M2 Update: 11th Consecutive Weekly Increase

Tyler Durden's picture

M2 continues its inexorable rise higher, and while by all indications the various shadow components of M3 are declining, the Fed and the banking system sure are doing everything in their power to reflate traditional monetary liabilities. In the week ended September 20, M2 rose to a fresh record of $8,712 trillion, even as M1 has declined marginally in recent weeks. This was the 11th sequential increase in M2, which in 2010 has increased by quarter of a trillion dollars. Yet this increase does nothing to offset the over $2 trillion decline in shadow banking liabilities through Q2 which we discussed previously.

And as we reported earlier, one of the key components of M1, Demand Deposits, amounts to $471 billion, which will as of December 31 have unlimited insurance by the FDIC. Unfortunately, with the FDIC insuring up to $100,000 on savings deposits and other checkable deposits, the two of which combined for $4.7 trillion, there is no way that in a sudden bank run the FDIC will be able to pay off all these funds should banks collapse wholesale, as the FDIC's only capital recourse is its half a trillion line of credit with the Treasury. There is no way that this last course backstop will be sufficient if and when there is a bank holiday, and savers demand both the complete balance of their demand deposits plus the insurable portion of savings deposits.

The full breakdown of M1 and M2 by notional can be seen on the chart below:

As to the answer of why M2 increased, the next chart provides the answer: in the past week, there was an increase in the Currency ($2BN), Other Checkable Deposits ($7Bn), Savings Deposits at both Commercial banks and thrifts ($17BN), which however was offset by outflows in retail money funds (a $4 billion outflow largely applauded by the administration), $6 billion in small denomination time deposits, and, most importantly, $8 billion in Demand Deposits, which is precisely the number that the FDIC is doing all it can now to boost. Not surprisingly, this number has only increased by about $30 billion since the beginning of the year, even as banks have recently (and quite surprisingly) become very focused on deposit funding.

Weekly change in M1 and M2 components:

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pamriallc's picture

M2 will expand very quickly.  consider that with 2-3% spreads on capital, and money center banks at 20X leverage, and Federal guarantees, you can *EASILY* have 2-3% X 20 as a rate of return on your net capital base.  why are banks so profitable?  that's why.

it's also why M2 has expanded like crazy.  that's a good thing.  it allows banks to heal, take their lumps, and then lend once again, thus refreshing the system.   consider the wisdom.


God Bless America.


shawn mesaros, pamria, llc

DarkMath's picture

"it allows banks to heal, take their lumps, and then lend once again, thus refreshing the system.  "

don't forget to mention it's all made possible by us little people. don't forget us. our tiny pockets all add up you know. we don't mind. i for one vote for the banks. better they have it than those nasty prols. i used to eat steak, but i don't miss it.

Doubleplus good, this. You know, I don’t think there’s a single piece of meat in this stew. Looks like meat. Tastes like meat. It isn’t meat at all. Doubleplus good. Not like it, Smith? Yes, it’s too rich for me. Do you mind if I"... " Brothers and sisters, the battle for production has been won. Completed returns show that the standard of living... has risen by no less than 5 percent over the last year. All over Oceania there've been spontaneous demonstrations of Party workers... voicing their gratitude and joy!

i stand with you pamriallc, brother shawn mesaros of pamria, Limited Liability Corporation, and Voice My Gratitude AND JOY!
GoinFawr's picture

Either that or it allows banks to hoard fiat until they manufacture a fraudulent miasma of deflation that utterly destroys those (the middle class) who will never be given the luxury of marking their drowning liabilities as assets (ie to 'sky-pie') and then swoop in once the they are the last band playing and scoop up what's left of any actual hard assets for pennies on the dollar.

At least that is the Banks' wet dream, but we're gonna turn it into their nightmare. Just watch us.

Fraud Blessed America at one time, perhaps, but "on a long enough timeline", and all that cal...




rocker's picture

This is what it is about. How cheap can we buy thier stuff. Great thought GF 

RockyRacoon's picture

How can you even imagine that when nobody knows how deep the black hole really is?  I doubt even the Fed knows.  Obama is graying like Bush did!

You really think that monstrous money void can be filled with measly "profits" from reserves?

Caviar Emptor's picture

Ahhh to dream, perchance to lend...

And start the cycle all anew.

You see, in America we think if you provide enough money, someone else's money preferably, that things just simply can't avoid working out. 

So here's the math: Money X Leverage^2 = Happiness/Excess Body Weight.

America, wake up! Borrow big! Spend big! Eat smaller, though (pigs). 

scaleindependent's picture

F you pamria!

Federal guarantees!! ( That means regular people are guaranteeing your weak ass risk management). And when you and your mini-me clones are done ripping us off, then you get TARP part deux.

"Consider the" ... theft you POS.

"God Bless America". Yeah, we need it because of shits like you.

tom's picture

M3 isn't really shadow banking, it's large time deposits, eurodollars and institutional money funds. The last of those is often included in counts of the shadow banking sector, although it's mostly sweeps from corporate bank deposits. All the other usual shadow banking liability suspects are not included even in M3.

bull-market_3.0's picture

What shadow banking liabilities are not included in M3? I was under the impression that M3 represented "all the money" including shadow banking liabilities.

A bit of research suggests it includes repos and mmfs, can you confirm what it does not include? 

Are securitized assets included in M3? 

RockyRacoon's picture

Better minds than mine can answer that question -- and it's a good one.

tom's picture

You're right, M3 also includes repos, my omission. Institutional money funds are a kind of money market fund.

