Bank lending continues to pick up, liquidity is plentiful

Outstanding bank loans to small and medium-sized businesses have expanded by almost $200 billion in the past 18 months, as this chart shows. Moreover, loan growth has been accelerating: in the past six months C&I Loans are up at a 13.8% annualized rate, the fastest rate since the recovery started.

Consumer credit outstanding, shown in the chart above, is also on the rise, having expanded by $128 billion in the past 18 months, and at a 6.5% annualized pace over the past six months.

Increased bank lending is good evidence that banks are beginning to use some of the $1.6 trillion of new bank reserves that the Fed has created in recent years.

Required reserves have more than doubled since 2008, another sign that quantitative easing has resulted in a meaningful expansion of the money supply via increased bank lending and increased liquidity.

M2, a broad measure of liquidity, has grown at above-average rates in recent years, driven in large part by a flight to the safety of bank deposits in the wake of the financial crisis of 2008 and the Eurozone crisis of last year. Savings deposits now comprise almost two-thirds of M2, and their $2+ trillion growth in the past 3-4 years has been the principal driver of M2 growth.