Fourth-quarter US flow of funds accounts, released last week, confirm that broad money is growing at a respectable pace and has picked up in inflation-adjusted terms. Corporate monetary trends are healthier than in the UK and Eurozone, suggesting less pressure for business retrenchment.

The flow of funds accounts permit a more thorough analysis of broad money trends than is possible from weekly and monthly money supply releases. First, the accounts provide information on all the components of the old M3 – discontinued in 2006. Secondly, an adjusted M3-type measure can be calculated excluding money holdings of quasi-banks, which have been boosted by the financial crisis. Thirdly, this adjusted broad money measure can be broken down between households, non-financial business and financial institutions such as insurance companies and pension funds.*

Annual growth in adjusted broad money stood at 6.5% at the end of 2008, below a 9.9% December rise in the narrower M2 aggregate but above a 3.8% rate of increase of the equivalent UK measure (adjusted M4) – first chart. The 6.5% expansion was down from 7.6% at the end of the third quarter but a sharp fall in consumer price inflation resulted in real growth accelerating from 2.5% to 6.4%, implying greater monetary support for the economy in 2009 – second chart.

The 6.5% aggregate increase breaks down into growth of 5.3% for households, 6.2% for non-financial business and 13.9% for financial institutions – third chart. This suggests less pressure on non-financial business liquidity than in the UK and Eurozone: UK M4 holdings of private non-financial corporations fell by 4.7% in the year to January, while Eurozone non-financial corporate M3 rose by just 1.8% – fourth chart.

* Definitions:
M2 = currency, checkable deposits, savings deposits, small time deposits and retail money funds, other than held by government, monetary authority, depository institutions and foreign banks / official institutions
M3 = M2 plus large time deposits, institutional money funds, repurchase agreements and Eurodollar deposits, other than held by government, monetary authority, depository institutions, money funds and foreign banks / official institutions (discontinued)
Flow of funds adjusted broad money = checkable deposits and currency, time and savings deposits, money funds, repurchase agreements and foreign deposits, other than held by government, monetary authority, commercial banks, savings institutions, credit unions, money funds, “funding corporations” (= quasi-banks) and rest of world