Where's all the Money Coming From?

The Fed stopped counting M3 back in March, but you can still get a pretty good estimate of it by looking at a couple of other numbers they publish. Both of those numbers were rising at an accelerated rate already this year, and really took off in August and September.

Institutional Money Funds rose by about $10.6 billion per month for the first 7 months of the year, but rose by $27.6 billion in August and around $20 billion in September.

Large Time Deposits at Commercial banks in the US were rising at about $25 billion per month for most of this year, but rose by $31.9 billion in August probably even more in September.

The money has to come from somewhere. In this case it appears to be coming from two places. The first being that it is being squeezed out of the hands of average citizens, and the second is that it is being created in the form of new commercial debt.

Consumers aren't borrowing as much as they used to. Consumer Credit was up only $5 billion in August, after rising $8.3 billion in July and $34.7 billion in Q2. Real Estate loans at commercial banks were actually down $0.6 billion in August after rising by about $30 billion per month for most of the year. With home prices stagnating, and consumers already overextended, credit appears to be tightening.

Since they aren't borrowing, they appear to be drawing down their checking and savings accounts to make ends meet. M1, the money people intend to spend, is down $4.1 billion in August, and is down $25.4 billion from a peak of $1393.6 billion in May. M2 is up, but there is a divergence within that measure. Savings deposits were down $9.8 billion in August and are down $41.8 billion from a peak of $3657.3 billion in February. Meanwhile, small time deposits jumped $23.4 billion to $1107.7 billion and Retail Money Funds rose $11.5 billion in August.

On the whole, a lot of new money was created in August but it didn't flow into the hands of consumers. Instead it appears to be in the form of commercial lending. Commercial and Industrial loans at Commercial banks rose by $27.4 billion in August, more than doubling the rate of increase over the past year. I'll credit hedge funds for much of that borrowing and builders for another large portion (as they continue to build homes but have trouble selling them).

All this new money was desperately needed to fund the federal deficit and keep the economy kicking. With many consumers choking on too much debt and leading indicators pointing toward recession, money creation to finance hedge fund speculation and surplus housing appears to be all that our financial system can muster. Neither of those sources of money should be considered sustainable.