Alasdair Macleod – 16 April 2010
In the last week of March US bank lending grew by $420bn, a jump of 4.7% or an annualised simple rate of 250%. This is in sharp contrast to recent weak bank lending, and this is captured in the chart below:
This is particularly interesting, given that narrow money has more than doubled in the last eighteen months, while broad money (mostly bank lending) has been contracting. In one week, it appears that almost all of this divergence has been reversed.
I cannot find any official explanation, and the only comment I have seen is that perhaps the Fed is coming to the rescue of Greece. This is unlikely, since such a move would presumably be reflected in the Fed’s balance sheet, which it is not. This jump in bank lending seems to be purely a commercial banking matter.
There are three possibilities, or any combination of them:
- A disruption of payments by one or large state (such as California), being reflected in increased overdrafts for all suppliers. If so, it is the first signal of a state’s insolvency. A further possibility is the Federal Government is resorting to bank borrowing to supplement cash flow, thereby by-passing the Fed.
- Disruption in the financial system, but for this to be the case, there would have to have been high-level and secret collusion between the Fed and the largest banks in the system, and the jump in bank lending reflects this covert support.
- A sudden economic downturn with a collapse in consumption and an accumulation of inventory. There is no anecdotal evidence that this has happened.
None of these explanations are satisfactory without further information, but this sudden jump in bank lending is a new, and potentially important story. It is too early perhaps to think about the inflationary implications, but any sudden increase in broad money must be unsettling for currency and interest rates.
The next release is due on Monday late afternoon UK time.