US Money supply annual increase 4X larger than what is being reported?

roadrunner

Katz on Monetary Base vs. reported Money Supply

Katz's article questions why the reported monetary base is larger than the money supply. This is a problem considering that the money base normally makes up only about 60% of the money supply. At least that was the case in previous years. The part shouldn't be greater than the whole. Money Base is now reported at around 1.8T vs. money supply at 1.6T.

The author inquired at the source about the difference and was told that the above occurs due to "retail sweeping." What that comes down to is reclassifying demand deposits (money deposited w/o any interest being earned) as savings/time deposits (money deposited with an interest rate being earned for a stated time period). Approx 1/2 of the demand deposits undergo this reclassification. The benefit to the banks is that this lowers statutory reserves. The FED has no problem with this method of accounting. Apparently it's just another one of those helpful changes we've been seeing to accounting principles that "helps" the numbers look better.

The net effect is that the currently reported money supply (printed money + 100% of all demand deposits) is not $1.8T but rather more on the order of $2.34T. That's a 70.8% real yoy growth rate. Compare that to the commonly stated 16.7% change of $1.37T to $1.6T. Katz puts this into perspective by noting that 1986 held the record for the greatest 1 yr change in the money supply at 16.9%. So the reported figure is not even a record. The average yoy change in the 1970's was only 8-9% per year. But when you toss in 70% that changes things a bit.

roadrunner

jmski52

It does seem that the main objective is to obscure, rather than clarify what is actually happening in the money supply and the economy these days.

I am not sure how changing the the definitions of M1, M2 and M3 over the years and now changing the FASB Accounting Standards is helping anyone. Having a scientific background, I always thought that knowing the answer was marginally better than making the answer up, especially on an important exam.

Even if the money supply has increased 70.7% yoy, it may still be the case that wealth destruction from the reconciliation of interest rate swaps and commercial mortgage defaults, not to mention the new crop of maturing ARMs - will continue to suck up liquidity. Since the sum total of these problems is huge, that extra $trillion or so still might get lost in the shuffle.

The biggest problem that they have, imo - is that they won't know when they've overshot with money creation, and that if they then try to over-correct by siphoning money back out of the system, it could lead to another crash. (And, at this point I don't know that they even have an effective way to remove money from the system - I keep hearing that they do not). I think that Bernake feels it is better to err on the side of monetary surplus for a variety of reasons which include his study of the Great Depression.

As Sinclair continues to point out, the hedge fund algorithms are having a bigger influence on price discovery than the fundamentals of supply vs. demand. Ultimately, this has to impact other prices and wages, probably in very uneven and unpredictable ways.

In my assessment, such a situation can only foster uncertainty and distrust, which is positive for gold and other commodities.

If long bond rates continue to rise and constrict the ability of home buyers and businesses to borrow, any would-be economic recovery will be choked off before it begins. Rising rates are an indication of increased risk, especially in the long bond - the risk for which bond buyers demand a premium in order to assume the risk.

Now that GM bondholders have been sold down the river - the important principal that bondholders are the prime creditors in a corporate default - now that corporate law and legal precedent have been trashed and several state retirement pools from Indiana have been placed in jeopardy, it will be very interesting to see what kind of premiums bondholders will require in order to assume the risk of total loss.

This is not good news for any economic recovery. In addition, if the Fed is buying T-Bills, isn't that kind of an oxymoron? The money is created from thin air anyway, so why complicate the issue by even holding an "auction"? It's really getting bizarre out there in finance-land.

Suddenly, the "barbarous relic" seems like just about the only thing that isn't barbarous, if you don't want to lose a large chunk of your assets "overnight".

ProofCollection

They can increase the money supply all they want and all is OK as long as people are stupid enough to still want the dollars.

The real trouble comes when people start to dump their dollars to turn into any available asset. China and Japan debt holdings declined from March to April, and Russia is selling US bonds to buy IMF bonds.

And China Plans to buy $80B worth of gold

roadrunner

One major problem with the FED withdrawing liquidity from the market: how can they do it considering they would need to sell the very toxic assets they have accumulated on their balance sheet over the past year. No one wanted these things to start with and placing them back on the market would only show their true value....potentially 10-40c on the dollar rather than the 80-120% they are probably on the books for. And these are supposedly the "best" of the toxic assets which the FED "hand selected." This would only prove that the remaining toxics are only worth a lot less. The other option is to dump treasuries which would counter FED efforts to keep interest rates stabilized. They are stuck between a gold rock and a hard place.

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The recent strengthening of the dollar and long bond overwhelmed the recent news of the poor April Treasury Capital Investment flows.

Net TIC purchases on long term maturity US securities dropped from $55.4B in March, to $11.2B in April.

Net flows from all sources and all maturities went from inflows of $53.2B in March to OUTFLOWS of $25B in April. A -$78 Bill change in one month. We need these guys to buy (not sell!) $60B-$90B every month just to keep the ship on course.

What's next for the US?

I'm not in agreement with everything in this article, but it offers up some thoughts to ponder that aren't pretty.

roadrunner

secondrepublic

At least for the U.S. dollar, it's possible that....

mhammerman

"...it will be very interesting to see what kind of premiums bondholders will require in order to assume the risk of total loss."

We've seen some of this in the recent U. S. automobile industry and I've noticed that some of the "...Q" (as in gmgmQ) stocks on the pink sheets are opting to cancel common stock when the emerge from bankruptcy and pay 0 to the common stock holders and I wouldn't question that opportunity for the bond holders as well; it's just part of the judgement so unless someone wants to go to federal court and gripe about not getting paid, as in the story we just saw with Chrysler. Chrysler bond holders They got in the way and then got run over...wasn't even a fight.

I got tagged on a small holding of a Q stock, one day it wasn't trading and then it was "symbol not found" and when I did find the new symbol, I got the bad news. At first I was happy because the new/postbankruptcy price was $10 and I had bought it as a Q for .11 and I just said damnnnnnn...I just made $50K; but, nah, didn't get anything.

Bond holders with hundreds of millions out on some company that's goin' Q are certainly aware of the risk and in light of current events, I'd bet they are payin' real close attention too. But as with gmgmQ, folks are out there running the price up and up; they're playin' it like a tin drum...hummmmmmm.

Peace