My broad measure of credit driven financial liquidity has been flat
since late 2007, with money M-2 growth offset by the collapse of
the financial co. commercial paper market and a $250 billion roll -
off of no reserve jumbo deposits in the banking system. In essence,
a contraction of private sector credit has been offset by a large
increase in monetary liquidity as evidenced by the sizable gains
in Fed bank credit, the monetary base and M-1.
The dramatic easing of monetary policy has been essential to
source the economy in the early stage of economic recovery. A
major recovery of business sector cash flow and and personal
income buttressed by counter cyclical fiscal moves has been
sufficient to fund recovery so far without reliance on private sector
credit growth.
However, since late 2009, monetary liquidity in the system has
flattened out as the Fed has wound down special credit facilities
and the program of straightforward quantitative easing. No problem
there provided that private sector credit demand has turned around
and is growing. But it is not, so a liquidity squeeze is developing
in the financial system, which if extended substantially further, will
damage the economy and the capital markets.
If credit is not growing, a year of no real M-1 growth may be long
enough to assure recession. So, if the Fed wants to keep the economy
out of trouble, then it will have to inject more money into the system
or watch credit growth resume or allow some of both, and it may
need to do so well before the end of the year.
Normally, a liquidity squeeze of a few months duration does no
substantial economic harm. I bring the issue up because it just may
not be wise to assume the Fed is properly attuned to the risk.
In this regard, it is interesting to note that Bernanke has recently
been verbally prodding the banks to do some lending. The Fed
would like to avoid adding more liquidity directly and have the
private economy begin to source credit for a portion of its growth
instead.
No comments:
Post a Comment