$10 Trillion M2 Is Now In The Rearview Mirror

Two weeks ago we observed that the broadest money aggregate tracked by the Fed, M2, was less than $10 billion away from crossing the historic $10 trillion mark. As of this week, this number now officially has 14 digits for the first time ever, or $10,035,100,000,000 to be precise (technically the non-seasonally adjusted number crossed $10T last week, but for some reason bank deposits need to be seasonally adjusted, so waiting for the traditionally fudged data seemed appropriate). And we have a $50 billion increase in savings deposits, aka deferred buying power to those who still have the capacity to save, in one week to thank for putting $10 trillion in the rearview mirror.

Which actually brings us back to a point we have discussed previously, namely that even though M1 may be flattish and declining in direct proportion with the amount of excess reserves held by banks, and currency in circulation is rising at a glacial pace of about $1 billion each week - a key reason why the inflationary animal spirits have not bee unleashed yet, it is M2, i.e., total deposits, where the bulk of electronic money is contained, and which is rising at a soaring pace as seen on the chart below. And this is happening even despite ZIRP and soon - NIRP. Because this is real, well technically electronic, money that is just waiting for the signal to be withdrawn and spent on other things. Like bread. And wheelbarrows.

Now as the chart below shows, while the ratio of total deposits (checking, savings, small-denomination time deposits, and other) to currency has declined from a peak of 13.0x in 1987 to just over 6.0x in 2000, this ratio has been increasing since 2000 and is now back to 8.0x.

Which then begs the question: if and when the US currency in circulation starts picking up, due to conversion of reserves into dollar bills, and if the current ratio of reserves to currency persists, then the conversion of another $1.6 trillion in reserves into currency (since the Fed will be absolutely unable to withhold the reserve avalanche from converting into real circulating money without raising the IOER to a level which would crush the stock market, directly in opposition of what the Fed's prime and only directive is) would mean, all else equal, total bank deposits would rise from the current $8.4 trillion to $21 trillion.

What the price of a loaf of bread, or a bar of silver, will be at that point, is anyone's guess. Or a wheelbarrow for that matter.