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Bank Deposits Surge $2 Trillion More Than Loans: Credit Markets
Bloomberg, By Charles Mead & Dakin Campbell - Dec 18, 2012 8:06 AM PT

Deposits at U.S. banks exceed loans by an unprecedented $2 trillion as the threat of a slowing economy tempers borrower demand and lenders preserve tightened standards....

The tepid growth in bank lending contrasts with the unprecedented pace of borrowing in corporate bonds, where investors are accepting both record-low rates and looser protections to boost returns. ...

Deposits have surged 29 percent from $7.1 trillion in September 2008, when Lehman filed for bankruptcy and sparked a seizure in credit markets. Loans have increased by less than 2 percent in the same period, Fed data show. ...
[end quote]

This article has lots of good stats. Practically every sentence is a lesson in unintended consequences.

First, let's put $2 Trillion into perspective. It's roughly 1/8 of GDP. It's slightly less than 1/5 of Personal Consumption Expenditures. It's HUGE.

Gross Domestic Product 2012:Q3: 15,797.4 Billions of Dollars

Personal Consumption Expenditures 2012-10: 11,197.4 Billions of Dollars (Seasonally Adjusted Annual Rate)

Banks are sensibly restricting lending to borrowers who can probably pay back the money.

Households are sensibly restricting their debt service to what they can actually pay back. (At least some of those who were bankrupted in the past few years are now excluded from the pool of borrowers.) Household Debt Service Payments as a Percent of Disposable Personal Income is now about what it was after the 1980 and 1990 recessions.

Household Debt Service Payments as a Percent of Disposable Personal Income 2012:Q3: 10.60947 Percent

Some of the bank deposits are from households. Others are from businesses, especially small businesses that can't borrow in the corporate debt market. The small businesses (and wealthier households) should be aware that the government may soon cut protection for accounts over $250,000.

Where did all this money come from? Well, the broad household money supply, M2, increased $2.6 Trillion between September 2008 and now.

2012-12-03: 10,300.3 Billions of Dollars
2008-09-01 7,739.1

A quick glance at the chart shows that the Fed increased M2 at a more-or-less constant rate between 1995 and 2007. If they had simply continued that constant rate (instead of boosting it due to the 2008 financial crisis), M2 would now be about $9 Trillion.

I figure that the "excess" M2 is ($10.3 - $9) = $1.3 Trillion.

So ALL the Fed's boost in the money supply plus $700 Billion is now sitting as net increased bank deposits (compared to loans).

Is it any surprise? For a low-risk investor, what's the point of holding anything except cash when all the alternatives (e.g. Treasuries) are yielding bupkiss and the Fed has forced the Treasury market into a bubble (so Treasury investors could lose when it pops -- but savings accounts are FDIC insured)? Not to mention that the banks are investing in Treasuries because they aren't lending much and they have to put the money somewhere.

However, before we bemoan the lowest M2 Velocity since 1950...

...let's be careful what we wish for!

If consumer spending increases faster than GDP, inflation will increase.

Consumer Price Index - All Urban Consumers, 12-Month Percent Change was 2.3% for 1H2012.

Even with a few months of deflation during the depths of the 2008-9 crisis, Consumer Price Index: All Items for the United States shows that each dollar has lost almost 20% of purchasing power in the past 10 years even with "low" inflation.

2002-08-01 92.52
2012-08-01 117.96

The increase of deposits compared with loans is an indication that the economy will continue to be slow. Consumers and banks are cautious.

Oh, but what about yield-hungry bond investors? They are buying record numbers of corporate bonds with many of the same lack of yield and contract protection that sank them in 2008. Of course, that could never happen again, so the iShares Corporate High-yield Bond Fund ETF is skyrocketing.

In my opinion, the surge in bank deposits over loans shows that prudent savers and prudent bank loan officers are folding their hands and saying, "Deal me out until this makes sense again."

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