Velocities of M2 & MZM
I wrote a post about the velocity of M2 money supply. There were comments that the M2 money supply is a dying indicator. Well, let’s look…
There are 3 indicators for the money supply, M1, M2 and MZM. M1 is the narrowest. MZM is the broadest. M2 is in the middle.
“M1 is the money supply of currency in circulation (notes and coins, traveler’s checks [non-bank issuers], demand deposits, and checkable deposits). A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis.
The broader M2 component includes M1 in addition to saving deposits, certificates of deposit (less than $100,000), and money market deposits for individuals. Comparing the velocities of M1 and M2 provides some insight into how quickly the economy is spending and how quickly it is saving.
MZM (money with zero maturity) is the broadest component and consists of the supply of financial assets redeemable at par on demand: notes and coins in circulation, traveler’s checks (non-bank issuers), demand deposits, other checkable deposits, savings deposits, and all money market funds. The velocity of MZM helps determine how often financial assets are switching hands within the economy.” (from notes in FRED)
Here we compare the two broadest measures, M2 with MZM, year over year % change.
If you squint, you might see the difference in this business cycle. ¯\_(ツ)_/¯
The bottom line is that the general velocity of money supply is declining throughout this business cycle. That is a continual drag on prices and output.
EL M2 velocity is just the ratio of money and nominal GDP – nothing more.
From June 15 to June 16:
M2 rose $833.5 B (from 11.931T to 12.765T)
Nominal GDP rose $439.3B (from 17,998.3T to 18,437.6T)
Velocity (the ratio of money to gdp is lower as that rate of increase in M2 was greater than the increase in nominal GDP.
So there is more money in the system. This is the Fed’s doing as their goal is to stimulate the economy. Can you tell me how an increase of money that is twice the growth of GDP is (Your words):
“That is a continual drag on prices and output”
More money in the system is neither a drag on prices or output.
The only thing dragging on output from before is inventory and looking by the BLS, that is ending in the 3rd quarter.
Bkrating wrote: “So there is more money in the system. This is the Fed’s doing as their goal is to stimulate the economy.”
Do you never ask yourself why velocity went down dramatically during the Great Depression and again during the Great Recession? (And rose in the period between them.)
See: Irving Fishers 1932 “Booms and Depressions” and
https://fred.stlouisfed.org/series/M2V
The formula for velocity is:
Velocity = GDP / M2
So why was M2 rising faster than GDP? Because the Fed feared that otherwise GDP would have fallen!
Raise M2 OR lower GDP and velocity falls. So velocity was bound to fall either way.
In light of our economic experience over the last 85 or so years, I don’t see any way to paint falling velocity as a positive indicator or even a neutral one.
Seems to be more than just a ratio.
If it ain’t circulating, the economy ain’t percolating. Look at the multiplier level. It seems to be an excess demand for money.
EL – Check Fred for V for the period Q3 2010 through Q2 2016. During this six year period there were no recessions in the US, but V fell every Q.
That does not jive with your assumptions. Are you sticking to what you have said?
Edward,
Frankly, I was a little stunned by how long it took for Velocity to recover after the Great Depression. Here is “GDP/St Louis Adjusted Monetary Base” which is the best that I can find at the moment.
See: https://fred.stlouisfed.org/graph/?g=9wK
It appears that it took about 15 years for Velocity to begin to recover. (1933 to 1948)
That included about 4 years of very high wages and low labor share! (1942-1945)
Jim H – Why do you focus on the monetary base of just St Louis? Why not the whole country?
The monetary base of St Louis is $3.8T while M2 for the entire country is $13T.
You are missing 70% of the data???
Bkrasting:
As I stated in my comment “Here is “GDP/St Louis Adjusted Monetary Base” which is the best that I can find at the moment.”
I needed a velocity stat for the entire country which went back to 1929 and I found one.
(Velocity = GDP / Monetary Base)
I refer to the St Louis Monetary Base for the same reason that you refer to the Atlanta GDPNow.
Both stats are generated by Federal Reserve branches and both apply to the entire country.
See the Notes under this graph: https://fred.stlouisfed.org/series/BASE
But I imagine that you already knew that. :^)
JimH – Well, you’ve got me confused. You say:
“Both stats are generated by
Federal Reserve branches
and both apply to the entire country.”
The Atlanta Fed’s Nowcast does measure GDP on a national basis. But the St. Louis Monetary base is NOT a national number. The only national monetary numbers are M1, M2 and MZM.
Bkrasting,
As I wrote before:
See the Notes under this graph: https://fred.stlouisfed.org/series/BASE
And you will find this:
“The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. These data are adjusted for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories.”
It might be helpful if you also read the first page here:
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.198.3192&rep=rep1&type=pdf
This is clearly a national number and it runs from 1929 to the present.
Look at this number more closely. It has morphed since 2008.
The St Louis number used to be just cash money in circulation. But it also includes the excess reserves that were created with QE 1, 2 and 3. Given that the excess reserves never get into the broad money supply, I think of this as not a true measure of the national money supply.
In 2008 The STL # was $875B. 8 years later it is $3.8T a 400% increase.
