Credit & Money Supply in the USA and China

November 19, 2011 · Posted in Global Economics · Comment

As explained before, inflation and deflation within a certain territory are defined as increase and decrease of the total volume of money plus credit in that territory.

Total Credit Volume

Probably the best approximation on the development of total credit outstanding in the US is the Federal Reserve’s so called Flow of Funds report’s data series “Total Credit Market Debt Owed“.

The long term series shows us the historical relevance of 2008’s credit event:

As I predicted before, I believe that the US has reached peak credit in 2009 and is now on a long term path of credit contraction. I would consider the 2010 bump an anomaly, one that was brought about and fueled by massive and unprecedented government stimulus and bailout programs, and a general yet tentative mood of things potentially looking up again.

As I also predicted, it will be those stimulus and bailout programs that will be aggravating the agony and sluggishness, and prolonging the duration of this necessary correction:

Neither is there any need to be surprised about the fact that all countermeasures taken by the government will turn out to be utter failures that will accomplish nothing but aggravate the crisis. For if the cause of the problem has been too much government intervention, then more government intervention will only add to it.

Zooming in, we can see that as of Q2 2011 (the latest quarter available in the data series) it looks like all these countermeasures have run out of steam and total credit has begun contracting again, from around $52,650 billion to around $52,550 billion, a contraction of roughly $100 billion:

Money Supply

I have recently come to realize, mostly based upon this article that the Treasury’s Supplementary Financing Program really seems to be nothing but another sort of checking account that the federal government holds at the Fed, in particular it is actual spendable money, not just a reserve balance that would still need to be loaned out in order to become spendable money. And as you can see, the Treasury does spend the money, since it obviously regularly draws upon that account, to the point where now the balance on there is zero again. Thus I will from now on include it when adding up the different components to come up with theTrue Money Supply.

Based on that we can see that the true money supply is currently at $2,592 billion, and that so far its been able to maintain its growth through 2010 and 2011 for the most part:

The growth rate is currently at around 6.19% and has been recovering from a low 1.28% around April:

During the period from Q1 to Q2 2011, which is the one we observed credit growth for above it has risen from $2,417 to $2,458, so by about $41 billion, which is less than the volume of credit contraction. And since then through now the money supply has roughly risen by another $140 billion (we’ll have to wait for the Q3 Flow of Funds report to see by how much this may or may not have been counteracted via credit contraction).

Overall it seems as though it is still a pretty close call between inflation and deflation, with inflation having certainly been the dominating force during 2010 and maybe also 2011, but slowly coming to a halt as credit expansion seems to have come to an end at this point.

We’ll have to wait and see what the next few months bring.

Money Supply in China

M1 in in China has most recently begun to fall:

The growth rate has now slowed to around 10%, coming closer to that in the US:

Money supply in China is slowing most likely as a result of contracting credit as a correction from prior government stimulus malinvestments.

As I said before, the Chinese housing bust is underway, the Chinese economy is headed for a severe recession, and that’s what the slowdown in the money supply growth rate may very well be indicating at this point.

Tags: china, credit, money supply, US

US Money Supply – December 2010

January 19, 2011 · Posted in Monetary Economics · 7 Comments

The true money supply in December 2010 has grown to $2,345 billion, the annual growth rate has gone up to 5%.

Tags: money supply, true money supply

Inflation & Money Supply in China

November 18, 2010 · Posted in Global Economics, Monetary Economics · Comment

As China’s economy overheats, inflation is the talk of the town these days:

In China, everyone is talking about inflation. Prices for food, raw materials and other commodities are rising, and that’s making people skittish.

Officially, prices grew at a 4.4 percent annual rate in October, the biggest jump in more than two years. But it’s striking how many people you meet in Beijing who say official statistics lowball the true inflation rate.

One economist I spoke with says inflation is probably running at twice the government’s estimate. A business executive I met says the same. He factors significant future inflation into any investment his firm makes these days.

And on the street it seems to be the same story. “I tend to agree with the housewives,” who are skeptical of the official inflation numbers, says economist Yu Yongding.

So why does China’s actual inflation rate matter? If forecasts are correct and China’s inflation rate levels out next year, then it’s full steam ahead for China’s economy. Factories will keep churning out goods. The building and investment boom will probably continue without pause.

But if China’s inflation rate climbs to 6 or 8 percent or higher, then the situation changes significantly. China’s central bank would continue to raise interest rates. The government might step into to control prices for grain or other commodities. It would probably be forced to rein all that money flowing out of the banking system that’s fueling China’s boom. Lenders would pull back.

And if all that happens, then the China miracle goes on hiatus, at least for a while. And the world will notice.

Some more data on Chinese money supply may help put things into context.

The Chinese money supply figure that is closest to my True Money Supply in the US is M1 as reported by the People’s Bank of China:

The money supply in China has easily tripled over the past 6 years.

And here is a comparison between the money supply growth rates in the US and China:

Money supply and credit supply have both been exploding in China, while money supply in the US has rather stagnated or at least grown a lot slower alongside contracting credit.

This is the main reason why I don’t think that the Yuan will remain strong against the US dollar for very long, and it is also why I don’t think the Chinese bubble can continue for much longer, but then … bubble often times last a lot longer than you’d expect.

The only way how the Yuan can maybe remain strong against the US$ for a sustained period of time, in my view, is if the PBC tries to cheapen the Dollar by selling reserves against Yuan, which in turn would exert an upward pressure toward exports from the US into China while having the adverse effect on Chinese exports, and thus hurt China’s politically powerful export lobby.

