This week's (July 8, 2010) "U S Financial Data" from the Federal Reserve Bank of St. Louis shows that the two-month growth rate of M2 money supply is 9.5%, up from 9.2% last week. Likewise, the year - over - year growth rate has moved up to 1.8% (still sluggish) from 1.7%, The trend toward acceleration in this broad measure of the money supply is very recent, but unmistakeable. Over the first four months of 2010, M2 actually had fallen at a 2% rate. The sudden reversal from shrinkage to robust growth in M2 is likely the result of a purposeful effort by the Federal Reserve to head off deflation.
Gold advocates have critcized the Fed for printing too much money, but the slow growth in M2 belies this. Bank reserves have increased many-fold, but that new money remains bottled up within the Federal Reserve system, maintained there to bolster banks' balance sheets. The near zero rate for Federal Funds has not unleashed any flood of money into the economy, as banks have hoarded reserves, while reducing their net lending. The trend of bank lending does seem to have flattened out, recently, and may be on the cusp of expansion.
Robust growth in the money supply, if it continues, will boost the rate of inflation and squelch fears of deflation. The increased liquidity will likely be a boon for stock prices, while putting upward pressure on interest rates. This is bearish for holders of long term bonds, which have benefited in recent years from the declining rate of inflation.
Too much inflation is to be avoided, of course. But, a little more inflation than we have now (under 2% and falling) can be a good thing, given our sluggish economy and moribund credit markets.
Speculators who want to benefit from an uptick in long term interest rates should consider the Proshares Short 20+ Year Treasury ETF (NYSEARCA:TBF).