Money Stock Flows Are Not Encouraging For Economic Growth Despite Federal Reserve Efforts

by: John M. Mason

The Federal Reserve continues to pour money into the banking system. Yet, the behavior of people and the banks hasn't seemed to change much at all.

This is not a good sign for more robust economic growth.

The M1 measure of the money stock measure grew just a little under a 10.0 percent growth rate from July 2012 to July 2013. This is down from 15.7 percent the previous twelve months, which was down from 16.2 percent from July 2010 to July 2011.

The rate of growth of the M2 measure has also declined over the preceding three years but the rate of growth of the non-M1 part of M2 has remained roughly the same every year remaining roughly at 6.0 percent each year.

The major rate of expansion has been in the demand deposit component, which grew at a 14.5 percent year-over-year rate of growth from July 2012 to July 2013.

Individuals and businesses are still moving their funds to transactions accounts and currency from time and savings accounts and from money market funds for two reasons. The first is related to the condition people and businesses find themselves in: there is still a lot of under-employment even though the unemployment rate is going down and businesses are just not spending. Second, short-term interest rates are so low that it really doesn't pay that much to keep funds in interest-bearing accounts.

One must note that people and businesses have been acting in this way for the last four years. In this area, nothing has changed.

This must be discouraging for the officials of the Federal Reserve System. For all their efforts over the past several years…little has changed in terms of the behavior of individuals and businesses.

Still the Federal Reserve carries on. Over the past five weeks, the Fed added almost $89 billion in securities to its portfolio.

Over the past year, the Federal Reserve added just over $700 billion to its securities portfolio. Compare this will the fact that on August 1, 2007, the Fed only had $791 billion, total, of funds in securities. Remarkable that in one year purchased an amount that was almost 90.0 percent of the total of securities held in the whole portfolio just six years ago!

Excess reserves in the banking system total more than $2.0 trillion at the end of July.

An interesting fact is that the effective Federal Funds rate has fallen over the past three months. After remaining relatively constant in the latter part of 2012 through April 2013 in the range of 14 basis points to 18 basis points, in May the Funds rate dropped and averaged around 9 basis points in June and July.

This is interesting because during this time period international funds were flowing out of the United States Treasury bond market and moving back into Europe. At this time the yields on longer-term Treasury securities rose by around 100 basis points and have remained at these higher levels.

This, to me, is another indication that the major changes in interest rates came at this time because of the movement of international funds from the "safe haven" of the US Treasury market back into riskier securities in Europe. This movement of funds, I believe, was much more important to the movement in longer-term yields than was Mr. Bernanke's talk of "tapering."

Just a side note: the thrift industry continues to shrink both in numbers of institutions and in the asset size of the industry. The Federal Reserve statistics indicate that over the past year, ending in July, savings accounts at thrift institutions declined by almost 1.0 percent while small time accounts dropped by almost 21.0 percent.

Small commercial banks and most thrift institutions are relics of the past. The government and the regulatory bodies are just letting them go.

So, nothing much has seemingly changed in the banking system over the past month, over the past quarter, over the past year, despite the efforts of the Federal Reserve. And, as reported elsewhere, although bank profits, especially the profits of the largest banks in the country, are very high, they are not coming from traditional banking business. Substantial uncertainty relating to financial institutions and financial markets still remains. And, this uncertainty is made worse by all the fuss pertaining to who is going to be the next "chief" at the Federal Reserve. Nothing seems easy for the Obama administration.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.