Measured yr/yr, my broad measure of financial system liquidity has reached its strongest point
since late 2008, with this measure up 5.4% through 6/30. Moreover, liquidity categories beyond
the direct beneficiaries of the QE programs are expanding. My proxy for private sector credit
demand is up at a 5.0% annual rate for Half 1' 11, and the short term business credit supply /
demand pressure gauge has improved from a post great Depression low of -19.0 set early last
year to a -4.1 reading currently.
Private sector credit demand is recovering save for the large real estate segment, which is still
in a bottoming process. The banking system has boosted on balance sheet liquid reserves by nearly
48% or $550 bil. since 2008. Total system lending is flat with 2009 levels, but has started to inch
up. The banks' collective loan book has finally dropped down to the long term growth trendline
following the remarkable ballooning of the book from 2005 - 2008. Loan loss reserves remain
very high, but are gradually winding down.
In sum, private sector credit demand and the banking system are recovering from near death experiences, but improvement remains in an early, tentative stage. Thus it is that the Fed
must keep its options open on monetary policy: An improving system is still on shaky ground
but is inching closer to benchmarks that would suggest the FOMC should firm up policy.
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