Kevin Spires, CFA, FRM

M1 growth rates continue to decelerate.  The M/M growth rate is 3.53% (All figures Seasonally Adjusted Annual Rates or SAAR).  The Q/Q growth rate is 5.58%, while the Y/Y growth rate is still quite frothy at 16.72%

The downward trend has been in place for months with no clear bottoming in sight.

M2 growth has followed a similar path, but has seen a bit of stabilization over the past month.  The M/M growth rate is 7.80% - higher than the Q/Q growth rate of 4.99%, but still lower than the healthy Y/Y growth rate of 9.57%

If the M2 growth rate can rebound in the absence of further quantitative easing then the economy is probably a lot stronger than the gloomier economists are projecting.

Kevin Spires, CFA, FRM

Yesterday after the market close, the Federal Reserve released its weekly Money Supply (H6) Report.  M1 Growth continues to decelerate with the Q/Q growth rate at 5.82% while the Y/Y growth rate is still quite steamy at 16.76%.  Looking at the chart to the left, the sharp deceleration in the quarterly rate is slowly flowing through to a slower yearly growth rate.

For now, there is plenty of money in the system, but if the quarterly growth rate turns negative, expect the Fed to leap into action on QE3

M2 Money Supply growth has also decelerated. with the Q/Q growth rate at 4.78% versus a quite healthy 9.58% yearly growth rate. 

Operation Twist hasn't been a boost to Money Supply (or Credit) growth.  The big boost to Money Supply has come from the Federal Reserve's outright money printing from QE1 and QE2.  As big banks continue to come under pressure to delever, expect Ben Bernanke to rev up the helicopters again this fall and print money in a QE3 operation.

Watching how Money Supply & Credit Growth behaves over the next 2-3 months is crucial to calling the exact meeting where Bernanke will be able to convince the FOMC to undertake QE3.  QE1 and QE2 were undertaken in response to money growth rates close to zero.  If quarterly money growth rates continue to drop over the next quarter, expect the FOMC to leap into action. 

This does not mean that I think QE3 is necessary or good for the economy.  In my quest to understand Ben Bernanke's outlook on the world, I have come to believe he would rather ignite an inflationary episode like the 1970's rather than repeat the mistakes of the 1930's. Unfortunately, I think the Fed's medicine is counterproductive and is allowing a massive leveraging up of the Federal Government that will ultimately have to be unwound. There is an increasing probability that the unwinding of the Federal Government's fiscal situation will be accompanied by a debt crisis that will make the current European Debt Crisis pale in comparison. 

Kevin Spires, CFA, FRM

M1 Money Supply Growth continues to decelerate.  The 13/52 Week Rate of Change is still very frothy at 16.87%, but the 13/13 Week rate of change is down to 5.97%.  Prior to the last recession, M1 growth was rather tepid and never made it above 5%.  If these measures continue to decelerate over the coming weeks, that would be a good indication that Helicopter Ben will succomb to pressure to institute QE3. 

M2 Money Supply growth is also decelerating.  The 13/52 Week rate of change is still very strong at 9.61% but the 13/13 Week rate of change has dropped to 4.92%.

Click on our weekly Money Supply Chart Package for more data and charts

Kevin Spires, CFA, FRM

The Federal Reserve released its Weekly H6 (Money Supply) Report yesterday.  Yesterday's report showed a continuing decerlation in Money Supply Growth.

M1 Money Supply Growth has clearly peaked - although from very frothy levels to levels that would be considered inflationary under normal circumstances.  The Q/Q growth rate (annualized) has decelerated to 6.1% from the very frothy 30%+ growth rates seen a year ago.  The 13 Week/52 Week Growth rate has decelerated to 17.0% from the 20%+ rate seen last year as well.  The Month over month growth rate has declined to just .32% on a Seasonally Adjusted Annual Rate (SAAR).

The M2 Money Supply Growth rate is following the M1 deceleration.  The Q/Q Growth Rate (SAAR) has dropped to 5.15% from peak levels of 18%.  The 13/52 Week Growth rate has dropped to 9.63% - just off the peak levels of just over 10%.  The Month over month growth rate has dropped to just 3.24% on a SAAR basis.

The M1 growth rate decelerated to below zero leading up to the last recession and almost hit zero befor QE2 - lending credibility to the idea that continued Monetary Decelaration will lead to QE3 - based on expansion of the Fed's Balance Sheet - although we are probably a quarter or two away from that point.

Kevin Spires, CFA, FRM

Yesterday, the Federal Reserve released its weekly Money Supply (H6) Report.  The QE2 Money Printing is now fully distributed into the Money Supply.  M1 growth rates peaked on a quarterly basis last October and are now taking another dive down after stabilizing during the first quarter of this year.  Year over year growth rates are still solidly above 15%, so the economy won't be starved for liquidity, but the QE2 effect is finally starting to fade.  For anyone who is wondering why I am refering to the QE2 effect, remember that Monetary Policy acts with a long and variable lag.  QE2 is just now hitting the real economy with a 6-8 quarter lag - as expected.

The Growth in the broader M2 measure of Money Supply has also peaked - although at rates above nominal GDP -especially on a year over year basis, where the M2 growth rate is still 9.77% for the past 13 weeks over the same 13 weeks one year ago. 

The trend in Money Supply growth bears watching as extremely low Money Supply growth can be a harbinger of an economic slowdown.

Kevin Spires, CFA, FRM

The U.S. Monetary Base has exploded the past four years, but this explosion has not fed through into Consumer Prices -yet.  An interesting divergence has taken place over the past year that I believe is foreshadowing more pass through of the accumulated monetary stimulus into the Real Economy.

Over the past four years, the Monetary Base has expanded threefold, but Consumer Prices have remained quite low at around 2%.  One reason why Consumer Prices have been relatively stable with the explosion in the monetary base is that much of the increase in the Monetary Base was kept by banks as excess reserves at the Fed.  In other words, much of the Fed monetary stimulus was lying fallow and not being lent out to consumers. 

Over the past year, something has definitely changed in this dynamic.  While the Total Monetary Base is mostly flat, the Monetary Base adjusted for Excess Reserves is up over 10% - a clear divergence. 



Excess Reserves have started to drop and Bank Credit Growth is excelerating with C&I loans, Consumer Loans, and Real Estate Loans all expected to grow strongly over the next several quarters.  The Big Banks are finally turning all the monetary fuel into more lending.  On this basis along, I would be very skeptical that the Economy will head into a recession anytime in the next several quarters. 

Tell us your thoughts...

The Weekly Money Supply Report was released Thursday afternoon and the M1 decceleration seems to have ended with M1 still growing at double digit rates.  M1 is growing at 18.23% Y/Y and 20.54% M/M Annualized.

Some of the M1 growth is a substitution into Demand Deposits which now can earn interest and away from CD's and Money Market Mutual funds which are a part of M2, but one cannot deny that there is plenty of money sloshing around in the system.

M2 money supply growth has been slower than M1 growth, but has still been above Nominal GDP growth as M2 growth has been 9.21% Y/Y and 5.59% M/M Annualized.

I pay attention to Money Supply Growth because recessions have usually been preceded by a severe slowdown in M2 growth.  Prior to the last recession, M1 growth was around zero for years and finally a Credit Crunch developed into a deep recession. 

Check out our weekly Money Supply package that I posted today for more information.