Positive Economic Commentary
January 4, 2000
Is Greenspan "Spiking" the Punch?
Former Fed Chairman William McChesney Martin is credited with the comment that the Fed's job is to take away the [money and credit] punchbowl before the [economic] party gets out of hand. The recent surge in bank credit and the broad M3 money supply suggests that, if anything, Fed Chairman Greenspan has been spiking the monetary punch rather than taking away the bowl. (I wish I had come up with this "spiking" analogy, but I did not. If I could remember where I read it recently I would give proper citation credit to the originator.)
The chart below shows the explosion in bank credit (loans, exclusive of interbank loans, and investments of commercial banks located in the US) and the M3 money supply (currency/travelers checks, liabilities of depository institutions excluding bond/debenture liabilities and money market mutual fund liabilities). In the 8 weeks ended December 22, 1999, bank credit growth surged to an annualized rate of 23.4 -- eclipsing the 23.0% growth in the 8 weeks ended November 2, 1998. M3 growth has soared to an annualized rate of 21.8 in the 8 weeks ended December 20. This surpasses the prior peak M3 growth of 14.8% set back in the 8 weeks ended November 30, 1998.
(growth in Bank Credit & M-3 Chart)
The surge in bank credit and M3 growth back in the fourth quarter of 1998 was due, in part, to the "seizing up" of
(cont)
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