Economic News Blog
Posted by: Steven Kline, Jr. 10. August 2015

Monetary Base Contracts for Second Month

In July 2015, the monetary base was $3.994 trillion dollars. This was an increase of almost $50 billion from the previous month. Since July 2014, just before the end of QE, the monetary base has been bouncing above and below $4 trillion. Compared with one year ago, the monetary base decreased 0.5 percent for the second month in a row. This was the first time the monetary base contracted in consecutive months since September and October 2012. If the monetary base stays at its current level, then it would contract month-over-month for the next three months as well. This would be one of the most extensive contractions in the month-over-month change in the money supply since 1949 as the U.S. exited the buildup in government spending from World War II. One significant difference between then and today though is that the world is now awash in manufacturing capacity whereas in 1949 much of the world's manufacturing capacity had been destroyed in the war.

The annual rate of change slowed to 5.6 percent. The annual rate of change continued to decelerate in July, as it has done since June 2014. This is a negative sign for future capital spending. Unless the Federal Reserve starts increasing the money supply, the annual rate of change will continue to decelerate.

You can see how the monetary base leads various machine tool sales and consumption data as well as primary plastics processing equipment at our monetary page.

The real 10-year treasury rate is a leading indicator for the adjusted monetary base. Tthe year-over-year change in the real 10-year treasury has increased the last two months. This indicates a slower rate of growth in the monetary base. However, 10-year rates are being influenced by the Fed's own purchases and investors front-running the Fed's purchases. So, the 10-year may not be an accurate indicator of the money supply at the moment.

Also, the U.S. dollar major exchange rate (the USD compared to the other six major currencies of the world) and the U.S. dollar broad exchange rate (the USD compared to all world currencies) appear to be good leading indicators of the U.S. monetary base. The US dollar against the other major currencies of the world is growing at almost its second fastest rate since 1975. Normally, this indicates an expansion of the monetary base. But, the Fed seems to be moving the monetary base in the opposite direction.


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