Of the two transmission vectors, the one that seems most broken is that between the monetary base (the Fed’s balance sheet) and the money supply (M2). The monetary base has grown exponentially since Lehman, from roughly $1T to $3T, while M2 has only grown from roughly $8T to $10T. The Fed would appear to be pushing on a string, and monetary velocity continues to decline.
Banks are leaving the Fed’s money on deposit at the Fed instead of lending it. (A bank deposit at the Fed is not money, it’s a bank asset; money is a bank liability which is created when a bank makes you a $1 million loan and deposits $1 million into your checking account, which is your claim on the bank. Now you have $1 million, and the money supply has risen by $1 million.)
There are clear linkages between bank loan growth and money growth, and between overall credit growth and nominal growth. Let’s take a look at these two variables: bank loan growth, and overall credit growth.
Bank Credit Growth (FRB H.8)