By Claus Vistesen
The Calafia Beach Pundit raises an interesting question in relation to the recent surge in the US money supply, which he suggests might be a reflection of a scramble for USD assets. More specifically, the argument would seem to be that a silent run on European banks is in the works as money is moved into perceived safe USD liquid assets.
As this chart of the M2 measure of money supply shows, it has gone on to experience a gigantic surge in the past seven weeks. M2 has risen almost $420 billion since the week of June 13th, on average almost 60 billion per week. To put this in perspective, annual M2 growth has averaged about 6% per year since 1995, and growth at this rate would translate into about $10 billion per week. In other words, M2 normally would have grown by $10 billion a week, but instead has grown six times faster. M2 has never grown this fast in a seven week period for at least the past 50 years. No matter how you look at it, this is a major event.
Where is the growth in M2 coming from? Virtually all of the increase can be traced to savings deposits (up $267 billion) and checking accounts (up $148 billion). Now we know why several large banks have announced they will now begin to charge customers who have over $50 million on deposit—they don’t know what to do with all the money coming in.
Clearly, the theoretical argument is sound here. In a world populated by different paper currencies, a surge in liquid deposit assets of the reserve currency in times of crisis reflects preference for liquidity and safety. However, the idea that money is now systematically fleeing Europe is new and disturbing. The news last week that the ECB had to supply 500 million USD to an un-named Eurozone bank has added further to the speculation.
However, there are two problems here. Firstly, as Simon Ward points out, the data do not quite support the idea of capital flight from the Eurozone. In particular, one would have expected EUR/USD to have reacted strongly on a flight from the Eurozone to USD assets.
Scott Grannis, for example, argues that US money demand has been boosted by massive capital flight from the Eurozone as investors anticipate a break-up of the single currency. The US money supply gain, however, has not, to date, been fully offset by Eurozone weakness – G7 monetary growth, therefore, has risen. Eurozone figures for July, released next week, could conceivably change the story but would need to show a large decline to offset US strength.
The Grannis theory of a huge capital inflow to the US from Europe, in any case, is inconsistent with the stability of the euro / dollar exchange rate in recent weeks.
Of course, someone else could be behind the bid for EUR/USD (Voldemort?) but we should also observe a blow out in Eurozone interbank spreads. And while we may still see this in the coming weeks, we have not seen anything resembling 2008 levels of panic.
Secondly, Simon Ward points out that even if you adjust for a plausible measure of liquidity preference money growth in the US is still strong which suggests that we cannot linearly equate a spike in the US money supply with capital flight from the Eurozone.
Another point worth considering here is that while the USD certainly must still be considered a safe haven, other currencies have taken up this role, especially in the wake of the debt ceiling debacle which saw the US lose its triple A rating from S&P. The CBP points out in the comments section;
(…) it’s true that the euro isn’t falling against the dollar, but both are falling against gold, the swiss franc, and the japanese yen. With currencies, everything is relative.
The ascent of CHF in particular has seen the Swiss National Bank resort to more or less desperate measures to rid its currency of safe haven status since it deems the Swissie to be severely overvalued.
At the end of the day, the answer must be found in deposit growth in the Eurozone. We have observed for a while how the periphery has been bleeding deposits, which, logically, have been moving to the core (or so I assume). But generally, the total stock of money in the Eurozone has been volatile around a flat trend since 2008 which makes it difficult to interpret spikes and dips in the data. I will be looking closely at Eurozone deposit data next and will report back if I find something interesting.