No, There Is Nothing Strange About The Surge In The Adjusted Monetary Base In The Past Two Weeks

Tyler Durden's picture

In the past two days, both UBS Andy Lees, Dennis Gartman (of the world renowned Gartman ETF which is just off its all time lows), and now even Art Cashin, have been stumped by the "dramatic" increase in the M2 and the Adjusted Monetary Base. To wit, per Art Cashin's take of Andy Lees' recent note: "US M2 money supply surged by USD88.7bn for a 2 week gain of USD165.6bn without any compensatory rise in the Fed’s balance sheet. Andy goes on to ponder whether this has been conscientious attempt by the government to beef up as QE2 ends. There is some evidence but not fully conclusive." Actually no, there is no evidence, and unlike many other instances of shadiness involving the Fed, this is not one of them.

Here is some more from Cashin's note today that explains the confusion:

Trading pit veteran, Dennis Gartman, took note of the continuing surge in the monetary base (or stock).

Finally regarding “economics,” we’ve included a chart at the bottom of p.1 this morning of the Federal Reserve Bank of St. Louis’ adjusted monetary base. Once again we shall refer to this figure as the “stock” from which the broader “soups” of monetary aggregates are derived. As is clear, the base is still expanding despite the ending of QE II at the end of June. The Fed is not contracting the base, and it will not do so, but certainly we can expect the growth of the base to halt rather quickly for right now it is “hugging” the green line in the chart which is 30% simple growth in annualised terms. That is obviously unsustainable… impressive perhaps… but unsustainable.

It is very important to know what the components of base are. If a large part of the growth is cash (currency), as it was a year or so ago, that is deflationary (that’s what led to QE2). We asked our old pal Dennis if he had examined the components. This was his reply:

Since May of ’10, the adjusted base has risen from $2.000 trillion to $2.722 trillion, a gain of 36% and $720 billion. The currency component of M1 has risen from $880 billon to $965 billion, an increase obviously of “only” $85 billion, so it is clear that nearly ever single bit of the increase in the base has been high powered money: real purchases by the Fed of agencies and Treasury securities from fed dealers. IN fact, in the past three weeks, the currency component has fallen ever so slightly, while the base has gone on to new highs.

The sharp spikes in money bear careful watching. It is not dangerous of and to itself but has the potential to explode into
an inflationary fireball. That would occur if it suddenly gained velocity (lending and spending). Let’s keep an eye on
monetary velocity.

Lots of wordy speculation there. Here's what actually happened, and in this one case there is absolutely nothing ulterior.

Simply, between July 1 and July 13, as we pointed out before, the Treasury's cash balance plunged from $130 billion to $39 billion. This is cash that is held at the Fed, and represents a liability on the Fed's balance sheet under the "U.S. Treasury, general account" entry. This can be found each week int he Fed's H.4.1 update. And while the Fed's assets have been flat now that QE2 has ended, the only plug to compensate for this major move is to adjusted the Excess Reserves held at the Fed, which as everyone by now knows is the most abstract concept known to man, and is much more of a Fed balance sheet plug than actual representation of cash (hard or electronic) held in bank vaults.

Anyway, since the Adjusted Monetary Base fluctuates exlusively due to fluctuations in the Fed's Reserve balance, the rapid drop in Treasury cash is what prompted reserves to surge even without any change in assets whatsoever.

This can be seen on the chart below, which shows the balance of Fed reserves since 2010.

What are the implications: simply, that next week when $66 billion in new bonds settle we will see a drop in both the M2, the Adjusted Monetary Base, and most importantly, the Fed's Reserve Balance will drop by a comparable amount. The irony is that on a synthetic basis, as the Treasury runs out of money at an ever faster rate courtesy of increased cash burn due to not rolling bills, the transposition into the monetary base is an increase in actual 1s and 0s in bank vault currency. And vice versa.

The truth is that since the Treasury needs to keep at least $10 billion in cash at any moment, there is both a lower and an upper bound as to how much cash can fluctuate in the Reserve balance account, and thus Adjusted Monetary Base, on a weekly basis.

