Liquidity Factors

This is an update post which builds on the original "Liquidity
Factors" memo posted on 2/14/07.

Monetary Liquidity
The Fed continues to maintain basic monetary liquidity growth
at low levels. M-1, the basic money supply, has shown barely
any growth for some time now. Monetary policy remains firm.

Credit-Driven Liquidity
This wide measure of money remains in a strong growth pattern,
although yr/yr growth has leveled off at about 9.0%. The growth
of bank lending to key sectors -- mortgage and real estate
development, home equity and C&I loans has moderated in recent
months, although the real estate and C&I books are still up
smartly yr/yr. The real estate loan book did dip in March reflecting
the turmoil in the mortgage market. Bank funding remained aggressive
and sales of asset backed paper resumed growth. Funding tends to
follow loan growth, so there could be some moderation of broad money
growth ahead. The slowing of the economy since mid-2006 is beginning
to be reflected in asset generation and funding.

Economic Liquidity
With a more sluggish real economy and still high broad money growth,
there is surplus liquidity in the economic system to support financial
and real asset investment and speculation. There is a liquidity
tailwind for areas that are viewed positively. Unfortunately for the
Fed, commodities speculation has picked up some, which reduces the
efficiency of monetary policy management. The loss of Fed control
traces directly back to the Greenspan Fed liberalization of reserve
policy implemented in late 1992 and never reversed.

Trade-Driven Liquidity
The outflow of dollars through the trade window remains high but
relatively static. The leveling off of dollar outflow will negatively
impact offshore growth with a lag.