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Bank loans continue to accelerate

Bank lending to small and medium-sized businesses continues to accelerate. C&I Loans outstanding are up at a 15.2% annualized rate in the past 3 months, and have risen 12.3% over the past year. Since the recent low in Oct. '10, C&I Loans have grown by $174 billion, or about $2.5 billion per week on average; in the past 3 months the pace has picked up to $3.7 billion per week on average.

M2 growth has also been robust, fueled in part by increased bank lending. I think it's rather astonishing, actually, to see in this chart that the M2 measure of our money supply has risen by almost $3 trillion in the past 5 years. The increase since early 2007 works out to $10 billion per week on average. Surely there is no shortage of liquidity in this economy. In fact, M2 has grown over 20% more than nominal GDP since the end of 2006. So far, it would appear that the major driver for M2 expansion has been increased money demand: people simply want to have more "cash" on hand because they are worried about the economy. Savings deposits now represent about 63% of M2, and they have contributed the lion's share of M2 growth in recent years.

One of the biggest changes we should expect to see in the economy and the markets over the next year or two will likely come from the unwinding of all this demand for cash. I seriously doubt whether the Fed will be able to soak up all the money that may be unleashed by a public that is no longer willing to hold a mountain of zero-interest-bearing cash, and wishes instead to exchange that cash for all manner of more interesting things. Stepped-up bank lending and a reversal of cash hoarding could unleash a wave of liquidity into the market and the economy, boosting nominal GDP, boosting corporate cash flows, boosting commodity prices, and yes, likely boosting inflation.

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