Financial System Liquidity Factors

Cash & Checkables
The basic money supply M-1 has increased by 13.5% over the past year. When credit
demand growth is low, it is vital for the Fed to supply the system with monetary liquidity
to keep the economic recovery on track. More vigorous private sector credit demand in
2013 might well pressure the Fed to cut back on the now generous QE program.

Credit Funding & Demand
My broad measure of financial system liquidity increased by 6.4% over the past year. This is
the strongest reading since Nov. 2007 and indicates that system liquidity is finally approaching
levels needed to support economic recovery for the private sector. Note though that the strong
growth of the basic money supply has played a major role in allowing liquidity to expand
since mid - 2008 but that non - money sources of funding are now rising as well.

The banking system loan book (excluding the Fed) has been recovering modestly since early
2011, but, reflecting the depth of the past recession and tighter loan policies, is just now
at prior record levels seen in the autumn of 2008. Interestingly, by mid - 2008, the banking
system's loan book was running about $1.5 tril. or a whopping 31% over the long term growth
rate of 6%. The loan book is just about at the long term trend line now, and this signals still
tight demand as the loan book tends to jump moderately over the 6% trend during economic
expansion periods.

The Fed did push forth QE 4 partly because private sector loan growth had decelerated as
2012 wound down. The Fed is doing its bit to foster faster credit growth in 2013. I have
included an interactive chart from the Fed which you can use to measure the growth of all the
major interest earning asset categories since the mid - 1980s. Good stuff for chart buffs.
Banking System Credit Chart

Cash Reserves
The market meltdowns of 2008 - early 2009, led to a jump in the total of money market fund
(MMF) balance of roughly $700 bil. to $3.6 tril. by the spring of 2009. Over the following
two years, the MMF balance declined from the $3.6 tril level to $2.4 tril. as investors moved
back into stocks as well as buying a boat load of Treasuries and private sector bonds. MMF
balances have been relatively stable over the past 18 months, with new flows and reinvestment
proceeds going into the markets and elsewhere, but with ending balances held firm.

The total MMF balance can be drawn down further, but the recent extended stability of ending
balances does suggest that preference for capital assets may now involve rotational moves
between categories such as stocks, bonds, PMs and real estate. So, for example, a strong
stock market for this year could again come at the expense of the bond market while an expanding
economy could also draw far more resources to real estate development and investment.