Bank Lending Stays Brisk

by: Calafia Beach Pundit

Since last March I've been tracking the confluence of a reduction in the growth of bank savings deposits, the pickup in bank lending, and the Fed's tapering of its QE3 program ("Tracking the perfect storm"), looking for signs of declining money demand that the Fed might be underestimating. The Fed recently told us that tapering will finish within 3 months; bank lending continues to be strong; but bank savings deposit growth has not slowed further. Although there's no evidence of any further significant decline in money demand, these all remain symptomatic of a slow and gradual decline in the demand for money and money equivalents. As such, it is appropriate for the Fed to taper its QE purchases (which were designed primarily to satisfy the world's seemingly insatiable demand for money and money substitutes, since bank reserves are now functionally equivalent to T-bills), and there is no reason at this point to worry about any unexpected consequences from the end of QE3.

The two graphs above show the level and the 6-mo. annualized growth rate of bank lending to small and medium-sized businesses. Since the end of last year, C&I Loans are up by about $130 billion, for a 16.5% annualized growth rate. That's the fastest growth we've seen since the recession. This is a good reflection of increased confidence on the part of banks and businesses, and it is also symptomatic of an important decline in the demand for money. C&I Loan growth had slowed a bit in recent months, but last week's surge in C&I Loans put to rest any notion that bank lending is not moving forward at speed.

The two graphs above show the level and the year-over-year growth rate of bank savings deposits, which have grown by almost $3.4 trillion since the onset of the 2008 financial crisis. Since the end of last year, this component of the M2 money supply has grown at a 5.5% annualized pace, which is somewhat slower than the 7.1% annualized growth of M2 over the same period; it is definitely slower than what we have seen in recent years. I think this is symptomatic of a world that is somewhat less anxious to accumulate safe assets that pay almost no interest. Money demand today is not what it used to be, but it is still reasonably strong.

Meanwhile, the demand for gold and 5-yr TIPS has been relatively steady for the past year or so, after falling significantly beginning in late 2012/early 2013. Both of these reflect a moderate decline in the demand for safe assets. Gold and TIPS are even better than money, because they can offer protection from inflation that pure money can't.

Not much has changed in recent months, but it's still notable that bank lending is increasing at a relatively brisk pace. At best this is a reflection of increasing confidence; at worst it's a harbinger of some modest inflation pressures.