[Editor's note: Shostak employs a different measure of the money
supply than the Rothbard-Salerno money supply measure used
here. For a more full explanation, see here.]
On October 2016, the US Money Market Fund (MMF) industry underwent a
reform with new requirements for US institutional prime and municipal MMFs
becoming effective.
Under the new US MMF regulations, institutional prime and municipal MMFs
are required to change from a fixed net asset value (NAV) to a floating NAV and
adopt provisions to consider liquidity fees and redemption gates. However,
government and Treasury MMFs were given a reprieve from these structural
changes because of their perceived low risk and high liquidity.
RELATED: "Money
Supply Growth Falls to 17-month Low in February"
The changes that took place in October were announced two years earlier.
In response to this since the end of 2015, there was a massive increase in
the demand for Treasury bills. Consequently, government deposits, or the cash
balances, with the Federal Reserve jumped from $75 billion in October 2015 to
$394.6 billion by November 2016 — an increase of 426.1%. An increase in
government deposits with the Fed reduces the supply of cash in the federal
funds market, all other things being equal.
Consequently, this puts an upward pressure on the federal funds rate. In
order to keep this rate at the target, which was set by Fed policymakers, the
US central bank is compelled to lift the money supply by buying assets.
Note that while the increase in government deposits does not change
the money supply, the Fed’s policy to protect the federal funds rate target
results in an increase in money supply. Indeed the yearly growth rate in AMS
jumped from 3.4% in October 2015 to 16.7% by November 2016.
Using our model, we forecast that government deposits are likely to follow
a horizontal trend during 2017 to 2018. After closing at $323.9 billion in
February, the level of deposits is forecast to close at $359 billion by
December. By November next year, the level is forecast to climb to $445
billion before settling at $388 billion by December next year. According to
our model, which incorporates the effect of government deposits among other
variables, the yearly growth rate of AMS forecast is to close at 7% by
December versus 8.5% in January before settling at 8% by December next year.