M3 at least as defined in the US does not include retail money market fund shares, any other kind of mutual fund, ETF or hedge fund shares, commercial paper, securitization, security credit/rehypothecation, or any kind of bonds.

wiskeyrunner's picture

The futures will rise like magic tonight and todays set back will be history by 5am. As I type the stock index futures offers are being pulled and it's floating higher just like magic.

surfsup's picture

All this "pump and circumstance" just in case the legal genie is further freed from the lamp in the form of "off balance sheet" debts AND mark to myth black holes -- which if brought to the light of day would be pulling at m2 like an angry pack of rottweilers on prozac.   As M/C hammer (2010) says:  "it RICO time..."

flow5's picture

Neither M1, M2, nor M3 money stock growth rates are measures of the rate-of-change in aggregate monetary demand, i.e., nominal gDp. MZM is the best reported.

"Money" is the measure of liqudity, the yardstick by which the liquidity of all other assets is measured.

(Monetary Flows), or aggregate monetary purchasing power, is our means-of-payment money X's its transactions rate of turnover (money actually exchanging hands).  I.e., bank debits best fit these definitions.

Contrary to economic theory and Nobel Laureate Milton Friedman, monetary lags are not "long & variable". The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically (for the last 97 years), always, fixed in length. However the lag for nominal gDp (the FED’s target?), varies widely.

LAGS: Roc’s in (MVt) are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact (not date range); as demonstrated by the clustering on a scatter plot diagram).

It’s a scientific fact that economic forecasts are mathematically infallible. Nominal (gDp) will cascade in the 4th qtr (down in every month - Oct, Nov, Dec & ending in Jan), without fiscal/monetary, countervailing, intervention/stimulus. That's why QE2 will start in Oct. & end in Jan. (because of the proxy for inflation).

flow5's picture

First, there is no ambiguity in forecasts: In contradistinction to Bernanke (and using his terminology), forecasts are mathematically "precise” :

(1) “Money” is the measure of liquidity; the yardstick by which the liquidity of all other assets is measured.

(2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits - Vt) that’s important (i.e., financial transactions are not random);

(3) Nominal GDP is the product of monetary flows (M*Vt) (or aggregate monetary purchasing power), i.e., our means-of-payment money (M), times its transactions rate of turnover (Vt). 

 (4) The rates-of-change (roc’s) used by economists are specious (always at an annualized rate; which never coincides with an economic lag). The Fed’s technical staff, et al., has learned their catechisms;

(5) Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus.

(6) Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman, monetary lags are not “long and variable”.  The lags for monetary flows (MVt), i.e. the proxies for (1) real-growth, and for (2) inflation indices, are historically (for the last 97 years), always,  fixed in length.  However, the FED's target, nominal gdp?, varies widely.

(7) Roc’s in (MVt) are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact (not date range); as demonstrated by the clustering on a scatter plot diagram).


(9) Consequently...by using simple algebra, economic prognostications are infallible (for less than one year).

(10) Asset inflation, or economic bubbles, are incorporated: including housing, commodity,, dot.com, etc. This is the “Holy Grail” & it is inviolate & sacrosanct:  See 1931 Committee on Bank Reserves Proposal (by the Board’s Division of Research and Statistics), published Feb, 5, 1938, declassified after 45 years on March 23, 1983.

 (11) The BEA uses quarterly accounting periods for real GDP and the deflator. The accounting periods for GDP should correspond to the specific economic lag, not quarterly.

(12) Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real GDP.

(13) Combining real-output with inflation to obtain roc’s in nominal GDP, can then be used as a proxy figure for roc’s in all transactions. Roc’s in real GDP have to be used, of course, as a policy standard. 

(14) Because of monopoly elements, and other structural defects, which raise costs, and prices, unnecessarily, and inhibit downward price flexibility in our markets, it is probably advisable to follow a monetary policy which will permit the roc in monetary flows to exceed the roc in real GDP by c. 2 – 3 percentage points.

(15) I.e., monetary policy is not a cure-all, there are structural elements in our economy that preclude a zero rate of inflation.   In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels.

(16) Some people prefer the “devil theory” of inflation: “It’s all Peak Oil's fault", ”Peak Debt's fault", or the result of the “Stockpiling of Strategic Raw Materials/Industrial Metals” & Soaring Agriculture Produce.  These approaches ignore the fact that the evidence of inflation is represented by "actual" prices in the marketplace. 

(17) The "administered" prices of the world's monopolies, and or, the world’s oligarchies: would not be the "asked" prices, were they not “validated” by (MVt), i.e., “validated” by the world's Central Banks


fe09rt65's picture

brain's on fire

Mentaliusanything's picture

Perhaps they can send anything left over as a charity offering to The Irish


and now Spain is downgraded (again) we can sit back and relax as the 'recovery' fully takes Hold.

RockyRacoon's picture

I'd say they knew well in advance of all of this:

On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. ...

It's what they know NOW that counts.

gwar5's picture

Hide the decline, before the decline?  Of course. They knew because they caused it.

M3 has crashed to depression levels and looks very bad for them. They caused the crash of housing, and the bank crises with d/c of Glass-Steagall. Keep on eye on players like Robert Rubin adn what directions they move for what they know now.

Tomash's picture

btw has anyone recently seen Hindenburg Omen? guess not...

Djirk's picture

Funny, when you look at the 3 year(ish) chart of M2 I do not see a liquidity crisis.

Not to say there were not problems, but they appear to be in the shadow/synthetic world of the banks, not the "real" economy. What a farce.

Write it off boyz and girlz, just accounting entries, not cash flow.


I propose a new standard of measuring certain fixed income securities....mark to cash flow. If you have a security with a coupon of 6% and only have of said debtors are paying. Your face value is 50% less. Simple.