We know where the money is – have a look at bank deposits . . .

The key measures are M1 and M2 (if you don’t know what they are, go to Wikipedia or the Fed’s web site).  The pundits don’t appreciate how scared the U.S. consumer/investor has become after all the political theatre in Washington and Europe.  We have had a historic flight to cash that started with the financial crisis in late 2008 and accelerated in Q3 this year with the hysteria over the debt limit debate and debt downgrade.  The U.S. has never had so much cash sucked out of productive investment as fast and parked in zero return assets.  For context, note that it took 24 years for M1 to grow as much it has in the last 3 plus years.  The hoarding of cash is not only an expression of a massive liquidation of investments but also a massive avoidance of productive investment.  In economic terms it means that monetary velocity has contracted.  It is remarkable how well the economy has performed in light of this development.  Jeb Terry, Sr. Dec 13, 2011

While all the money was being stashed in bank deposits, loans have been paid off or charged off.  This can be plainly seen in the above chart.  There are at least two major observations from this – 1) there is terrific unused bank credit capacity that will someday be used to fuel economic growth and 2) it would be unlikely for the U.S. to have a recession if there isn’t excessive borrowing at the margin.

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