Crescenzi: Money Supply Intrigue—M2 Still Accelerating

Over the past 13 weeks, M2 (a measure of the money supply) has increased at a 7.9 percent annual pace, more than triple the year-over-year pace that existed before the 13-week period began. Over the past 8 weeks, M2 has increased at a 10.2 percent pace. The sources of the growth include in particular strong growth in savings deposits and stabilization in monies held in money market funds.

The vast amount of excess reserves in the U.S. banking system is of course fuel for money supply growth, but the match has been miles away. Now the fuel is moving from tankers out at sea to land. If these data are to have any value in determining whether or not excess reserves are finally multiplying enough to influence the outlook on monetary policy, the data must be accompanied by indications of stability in bank lending.


In other words, the increase in the money supply would be much more important if it is driven from the asset side of bank balance sheets. While data such as those for commercial & industrial loans indicate a slowing rate of decline in bank lending, no increase in overall lending has yet been posted.

Nevertheless, the case for a continued money supply growth includes:

  • Slowing declines in bank lending
  • Passage of FINREG and increased clarity on Basel III
  • Improved capital levels at banks
  • An easing of lending standards found in the Federal Reserve’s senior loan officer survey

Whether the money supply continues its above-trend growth depends importantly on a continuation of the upward trend in industrial output seen over the past year, because increases in output boost the demand for working capital.

This requires more confidence than exists in the business community, because the reflexivity of the moment is affected more by caution than optimism, causing hesitancy on the demand side of credit. The upcoming election will have a bearing on this outcome.

Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."