One certainly cannot complain that central banks are being too tight with credit. The European Central Bank auctioned off $500 billion in credit facilities this week, in part to cover over what everyone hopes is just a temporary year end credit crunch. That is a staggering amount of money. It makes the money the US Federal Reserve bank is putting to work seem small by comparison. They did their second $20 billion auction, and told us that when they said they would do four of the auctions, what they really meant to say that they would do as many as necessary.
But is it having the desired result? That depends upon which set of data that you look at. Let's look at the monetary supply from the St. Louis Fed (courtesy of Bill King). MZM is the measure of the liquid money supply within an economy. Note that it has been rising rapidly of late. But the adjusted monetary base (AMB), which is basically cash plus bank deposits at the Fed which can be turned into cash, is down over the year. MZM might suggest inflation, but the AMB is suggesting the opposite. There is a major disconnect here.
Now look at the chart below. It shows the growth of the various money supply categories. Notice that M3, which the Fed no longer publishes, was rising rapidly through last year. Also notice that M3 is a growing part of the overall money supply. Basically, to get M3, you add Eurodollars, repurchase agreements, CDs to M2. M2 is cash in the banks, savings accounts, money market accounts, etc. What this tells us is that Eurodollars and repos are driving the growth in the money supply.
Can we come to any firm conclusion? Not yet, because the data is still working its way through the system. But the massive actions the central banks are taking plus the growth of the money supply while actual cash is shrinking is a worrisome development. This will be watching.
