The growth rates of various “Austrian” measures of the US money supply (such as TMS-2 and money AMS) have accelerated significantly in recent months. That is quite surprising, as the Fed hasn’t been engaged in QE for quite some time and year-on-year growth in commercial bank credit has actually slowed down rather than accelerating of late. The only exception to this is mortgage lending growth – at least until recently. Growth in mortgage loans is still very slow though, especially compared to historical growth rates. It cannot really account for the recent surge in money supply growth either.
Year-on-year growth rates of TMS-2 (11.19%, black line) and total loans and leases at commercial banks (7.7%, red line) as of October. In absolute terms money TMS-2 has soared by a staggering $840 billion since the beginning of the year – click to enlarge.
Usually lending by commercial banks will tend to lead growth in the broad true money supply, but this lead-lag relationship has become a lot less straightforward after the 2008 financial crisis (in fact, it actually reversed for a while). As a result of the Fed’s heavy debt monetization activities, the pace of money supply growth is nowadays influenced directly by two major sources.
Prior to the crisis, the Fed would mainly affect commercial bank lending growth by setting overnight interbank lending rates (i.e., the federal funds rate) and maintaining its rate target by supplying or occasionally draining reserves. QE by contrast creates new deposit money directly (as well as bank reserves to the same extent), which adds to the fiduciary media commercial banks conjure into being by means of fractionally reserved lending. QE has fundamentally altered the way the system functions – this remains the case even now, with the Fed’s QE type activities reduced to reinvesting the proceeds from maturing bonds.
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