However, such a policy, too, would find its natural boundaries in the amount of Dollar reserves accumulated by the PBC.

Tags: china, money supply

True Money Supply – July 2010

August 12, 2010 · Posted in Monetary Economics · Comment

The true money supply in July has dropped again slightly from $2,213 to $2,200 billion:

The annual growth rate remains below 2% at currently 1.82%:

Historically, the true money supply is a helpful indicator in predicting recessions and booms. A sustained growth rate below 3% tends to portend recessions, while one above 3% tends to result in speculative booms of one or the other kind.

In hindsight over the past 3 years, it looks like the true money supply has once again been a good guide in predicting mid term trends, in particular the recession of 2008 and the reflation of 2009 which has now obviously come to an end.

But fluctuations in the money supply don’t change the fact that deflation is here and has been here for a while, and it’s not going away anytime soon.

Tags: money supply, true money supply

Money Supply – March 2010; Supplemetary Financing Revived

April 18, 2010 · Posted in General Economics, Monetary Economics · Comment

Money Supply

The true money supply in March has grown slightly to $2,202 billion in March:

The annual growth rate has, however, dropped to 3.85% now:

Fed & Treasury Revive Supplementary Financing

For a little while the Treasury has been winding down its mysterious supplementary financing program.

Now, after Congress has, as always, made way for more public debt by raising the ceiling, the program is being revived:

The Treasury Department announced Tuesday that it is expanding its Supplementary Financing Program to help the Federal Reserve manage its enormous balance sheet. In a statement, Treasury said it will boost the SFA to $200 billion from its current level of $5 billion. The fund had been up to $200 billion but was scaled back when Congress delayed passage of an increase in the debt limit. Now that an expansion of the debt limit has been signed into law, the department is able to resume the program. Starting on Wednesday, Treasury will conduct the first of eight weekly $25 billion 56-day SFP bills to restore the program. The department said it will then roll the bills over. “We are committed to work with the Fed to ensure they have the flexibility to manage their balance sheet,” a Treasury official said.

I’m not sure if this really means anything to anybody. Maybe I am just not getting something here. But I would love for somebody from the Treasury or the Fed to explain to me what precisely they mean by working “with the Fed to ensure they have the flexibility to manage their balance sheet”.

Obviously something shady is going on here when they have to use such complicated constructs and fuzzy terminology.

Credit and Loans

What has been most noteworthy recently was the following development in the supply of credit and loans during the last week or March:

The last time such a severe spike occurred was in October of 2008, to no avail as credit relapsed afterwards along with a severe market crash … a pattern which is only too likely to repeat itself at this point.

Update: I just chatted with Mish about this and he told me that this recent spike is likely to be just a technicality that is due to some reclassification of some student loan.

Tags: money supply, total credit

Money Supply – February 2010

March 12, 2010 · Posted in Monetary Economics · Comment

The true money supply has dropped by $72 billion from $2,253 billion in January to $2,181 billion in February 2010.

The annual growth rate has again leveled off to now 5.5%.

Tags: money supply, true money supply

Money Supply – December 2009 – Early Double Dip Recession Signs?

January 16, 2010 · Posted in Monetary Economics · Comment

The true money supply has grown to $2,232 billion in December 2009.

The annual growth rate has now slowed down to 3.2%:

A sustained drop below 3% is most of the time a good recession indicator. Given that we are still in a recession which may be declared over soon, this may be just another indicator of the coming double dip recession, as I have outlined a few days ago.

Tags: december 2009, double dip recession, money supply, true money supply

Money Supply – November 2009

January 10, 2010 · Posted in Monetary Economics · Comment

The growth rate of the true money supply has slowed down to 6.68 percent in November 2009.

Below is the actual amount of money in circulation over the past months till now:

Below please find a charge of the true money supply growth rates since 1930:

The red areas indicate recessions. As I have mentioned before the growth rate of the true money supply tends to be a relatively reliable indicator of coming recessions whenever it drops below 3 percent.

Note the area between 1930 and 1940: The Great Depression, an obvious result of the government’s previous inflation and credit expansion policies and the ensuing business cycle, was accompanied by a decline in the money supply. In 1933 the true money supply spiked up through 1936 only to contract again in the recession of 1937/38. The pattern that is currently panning out may very well be following that one in one way or another. It is certainly likely that soon an official end to the recession will be declared. Another one is likely to follow quickly, attempting to correct all the malinvestments that will have been created or left uncorrected by the recent and ongoing bailout and stimulus policies.

The government’s response to that coming recession is of course predictable. What exactly it will lead to no one knows, except that it won’t be good at all. The recession of 1938 was closely followed by World War II …

Tags: money supply, november 2009, true money supply

Money Supply – October 2009

November 22, 2009 · Posted in General Economics · 2 Comments

The true money supply in October was $2,151 billion, up 7 percent from 1 year ago:

Tags: money supply, october 2009, true money supply

Money Supply – September 2009

October 16, 2009 · Posted in Monetary Economics · Comment

The true money supply has fallen by $11 billion from August to September to now $2,133 billion:

This is the 4th monthly decline straight.

The annual growth rate has dropped to 10%:

One more noteworthy item in this month’s money supply data: The Treasury’s “Supplementary Financing Account”, after 6 months of maintaining a constant level of $200 billion, has now dropped to $191 billion. I believe this may be yet another sign that the Fed’s efforts to wind down the monetary stimulus have already begun behind the scenes.

This, along with an ongoing and accelerating credit contraction, will be forces blowing in the face of all futile attempts to reflate the bubble.

Tags: money supply, september 2009, true money supply