The Issue of Liquidity

Read this section of Michael Hartman's editorial posted on FSO Market Wrap: Big Debt Sales in Focus This Week

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Tons of Global Liquidity

From many articles I read, it appears we are awash in global liquidity. Analysts and talking heads on TV continue their banter on whether or not the Fed will cut rates or raise interest rates in the coming year. The interest rate determines the cost of money but remember, it is the supply of money that creates inflation. Unless we see a housing crash, the Fed will not lower rates. As rates remain steady, the Fed is trying to orchestrate a soft landing for real estate while keeping bond and stock prices inflated. In our world of pure fiat funny-money, new money is created by being “borrowed” into existence. Have a look at Doug Noland’s Credit Bubble Bulletin at the Prudent Bear from two weeks ago and you can get a much better idea of just how much money has been “borrowed” into existence over the last year. Please note the lines that Mr. Noland underlined:

Bank Credit declined $5.3 billion during the week (of 1/3) to $8.291 TN. Bank Credit expanded $803 billion, or 10.7%, over the past 52 weeks. For the week, Securities Credit fell $9.9 billion. Loans & Leases gained $4.6 billion to a record $6.080 TN. Commercial & Industrial (C&I) Loans expanded 12.9% over the past year. For the week, C&I loans rose $3.7 billion, while Real Estate loans declined $5.0 billion. Bank Real Estate loans were up 13.9% over the past year. For the week, Consumer loans added $2.2 billion, and Securities loans increased $5.5 billion. Other loans dipped $1.6 billion. On the liability side, (previous M3) Large Time Deposits surged $21.5 billion.

M2 (narrow) “money” jumped $28.9 billion (3wk gain of $75bn) to a record $7.073 TN (week of 1/1). Narrow “money” expanded $376 billion, or 5.6%, over the past year. M2 has expanded at a 9.0% pace during the past 20 weeks. For the week, Currency increased $2.2 billion, while Demand & Checkable Deposits declined $13.3 billion. Savings Deposits surged $32.4 billion, and Small Denominated Deposits added $1.1 billion. Retail Money Fund assets increased $6.5 billion.

Total Money Market Fund Assets, as reported by the Investment Company Institute, dipped $1.9 billion last week to $2.390 Trillion. Money Fund Assets increased $326 billion over 52 weeks, or 15.8%. Money Fund Assets have expanded at a 23.2% rate over the past 20 weeks.

Total Commercial Paper dipped $1.5 billion last week to $1.990 Trillion. Total CP has increased $300 billion, or 17.7%, over the past 52 weeks. Total CP has expanded at a 22% pace over the past 20 weeks.

Fed Foreign Holdings of Treasury, Agency Debt increased $7.2 billion last week (ended 1/10) to a record $1.770 Trillion. “Custody” holdings were up $239 billion y-o-y, or 15.6%. Federal Reserve Credit dropped $14.9 billion to $844.5 billion. Fed Credit was up $28.7 billion y-o-y, or 3.5%.

International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $770 billion y-o-y (18.8%) to a record $4.858 Trillion.

Another very worthy article about the excess of global liquidity came from Cliff Droke at the beginning of the year. The article is linked here and titled “Liquidity and the Global Bull Market of 2007.” If nothing else, check the article to see his chart of MZM Money Stock from the Federal Reserve Bank of St. Louis. I don’t agree with Mr. Droke on all accounts, but he makes some good points about the implications of the excess global liquidity. The chart of money stock says it all…inflation is baked in the cake!

The excess liquidity has got to go somewhere, and in the very near-term the money is being herded toward the Treasury complex. We have to refinance our old debt that is coming due and borrow enough additional money to finance the current deficits.