Well ehh, stillCJ, in the past 10 years we have had periods deflation in the price of real goods and services in the economy, coupled with weak GDP figures, so the FED wanted the commercial banks to lend - that is write their lovely IOUs for us all to spend - to counteract the deflation and boost demand.

Now once again we have gone over the 2% inflation chart with average GDP growth, so the FED fancies that the banks should maybe not write so much IOUs for everyone. So in keeping with rising interest rates & expectations of rising interest rates: they have slowed down. In fact they seem to have just about stopped completely.

How about that?

Select the 1 year view on the money stock charts and you'll see the money supply has actually seemed to have stopped growing for the first time in over 10 years (well it's a little early to say, but that might be what we are looking at if I'm correct and the FED doesn't take immediate counteraction).

Of course the money supply is never ever allowed to shrink, even during the 2007 mortgage crisis, banks are to make more loans one way or the other, even if the Fed has to force it itself. Monetary deflation is a big 1930s keynesian no-no. So I would first of all anticipate the Fed cancelling its scheduled interest rate hikes.

As to your graph specifically, banks were already weary lending to each over this decade because why borrow from each other when you can borrow from the Fed at record low rates. However, they do have to settle their differences with each other if they arise, because even if they don't want to trade with each other, their clients do. So they inevitably have to exchange all their IOUs with each other, and if one bank should end up with a surplus of IOUs of another bank and another with a deficit, then temporary lending arrangements come into place. This is particularly the case with low risk banks lending to high risk banks, nationally and internationally I believe.


By clients I don't really mean the individual with his good-old debit and credit cards buying his groceries at the supermarket, though ironically it is that character, and the price of the things he buys, the Fed cares about the most. The vast majority of a banks business isn't with him at all, it is with brokers of stocks, bonds, commodities, large corporations (broadcom big-time apparently) and governments, but above all else, mortgage brokers. Because apparently there is no asset more safer, more leverageable on a mass scale, than non-farm-land in a first-world urban/sub-urban setting.

What err, struck me as particularly terrifying about that particular graph you're showing us is that, it would seem to suggest, the entire finance ecosystem, leave aside John Doe and his shopping, has suddenly gone on holiday. You may very well ask what does this all mean for the economy and investors. Bad news I'm guessing.

If it's suddenly dropped from 70 billion to 10 billion, that is the trade in bank IOUs has contracted by 7, then I'm guessing that the very demand for bank credit (or willingness to supply) has just declined 7 times, or something proportional to that decline. At any rate, the above charts I quoted confirm that we are in a place where the rate of credit creation has fallen behind the rate of credit destruction, hence the January dip in the M2 supply.

Looking at rising LIBOR rates its costing banks more to lend to each other. I hadn't realised M2 supply had dipped. Could be fun with rising interest rates and the FED tapering.

The Fed is paying for the higher rates on those interbank loans. RRPO. I don't know what the excuse for LIBOR is, but keep capital from flowing into US markets to capture yield? With the dropping dollar its a doomed gambit. If M2 has dipped its because the players have left the slot machines and moved to the gaming tables. The Fed also RRPOs money markets to protect the NAV of people holding that bag. The Fed has been backstopping investors (Banks, MM accounts, FDIC for Goldman) who no longer really seem to need it. Everyone is all in.

The last time interbank lending was at the lows in 2016 was 1979! 29 years of trust among banks has been erased within 8 years. The only entity large enough to absorb that kind of financial stress without collapsing the economy is a group of central banks.