This is a link to Fred data on the excess reserves. It went from zero to a very big number since 2008. This is a consequence of QE.
https://fred.stlouisfed.org/series/EXCSRESNS
The following is from Matt Yglesias. He describes the STL Money number as “Irrelevant”. It once had meaning, now it is “noise”. Matt describes it better than I.
http://www.slate.com/blogs/moneybox/2012/08/03/the_monetary_base_is_irrelevant.html
Bkrasting
So now your argument has shifted from:
The St Louis Monetary Base is not a national monetary base
To:
We don’t really have low velocity of money now because the St Louis Monetary Base is including excess reserves which are parked at the Federal Reserve.
BUT since 2008 the velocity of M2 has also dropped dramatically. Are you saying that M2 “once had meaning, now it is “noise”.”?
Jim – I think M2 is an important statistic. I think the same of M1 and MZM. But I don’t think that STL is relevant when contemplating Velocity.
In 2008 the Velocity of STL was 15. In 2003 it was 15.8. In all the years prior to 2009 the V of STL was relatively steady.
But in 2009 the V of STL fell to 7 (50% decline in one year!). By 2014 it had fallen to 4. This very rapid change is a consequence of Fed monetary policy. The introduction of quantitative easing made STL a completely different yard stick.
The precipitous post 2008 drop in V of STL is very different from the drop in V of M2. Is this clear?
Bkrasting,
Yes, that is clear.
But I would like to disregard the current unemployment rate because of the irregularity of our low labor participation rate. And I would like to disregard the current GDP growth because of the irregularity of the decreasing Industrial production Index. And there are others. But ignoring the data is just as blinding as the obvious flaws themselves.
I see a precipitous drop in the velocity of M2 from Q4 2007 to Q3 2009 and then it has continued to drop since that time.
And I see a precipitous drop in the velocity of St Louis Monetary Base (SLMB) from 2007 to 2009 and then it continues to drop since that time. The timing of the event and the relative magnitude are telling, when compared to the timing and the drop in velocity of M2.
That velocity of SLMB allows us to look back to see the precipitous drop from 1929 to 1933 and the very slow recovery. In that velocity measurement. The only time that we see these kinds of precipitous velocity drops and slow recoveries are in the Great Depression and its aftermath and the Great Recession and its aftermath. That is a very inconvenient truth.
The M2 velocity measurement is just as likely tainted by Fed monetary policty as the velocity of the SLMB.
And I note that these 2 velocity measurements are using very different scales. So your objection about the quantitative difference in the drop in velocity of M2 versus the drop in velocity of SLMB is less compelling than it might be otherwise.
You and I have a difference of opinion about the importance of the velocity of the St Louis Monetary Base.
Hey, we don’t have to agree.
Have a good day.
Jim – Yes, we can disagree on just about anything.
You point to the drop in M2 V from 07 to 09 and conclude there is a problem with this result. I disagree (once again).
Whey did V decline? Because M2 rose much more quickly than did GDP (this is just a ratio after all – right?)
The Fed has been trying to boast the economy by boasting inflation for 8 years now. They do it by expanding the money supply (and other measures). Expanding M2 is a force that should (over time) offset the drags that the 08 recession caused.
Falling V is not a bad outcome. It is exactly what was intended. It is exactly what monetarist would call for. It is not something that either you or Eddie L. should be worried about.
Anyway… You have a nice day too.
bk
You can’t say MZM is the broadest money supply because it doesn’t include small time deposits. This is actually the most interesting part of this data – because when MZM shows dynamics vs. M2 and vice versa – you can estimate broad money saving measures and growth. Right now for instance – based on latest weekly data – you can see that MZM falls more that M2 on unadjusted basis. MZM is relatively weaker than M2. This can be interpreted as a negative growth rate. This is why gold is weak and mining sector is weak. If MZM continues doing that – and I assume it will, because of FOMC – then MZM change rate will exceed M2 change rate going forward and we will experience classical book contraction of money. I think this is not only very important – but also is being closely monitored by people at Citi and Bank of America. Those are the most careful bankers out there. They do look at this all the time. Other people don’t. Not looking at it is a major mistake. Last week Lundin was producing technical arguments to buy gold, because of the sorry state of his portfolio. These people sense that there is something wrong going on with gold. They just don’t think USD may actually go into reverse on steroids. Nobody is predicting money contraction today. Not a single person out there talks about it. It is a heresy.
M2 is going up vertically – and expecting a contraction here at this point seems to be not only absurd – but irrelevant. But that is not what the data is pointing to. Data is showing us that the small deposits are rising strong – people are saving money – but the funds money is on the border of contraction – which is why M2 is going up, while MZM is sideways. When MZM turns down – we will get to a mother-lode of market problems. This can happen any minute now. Since the data is published weekly – then any week can bring us into that territory. Investors won’t even know what hit them. Gold bugs will stare at their monitors in disbelief and won’t even understand what happened. FOMC will not react to that. Because M2 will continue going up – because – hello – people are saving. Right? Then there is new legislation about FOMC responding to banks in trouble. They won’t do anything until at least 5 banks are in trouble. When the market realizes what is going on with this – the sellers will start sprinting to exits. We are very close to that realization. It is already too late for large funds to exit the market.