Money Supply Numbers: Businesses Feeling The Credit Pinch

When Alan Greenspan started raising interest rates from 1 percent in the middle of 2004, he chose not to slow the growth in the money supply. By looking at the 1 year percent change in MZM you can see that it bottomed out around 0 percent in early 2005 but has been rising steadily ever since. M2 growth, which stayed in a 3-5 percent range has taken off in 2007. M3, before it was discontinued, was growing at an 8% clip. Reconstructed M3 figures put current growth at over 10 percent. What we can glean from this is that as interest rates increased which would normally slow growth the supply of money increased, negating that effect.

Part of the reason may have been that interest rates were coming off such a low number in 2004 that Greenspan was hedging his bets, but corporate America has been accumulating cash at an astronomical rate. The problem was that businesses were not taking risks even with rates at 40 year lows. If a business could not find justification for large capital expenditures when the federal funds rate was at 1 percent then how would they justify it at 3, 4, or 5 percent? The only justification would be out of a genuine need for capital investment in the US that could not have been done overseas and imported back into the US. So a bubble was created in the housing sector to keep the economy afloat.

Here is where it gets interesting: as the economy slowed in the first quarter of 2007, the year over year change in MZM and M2 began to increase exponentially. On a nominal basis the charts are in the beginning stages of a parabolic curve. But the last month has shown a slowing in the growth which may mean that as banks and lending institutions tightened credit the additional money pushed into the system provided no GDP growth so additional printed money would not help the economy.

If the Fed decides to cut rates one would think that money supply would increase as the Fed would be greasing the rails hoping that the economy gets an additional boost. But if the nominal money supply chart is any indicator, additional money coming into the system is not generating the same amount of GDP growth as they would expect and to slow the growth of MZM and M2 while cutting rates may not provide the economy the boost one would expect.

In fact, Commercial and Industrial Loan growth at Commercial Banks is beginning to slow as well so small businesses are beginning to feel the pinch. Percentage growth is still very high, but beginning to trend lower. What this means is that businesses are beginning to feel the credit pinch that consumers have felt since the beginning of the year.

The next few weeks will be very telling in terms of monetary data.