M2 Update: 11th Consecutive Weekly Increase

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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