Thread by @nickgerli1

US Banks lost nearly $400 Billion in deposits in March.❌

Biggest monthly loss in deposits in US History.

This data shows the gravity of the Banking Crisis. And why the Govt acted so quick to bail out depositors.

Trouble is - I'm not sure they fixed the real problem.

1) The real problem, in my view, is that the Fed has been aggressively "contracting" the money supply through quantitative tightening.

2022 was first year since Great Depression that M2 Money declined YoY.

Previous times that happened all had Depressions/Banking Crises.

2) Even small contractions in money supply can create big problems.

Because everyone in the financial system got "used to" the higher levels of money.

So even taking a little bit away can cause panic among both Banks & Depositors. And lead to bank runs.

3) Now a big question is what happens to Money Supply in the next several months.

Some people think that because the Fed "printed" $300B to save SVB that money supply will go back up.

And crisis will be averted.

4) But others, like Mohamed El-Erian, are more skeptical.

They think that Banking Crisis will have a "long tail".

And that banks will cut bank lending. Which will cause a credit crunch and money supply to drop further.

5) I mean - if you were the CEO of a bank, what would you do in response to all of this?

Probably tighten your lending standards, and make sure to hold more cash on hand.

In fact - government might even force you to do that with more regulation.

6) That's happening just as the Fed is continuing its Quantitative Tightening plan.

Yes - they printed $300B in short-term to bail out SVB.

But in background they're still sucking money out of the system through QT.

7) So if Banks continue to tighten their lending standards and the Fed continues to do QT.

Then Money Supply will likely continue to contract. 📉

Which greatly increases the odds of more bank runs. And a full blown banking crisis/Depression.

8) Of course - that's not a prediction. It's just me speculating.

We truly don't know how the financial system will react to all of this.

There's a chance banks see the Fed SVB bailout as a sign that they're safe to go buck wild.

And maybe they loan out more money.

9) The thing you should be tracking is BANK CREDIT.

(the assets on bank balance sheets incl loans and securities held)

Growth in Bank Credit has decelerated to 4.5% YoY.

If there truly is a credit crunch, that figure will keep decelerating. And go negative like in 2009.

10) What's interesting is that historically, even big decelerations in Bank Credit tend to correlate with Recessions.

So the big drop off we've had already suggests there's problems afoot.

You can track the bank credit data here: fred.stlouisfed.org/series/TOTBKCR

11) One more thing I'd like to address regarding deposits...

Some people say that the decline in bank deposits thus far is no big deal.

Bc the $17.3T deposits, down from a peak of $18.2T, is still very high. Way above pre-pandemic levels.

12) The trouble is that Banks matched the higher deposits with higher Bank Credit.

And the higher Bank Credit is what stimulated the economy.

So continued contraction in Bank Deposits, even small in % terms, will reduce Bank Credit. Which will hurt economy.

13) A lot of this might seem technical/esoteric.

But really the direction that banks go will mean everything for US economy.

If banks tighten up, deflation/depression/more bank crises could be coming.

If they loosen up, more inflation. And a different host of issues.