Money Supply Is Falling By Most Since Great Depression | Danielle DiMartino Booth

Episode Summary

Executive Summary: Daniel DiMartino Booth argues that the post-Silicon Valley Bank environment is not QE but the start of a broad credit contraction. Banks are tightening, private credit and venture capital are under strain, commercial real estate is heading toward a mark-to-market reckoning, and auto/housing stress is building. She sees QT and Treasury issuance draining liquidity while inflation stays sticky in the near term.

Main Topics: Banking system stress and emerging credit crunch (Priority: 5/5): Large banks appear resilient on earnings, but lending standards are tightening, loan demand is weakening, and provision levels are rising. DiMartino Booth sees the banking system entering an early household credit cycle with broad downstream effects on GDP and employment. Private credit, private equity, and venture capital unwind (Priority: 5/5): She argues private markets are not a safe haven. Private debt has grown huge and is now exposed to refinancing pressure, while VC valuations from the zero-rate era face delayed write-downs despite large 'dry powder' reserves. Commercial real estate and regional bank exposure (Priority: 5/5): Regional banks carry disproportionate CRE exposure and are also suffering deposit flight. She expects special servicing, refinancings, and possible fire sales rather than smooth workouts, especially in office real estate. Auto loans, repossessions, and collateral deterioration (Priority: 4/5): Used and new car prices are falling, making previously reasonable loans look risky as collateral values drop. DiMartino Booth warns of rising walkaways, repossessions, and consumer distress tied to high monthly payments. Housing slowdown, labor-market weakness, and sticky inflation (Priority: 4/5): Housing is weakening beneath headline resilience: mortgage rates remain high, rent data is rolling over in some areas, and job postings are falling. She expects shelter and used-car components to keep core inflation sticky for a while even as recessionary forces build. Fed balance sheet, QT, and Treasury issuance (Priority: 5/5): She rejects the idea that discount window and BTFP usage equals QE. Instead, she emphasizes continued QT, likely Treasury bill issuance, and shrinking liquidity as the Fed and Treasury navigate the debt ceiling and refinancing needs. ERC tax refunds and hidden fiscal stimulus (Priority: 3/5): A major, underappreciated source of stimulus has been employee retention credit refunds under the CARES Act and related legislation, which she says boosted spending and helped keep consumer demand stronger than expected.

Key Arguments: Big-bank earnings do not prove the system is healthy; they reflect flight-to-safety deposits and still-rising credit provisions. Loan demand is falling sharply, evidenced by auto-finance application declines and weak C&I growth, signaling households and firms are pulling back. Private debt has become a massive market and is now exposed to refinancing risk, especially as public pensions are heavily invested in it. Venture capital boomed under zero rates and easy exits; now, higher rates and SVB's collapse have frozen the ecosystem and will force write-downs. Commercial real estate stress will not be solved by easy refinancing because office values have fallen and many loans are non-recourse or already moving to special servicing. Small banks are most vulnerable because they hold outsized CRE exposure and are losing deposits to the largest banks. The Fed's BTFP/discount window operations are not QE; they are loans with haircuts and recourse, unlike outright asset purchases. QT plus Treasury issuance can drain reserves and tighten financial conditions even if markets briefly rally. The Fed may keep rates higher for longer because sticky inflation and lagged shelter data give it room to do so. The government’s hidden fiscal support through ERC refunds and other transfers has helped sustain consumer spending, but that support is fading.

Data Points: Fed balance sheet: shrinking for three consecutive weeks - Presented as evidence against the narrative that QE has returned Fed balance sheet peak: $9 trillion - Used to describe the scale reached during 2020-2021 QE and asset purchases Private debt market size: $1.4-$1.5 trillion - Described as now roughly as large as the high-yield bond market High-yield bond market size: $1.4 trillion - Bloomberg-reported size after shrinking for the first time in years Venture capital dry powder: upwards of $500 billion - Capital waiting to be deployed into private ventures and startups Public pensions exposure to private debt: 69% - She says public pensions own the majority of the private debt market J.P. Morgan loan loss provisions increase: $1.1 billion - Cited as an example of banks preparing for losses Unemployment rate: 3.5% - Used to argue the household credit cycle is only beginning Retail locations closures expected in 2023: almost 1,000 - UBS estimate cited as evidence layoffs are spreading down the income ladder CarMax lending standards: tightening - Seen as a red flag in auto credit DealerTrack finance applications: down 23% YoY at the beginning of April - Evidence that auto loan demand is falling Used car inventories: back to 2019 levels - Despite weakening demand, suggesting more downside pressure on prices New car prices: below MSRP after three monthly declines - Shows price normalization is only just beginning Office prices in Washington, D.C.: down 36% YoY - Used to illustrate severe CRE repricing Small-bank CRE exposure: disproportionately high - Chart comparison against large banks; small banks are more exposed Commercial real estate loans in special servicing: rising / one large Brookfield area moved to special servicing - Illustrates that CRE distress is already moving through workout channels Indeed job postings: down 10% YoY overall; 45% of 47 categories down YoY - Evidence of weakening labor demand M2 money supply: negative YoY in November 2022 for the first time since 1930 - Used to warn of severe historical tightening parallels Fed SOMA projection: $6 trillion balance sheet by 2025 - New York Fed projection cited as the likely QT endpoint Treasury interest service need: about $55-$60 billion per month - Monthly debt-service burden discussed in the debt ceiling context ERC refunds since July 2020: $380 billion - Described as a major hidden stimulus channel ERC refunds in prior 33 months: $190 billion - Baseline before the refund provision became available Largest ERC month: $25.4 billion in December - Shows the scale of recent refund flow BTFP balance: from $79 billion to $71 billion - Used to show the facility is shrinking, not expanding

Pivotal Quotes: "There is simply too much money that has been thrown in the direction." — Daniel DiMartino Booth: On private debt, arguing the market has been inflated by excess capital and is now vulnerable "I do think the word credit crunch is appropriate." — Daniel DiMartino Booth: Her bottom-line view on the banking and lending outlook after SVB and tightening conditions "This ain't them." — Daniel DiMartino Booth: On why the Fed should not treat regional bank failures as a moral hazard issue comparable to wealthy households

Implications: Expect slower lending, more CRE and auto stress, weaker hiring, and eventual markdowns in private assets. Markets may rally on liquidity noise, but the deeper trend is tighter credit, more layoffs, and a delayed but meaningful recessionary unwind.