A Movie We Have Seen Before – Repatriation Effect?

There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.

The y/y growth rate of TMS-2 increased from 2.68% in February to 4.85% in March. The 12-month moving average nevertheless continued to decline and stands now at 4.1%.

The sole component of TMS-2 showing sizable growth in March was the US Treasury's general account with the Fed. This is included in the money supply because, well, it is money. The Treasury Department will spend it, therefore this is not money that can be considered to reside “outside” of the economy (such as bank reserves).

We were wondering what was behind the spurt in the amount held in the general account. While there was a decline in the growth rate of US demand deposits, the slowdown in momentum did not really offset the surge in funds held by the Treasury.

This reminded us of a subject discussed by the Treasury Borrowing Advisory Committee (TBAC) in the second half of 2016 in the wake of the change in money market fund regulations. This led to a repatriation of money MM funds previously lent out in the euro-dollar market to European issuers of commercial paper (mainly European banks).

Readers may recall that there was a mysterious surge in the growth rate of the domestic US money supply (again, only visible in TMS 1 & 2) into November 2016, despite a lack of QE and no discernible positive momentum in the rate of change of inflationary bank lending growth. Concurrently there was a surge in LIBOR widely held to be “inexplicable” at the time – does that sound familiar?

In short, after US money market funds were subjected to stricter regulations, they were no longer willing and able to take the risks associated with grabbing a yield pick-up in euro-land; instead, they started buying t-bills. The TBAC was evidently well aware of the need to satisfy this sudden surge in demand, and the Treasury seems to have timed its t-bill auctions accordingly.

We have a strong suspicion that the same thing has just happened again, only this time repatriation flows from US multi-national corporations in response to the Trump tax reform were the culprit. Here is a chart of the Treasury's general account:

As you can see, right at the cut-off date for the monthly money supply data at the end of March, a new interim high of $318 billion was reached, which was almost a $120 billion jump from late February. It then decreased to $259 billion, but there was another jump to $343 billion in the week ending on April 23, which is not yet included in this chart (the data were updated one day after we made the chart).

The next chart shows the combined y/y growth rate of US currency plus demand deposits held at US commercial banks (in current and savings accounts) – i.e., the money supply without the memorandum items which are included in TMS-2 due to their “moneyness”. The y/y growth rate of currency plus demand deposits has actually declined to a new low for the move.