A perfect blog post on money supply and the Fed

Steve Saville checks in with a perfect post on money supply and the Fed

Coincidentally, I used this chart of M2 to show the drastic percent change from a year ago in US money supply in NFTRH 755. To this point we have been gauging M2 by its still bloated literal view, which the Fed is doggedly trying to deflate. But the YoY is just plain scary. Regarding money supply and the Fed, #755 noted:

Usually we have reviewed the M2 graph as it appears in literal terms. In that view it is rolling over and at high risk. But this week let’s look at the drastic drop in M2 on a percentage change from a year ago. Since 2000 the Fed has tended to ramp money supply during recessions and/or alarming market events. As you can see, they sprang into inflationary action to an epic degree in Q1, 2020. You may recall that was our signal at the time NOT TO BE ACTIVELY BEARISH and to prepare for a bullish outcome. Well, this signal shows the opposite condition shaping up. Back in Q1, 2020 you couldn’t convince the herds to be bullish and it took a while to resolve that way. Today, the same herds are not looking at signals like this. They are looking at their nominal TA and seeing the likes of the rallying SPX and NDX charts above.

m2, money supply and the Fed

The above is a blurb among other indicators and market analysis. Saville goes into a lot of detail on not only money supply and the Fed (using his True Money Supply measure), but also the banking sector and the reasons why it will not be able to come to the rescue to re-liquefy the system.

US monetary deflation intensifies

A perfect (in my opinion) blog post contains and even more perfect turn of phrase:

The Federal Reserve is like a loose cannon on the deck of a ship in a storm. It is crashing into things and generally wreaking havoc, although unlike an actual loose cannon it pretends to be the opposite of what it is. It pretends to be a force for financial and economic stability.

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This Post Has 7 Comments

  1. Clint

    My understanding is the new program (must have been in April) allowing banks to borrow par on all their long term underwater securities reversed substantially all of the money supply decrease, since the Fed started reducing their balance sheet. I also have heard discussion that a portion of that has been paid back quickly by the banks that didn’t need it. I’m interested in your comments about how that plays into the equation. Thanks

    1. Gary

      Where did you receive that information? I don’t see how a bank bailout would increase money supply if the banks do not turn around and inject those benefits of corporate socialism right back into the economy.

    2. Gary

      The Fed’s still bloated balance sheet showed a little hook upward in response to the pigs melting down, but thus far it is nothing notable. Where does this monetary magic come from if the balance sheet is still bloated and M2 is rolling over?

  2. Clint

    I did some googling. I found a 3/2/23 article that the Fed reduced its Bal sheet at that time by 626B from its historical peak. It looks like it has increased its balance sheet through early April by what appears to be 150B in discount window and BTFP borrowing defined below. Nothing came up more recent than that.

    The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.

    I’m not an expert here. Just wondering how this affects the reduced money supply thesis. It is my opinion that the banks using these borrowing avenues would be stockpiling the liquidity to avoid a panic, and not lending it. Here’s a couple articles describing it as quasi QE



    1. Gary

      I am certainly no expert either. Just a chart/indicator/macro nerd trying to keep track of it all and maintain themes. But it does seem more like trying to keep things intact rather than reversing the money supply contraction. As some of the indicators we reviewed in the last two reports indicate, the stress eased a bit recently but risk is high. If the indicators start reflecting something different, like a new inflation situation sooner rather than later, then I’ll go with that. I don’t expect it “sooner”, however.

      1. largefeline

        Yup it’s no reversal of QT, however a reversal by printing out of possible future bank failures is not that hard to imagine. Each outcome seems to be firmly counter-cyclical from this point of view as the TSI blog said.

  3. Dagny GromerDagny

    We need to watch what all the major CB’s are doing, not just the fed.

Comments are closed.