M2 Update: 12th Consecutive Weekly Increase, The Seasonal Adjustment Inflection Point, And The FDIC's "Free Capital Transfer" Plan Is Working

Tyler Durden's picture

M2 continues its seemingly endless rise higher...at least on a seasonal adjusted basis. In the week ended September 27, M2
rose to a fresh record of $8,741.9 trillion: a$30.9 billion W/W jump which was the 4th largest weekly rise year to date. This was the 12th sequential increase in M2,
which in 2010 has increased by over quarter of a trillion dollars. 

Not surprisingly, the biggest swing factor in the weekly change was the $20 billion rotation in Demand Deposits, which switched from an outflow of ($9.2) to $12.8 billion. Surely, this is precisely as the administration had intended: some may recall that last week we noted that the broke FDIC had decided to increase the insurance on demand deposits from $250,000 to infinity, precisely in hopes of achieving this effect. And while in the case of a bank run all these deposits will be lost as the FDIC's DIF is negative, it is all about perception. And for now, the government is once again on top. The impact of the demand deposit contribution can be seen in the yellow bar in the chart below.

The full breakdown of M1 and M2 can is presented here:

And now, time for a slight detour: for some odd reason the government presents the M1 and M2 data on a Seasonally and Non-Seasonally Adjusted basis: as if a particular checking account withdrawal will be necessarily offset in the future due to seasonal factors this year as it has in the past.Well, that's what the government would like us to believe. As the chart below shows, the NSA M2 is quite jagged, and while it does trend higher, it does so in a far more volatile fashion than the SA M2.

What is notable from the chart, is that we are now at that point in the year, when the SA vs NSA delta is highest: roughly $125 billion. And typically, as the next chart shows (which shows the historical M2 SA/M2 NSA ratio), from here on until the end of the year, it is the NSA M2 that surges, as it catches up with "deferred" monetary flow into the economy.

We are not sure what the real reason for the surge in "real" money is (and not magically seasonally adjusted money) in Q4 is, when the NSA "deficit" catches up with the SA numbers, but whatever it is: liquidations, pick up of spending into the holidays, etc., we think "this time may be different." Which means that the next several weeks will be very critical to confirm if the actual priced in surge in NSA M2 will actually occur. And since this is real money that goes into the economy for a variety of GDP boosting endeavors, this may serve as yet another accrued source of weakness. Because should not only the $125 billion in NSA monetary aggregates (that already are priced in by the government), but an additional pick up into EOY not occur, then the impact to GDP, from a monetary basis, may be quite severe, and amount to as much as 1% of GDP. We will keep a close eye on this differential and confirm or deny whether this hypothesis is playing out.