Regardless, readers now know, and don't have to speculate, why the surge in the monetary base in the past two weeks happened, and why there is nothing really ulterior about it.

As for those looking for Fed shadiness, look no further than the Fed's "Other Assets" which last week hit a fresh all time high of $136 billion, and which still nobody really knows what they are.

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NOPOMO's picture went into the stock market.  FED rally pump was buying shares to kill the shorts.  Nothing worse than a government that colludes with WS to defraud the public.

hedgeless_horseman's picture

From the article:

...the chart which is 30% simple growth in annualised terms. That is obviously unsustainable… impressive perhaps… but unsustainable.

Makes me think of this:

Inflation is always and everywhere a monetary phenomenon. 
                                 —Milton Friedman

                                    September 16, 1970

Arius's picture

i am afraid the way they look at it they are protecting the public.

disabledvet's picture

more than likely it went into the black hole called "government" actually. with 40 cents on the dollar going towards the debt we now have "the legacy." simply put: "no government." time to see which of the various States in the Union are "swimming naked." Welcome to "naked political/economy."

Bartanist's picture

Could it have anything to do with the Treasury monetizing government pension funds?

knukles's picture


What is sold in one account, (pension holdings of SLUGS (state and local nonmarketable government securities) raising cash is then offset by an expenditure of the cash so raised on the purchase of the marketable treasury debt. 

The two cash flows "sterilize" one another. 

Pass the KY jelly, please.

mt paul's picture

"other assets"...



lotz of peas

FunkyMonkeyBoy's picture

That was the money used to pay the final payment to the creator of the Obama "Birth certificate" .pdf... a job well done. Flawless i tell y'all, worth every cent!

firstdivision's picture

SPY and Euro Bonds?

virgilcaine's picture

something bad is out there.

kridkrid's picture

the second or third to last gasp of a failed monetary system... of course I've been saying that for a while now, but I'll be right eventually.

TapperIsTicked's picture

Eventuality is a bitch in a transitory world.

TapperIsTicked's picture

Eventuality is a bitch in a transitory world.

francis_sawyer's picture

...just as 'transitory' is a bitch in an 'eventually' world

NOPOMO's picture

FED & Government want to win on both the public eat your peas.  Obama administration is complicit with the FEDs actions and has been working to defraud the public.

Off with their heads.

Sudden Debt's picture

Now we know who is buying Google stocks like crazy :)

+600$ for a no dividend stock. Who else would be so stupid to do so.

Joeman34's picture

How do you get a moving avatar?  Just curious as it's currently beyond my computer capability threshold.  Thanks.

Sudden Debt's picture

Step 1 : First you have to save up 10.000 junks and insult every race on this planet.

Step 2 : Then, you take a animated gif, scale it to a pic size (may not auto resize or animation is gone) ET VOILA!



wandstrasse's picture

I have a question: how can you wave your arms all night/day without falling down dead from exhaustion?

Dr. Richard Head's picture

Anger is a powerful energy conduit.  He's really mad and rightfully so.

francis_sawyer's picture

he's broken the perpetual motion riddle...

fuu's picture

I don't recall you getting junked that often. Except for the folks that think youa re an American who can't type. But those people will likely think you just said 10 junks not 10000.

dark pools of soros's picture

i thought he was a machinist that likes to be exact to three decimal places

MajorityRules.'s picture

600 a share means nothing without using other data to understand its cost. Look into why citi's stock went from 4 dollars to 40 dollars and you'll have a better idea why.

NOPOMO's picture

Market is telling you candy canes and unicorns are abound.  US Markets are now nothing more than a ponzi scheme by the FED for the Banks. 

I suggest you all take you 401Ks out as quickly as possible. 

impending doom's picture

Not sure about 401k's, but i tried desperately to liquidate my 403b a year or so ago and was pretty much told "No, read the fine print, asshole."

shesalive's picture

right...though you should be able to take it out in the event of hardship, with only a 10% take from the irs. can't get my 403a though - it's only good for loan collateral.

Dr. Richard Head's picture

"Other Assets" - wouldn't you all shit if it was gold...not that it's money or anything.

