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Money supply growth alert (cont.)





Over the most recent two-week period, the M2 measure of money supply has surged by $165 billion. Such rapid and sizable growth is highly unusual, and has happened in the past only during periods of panic-driven demand for cash liquidity (e.g., following 9/11 and in the wake of the financial market panic of late 2008). As I noted in my first post on this subject, normal M2 growth would be about $10 billion per week. From the Fed's data, we see that about $100 billion of this growth has come from increased savings deposits at commercial banks, $55 billion has come from increased demand deposits, and all the growth has occurred in the non-M1 portion of M2. What's going on? It's tempting to think that this is somehow a reflection of the end of QE2 and the beginning of Treasury's need to juggle funds since the debt limit is approaching, but I honestly don't know. Stay tuned.

UPDATE: (Aug. 4th) It now appears that this surge in M2 was the product of panic-driven demand for safe-haven cash as Europeans attempted to escape the potential contagion of PIIGS defaults.

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