time period and net position. If people are selling out of bond funds and coming to money markets that isn't too meaningful.
I also agree that velocity is the key, true money circulation in the economy has been dead and we've been bolstering bank balance sheets to enable them to appear solvent and work out of troubled loans. In 2006 with super loose underwriting and the banks supposedly healthy they were around 30% of lending with 70% being the now zeroed shadow bank system. That's essentially what we are fighting here and I don't think we've remotely offset that damage yet (hence I'm still a deflationist for now). With huge reserves out there it's important to keep tabs on if/when/how this money is translating through.
Amazing article
America will try to raid on the back of the world by printing more of the 'reserve currency' till the world says No
After America will be officialy relegated to 3rd world status, and considering the demographics of the country with non-whites more than 1/3 totaly justified
Right...and we are told to believe gold is in a bubble and should be sold...good one.
Americababwe. In retrospect it will have been obvious, just like the housing bubble.
The nut of the story here is that the pace of money supply expansion continues to accelerate. I suggest keeping your eye on the money supply numbers, not worrying too much about the week-to-week, nor the reserve levels, which are affected by distracting noisy factors such as Treasury's general account.
During the 13 weeks before Ben signaled that QE2 was coming, from May 10 to August 9, circulating currency grew by $8b, M2 grew by $50b.
During the 13 weeks after Ben signaled QE2 was coming but before QE2 started, from August 9 to November 8, circulating currency grew by $21b, M2 grew by $130b.
During the first 7 weeks of QE2, from November 8 to December 27, circulating currency grew by $14b, M2 grew by $125b.
Those are not seasonally adjusted numbers, from Fed's H.6. (Currency here: http://www.federalreserve.gov/releases/h6/hist/h6hist10.htm, M2 here: http://www.federalreserve.gov/releases/h6/hist/h6hist7.htm)
The other interesting angle is that an unusually large portion of all this new M2 is M1. That's a symptom of a "hot" expansion, where fast money dominates, the most inflationary kind of expansion.
yeah, how is that full employment thing working out?
GDP growth (inflation driven) and price stability (inflation) seem to be working. At the expense of the rest of the world and lower living standards for the US citizens.
Dear Fed: Stick to clearing checks and prviding transactional liquidity please.
If the Fed creates any M (whether paper or electronic), but it is sequestered, say by paying banks interest on the reserves they elect to deposit back at the Fed, then that M will not be used to bid up wages and prices. Herein is the danger of looking solely at charts of the Ms, they don't tell us where the Ms went.
The scheme of swapping good Fed instruments for bad loan paper has the same effect as if the guvmint were to just drastically lower bank reserve levels. Should borrowing resume, it is at that time the flood of sequestered M will hit the real-life marketplace and cause prices and wages to go up in earnest. Even so, while the Fed can influence where the M flows, it cannot control it. So, it appears a lot of the early M that escaped sequestration has gone into commodities and the S & P via POMO. Just wait until it gets in the hands of Joe Consumer.
Actually, when the Fed expands base money through QE, but banks keep the new base money in the form of excess reserves, that does NOT show up in M1, M2, or M3.
For it to show up in M1, M2 or M3, banks must convert the new base money into circulating currency plus bank account balances (the latter always increasing at multiples faster than the former).
I believe what you're getting at is that back before November 2008, when the Fed paid no interest on reserves, all excess reserves were always converted into currency plus balances, whereas nowadays banks choose how much of their excess reserves to convert depending on market incentives to convert versus the Fed-regulated incentive (0.25%/annum) not to. So whereas prior to November 2008 the Fed knew that every new dollar of base money it created would be converted into circulating currency, but didn't know how much of which kinds of bank account balances would be created for each of those new dollars of circulating currency, these days the Fed doesn't even know what portion of the base money it creates will be converted into circulating currency.
As for expanding money supply going "into" the S&P or "the hands of Joe Consumer", actually it does both at the same time.
Whenever expanding money supply is spent on stocks, there's always a seller. Sometimes that seller re-invests in stocks, driving up some other stock's price, and so on and so on. But ultimately for every dollar that goes into stocks another dollar comes out. The net of buying and selling is always zero. Some of those dollars coming out go to companies, if it was a company selling newly issued shares, or if the seller re-invested in corporate bonds. Some of those dollars coming out go into real estate. Some are spent on consumption, including even some by the minority of Joe Consumers who own stocks. They call it "the wealth effect". Of course Joe Consumer probably had to spend it all and more on higher gas prices, but such is his fate.
To the Keynesian's aggregate monetary demand is nominal gDp. the demand for services (human), and final goods. But this definition excludes the fact that inflation begins with the inputs (with raw material prices and processing costs at all stages of production) and continues from thru to the end.
Aggregate monetary purchasing power (our means-of-payment money X's its transactions rate-of-turnover) is money actually exchanging hands (e.g., bank debits). And the proxies for (1) real-output, & for (2) inflation indices, are historically, always, fixed in length.
I.e., long-term monetary flows are now free-falling, while short-term money flows are peaking. The evidence is all over in the market place.
Still, there's no way to tell from the data whether this money is getting out of the immediate financial "industry". The Fed gives it to selected primary dealers, who in turn give it to selected investment banks and hedge funds, who dump it in the stock market or overseas.
There was a poster who claimed that the Fed was "talking deflation but doing inflation". I think it's the reverse. They will not let money out to the mob; it is carefully controlled re-liquification to the favored few.
I had a dicussion with Robert Wenzel about all this. He kept saying "Watch M2, watch M2". If all that money was getting out into the real economy, no way would unemployment be so high. And they're hiding how tight-fisted they are with the peons by reporting M2, while they have ceased reporting M3, which would be a far better indicator of whether there was an actual boost, however artificial, to the brick and mortar, Main Street type industries.
You can see about that discussion (follow the links) with Wenzel over on my blog here:
http://strikelawyer.wordpress.com/2010/12/30/inflation-deflation-debt/
And see generally:
http://strikelawyer.wordpress.com/
There's no doubt that QE favors the financial sector and the elites who own significant financial assets, because it acts primarily on asset prices and less so on consumer prices. But at the same there's no doubt that QE is causing consumer price inflation, most strongly through commodity prices, but also through subsidizing risk, which encourages more questionable investment some of which does indeed involve hiring. That latter factor is up against a whole lot of slack in terms of excess capacity and unemployment, but it's acting all the same.