LowProfile's picture

Ever wonder what the sound of 1,000,000,000 toilets clogging at once was?

"Yep, it's gold!"  "PPPPPFFFFFFTTTTDDDDDD!!!!!...  ...Splat!"

Now you know.

Hindsight2020's picture

The Fed misleading the public and acting shady?  Blashphamy!  It's not like they are a private corporation trying to look out for their stakeholders while trying to maximize profit....oh wait, they are and most people are too stupid/lazy/disinterested to put the story together.  I continue to look forward to each paycheck when I can take my excess pay and turn it into PMs.  Only for "traditions" sake of course and not because I don't like collecting worthless newspaper that's considered legal tender. 

wandstrasse's picture

...and turn it into PMs.  Only for "traditions" sake...

so, you are long tradition?

NOPOMO's picture

FED now monetizing all equities with PEs greater than 80.  Obama saying yes we can....have a bubble greater than the .COM.

FED & Government have no place in equity markest.  They only serve to distort and then defraud the public.

I feel bad that they are forcing those who make contributions into the 401K to buy overvalued equities.  Who loses...well the public loses.

gorillaonyourback's picture

its simply,,,,, all the bonds they bought have interest payment,,, they are printing money to pay the interest payments,,,,, and also retire the principle on expiring bonds that they also bought,,,, with newly printed money

Tyler Durden's picture

If it is an accrued to cash divergence it would collapse on itself every 6 months when the coupon payment was made.

JW n FL's picture

where is Mr. Big Mouth HFT from 2 nites ago? he had a crew here running their mouths the other day but things have certainly quieted down from them as of late.


hmmmm? looks like they are trying to cover and get out of things? before shit gets real ugly like i said huh?


Mr. 3,700 to 1! where are you!! we miss you! come back! LULZ!!!

vast-dom's picture

at least the fed and govt had the presence of mind to create abstract accounting columns back in the day; if they knew what kind of mess we'd be in today there would be other more abstract (read: even more egregious unaccountable/unverifiable/nebulous) columns outnumbering the "real" accounting.


Let's see how long this charade can hold up. China will prop us up for only so long until they have to buy $140+ barrels of oil while their banks and local cities default etc etc etc. Exciting times.


Who needs industry when we have finance¿

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

I have a fix for the current debt situation:  Sell California to the Chinese.  Take the Baja Peninsula from Mexico by force (100 minute war).  California citizens and illegals (now legal) who wish to move to the Baja Peninsula.  Debt problem solved plus L.A. freeways unclogged.  Oh! Sorry Hollywood!


Tuco Benedicto Pacifico Juan Maria Ramirez

buchesky's picture

This is why starving the government will be stimulative to the economy.  When the Treasury stops borrowing so much money, investors will find other productive means of investment (i.e. business investment).

kridkrid's picture

The treasury isn't borrowing money... it's printing money (mostly) and taking recycled dollars from places taking fake dollars in exchange for oil and worthless crap (some).  Starving the gov't won't stimulate anything.  It will only speed up the eventual collapse.  I think it's important to know that because when it happens, we shouldn't look at the government as the saviour.  They can't control the spin of what it was that just happened.  all just my opinion, of course.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Congress needs money.  The U. S. Treasury sells bonds to the privately held Federal Reserve at interest.  In return out of thin air the Fed provides the U. S. Treasury with Federal Reserve Notes comprised of cotton and linen.  Nice gig since 1913.  Oh, as you know those notes have lost 98% of their purchasing power in a little less than one hundred years.


August 15, 2011 marks the 40th anniversary of Nixon's closing the gold window.  Maybe the demons have some special plans for us on that day?!

Stoploss's picture

S&P goes straight up, M2 straight up same time, not hard to see where that went.

Juice Box's picture

The money was spent to pay for Michelle Obama's 2012 clothing allowance.  The also planned on gassing up the 747 for another Obama vacation.

mt paul's picture


high of the day 

39.08 $

forty plus close

for the weekend ..??

vast-dom's picture

silver will hit $55 by end of summer. guaranteed. 

and oil will reach $112 shortly thereafter. guaranteed.