The above chart data is from the Federal Reserve H.6 Funds stock reportreleased on January 24.
- M1 consists of (1) currency outside the US Treasury, Federal Reserve Banks, and depository institution vaults; (ii) demand deposits in commercial banks (excluding those amounts held by depository institutions, the U.S. government, foreign banks, and official institutions) less cash items in the process of collecting and floating the Federal Reserve; and (iii) other liquid deposits, consisting of other Realizable Deposits (or OCDs, which include Negotiable Withdrawal Order, or NOW, Automatic Transfer Service, or ATS), accounts at depository institutions, stock draft accounts at credit unions, and deposits under demand in savings institutions) and savings deposits (including money market deposit accounts). Seasonally adjusted M1 is generated by summing currency, demand deposits and other liquid deposits, each adjusted seasonally separately.
- M2 consists of M1 plus (1) small class time deposits (time deposits in amounts less than $100,000) minus an Individual Retirement Account (IRA) and Keogh balances at depository institutions; and (ii) balances in retail money market funds (MMFs) less IRA and Keogh balances in MMFs. A seasonally adjusted M2 is generated by collecting small denomination time deposits and retail MMFs, each individually adjusted seasonally, and adding the result to the seasonally adjusted M1.
- ODL is described below
A better definition of money and Lacey Hunt’s thoughts on when a recession will start
I have discussed ODL in A better definition of money and Lacey Hunt’s thoughts on when a recession will start
The main difference between ODL and M2 is that ODL does not include currency or retail money market funds.
The currency is accepted in increasingly fewer commercial establishments and simply cannot be used for high volume transactions. Retail money market funds did not become an important medium of exchange. Both are becoming less used mediums of exchange.
ODL has the additional advantage that it is the main source of financing for bank loans and investments, which makes ODL an aggregate of cash and credit. Friedman would not be surprised that the need to better define what constitutes money will change over the years.
The above blocks are offered by Lacy Hunt at Hoisington Management.
M1, M2, other deposit details since 2019
M1, M2, other deposits percentage change from the previous year
The Fed’s panic attack during and after the Covid pandemic seriously distorted the percentage changes in the M1 money supply.
M2, percentage change of other deposits from the previous year
In the mid-1990s, the Greenspan Fed significantly distorted the M1 measure of money Sweep calculation software.
Sweeps is the process by which banks take money from checking accounts and transfer it to interest-paying accounts. The benefit did not go to consumers, of course, but to banks.
Simply put, unknown to depositors, the money that people think is in their checking accounts and is supposed to be available on demand is not there.
For a while, he posted the Federal Reserve Bank of St. Louis survey dataThen it was discontinued in 2012.
I think the increased use of sweeps kept M1 negative over the year from June 1995 all the way through February 1998.
Reverse repos explain the sudden rise of M1 relative to M2 in the main chart.
The Fed has seriously distorted the money supply. In the process huge amounts of free money are given to financial institutions.
Scroll to continue
With M1 highly distorted, let’s go back to ODL.
M2, deposit percentage change other than a year ago details
Not since 1932
Lacey Hunt on what that means
From the fourth quarter of 2021 to the same quarter in 2022, it is estimated that nominal ODL fell at a record annual rate of 2.8%, which is the largest annual decline in history. In real terms, ODL has also contracted at a record pace.
Based on the $96 billion monthly reduction of the Federal Reserve’s balance sheet and monetary policy delays, the rate of decline in ODL will accelerate at least in the first half of 2023.
If the Fed sticks to its plan to raise the federal funds rate another 75 basis points, the rate of decline in ODL would be enough to neutralize the 2020/21 money mountain by the second quarter of 2023, when velocity is factored in.
The above is from Lacy Hunt ahead of H.6’s release on Tuesday.
Lacey and I think the recession started in November or December.
For more details, please see A better definition of money and Lacey Hunt’s thoughts on when a recession will start.
Longtime readers may remember that I came up with M’ (pronounced M-Prime) as a way to rebuild the M1.
M’ was my way of coming up with a better-for-the-money version that was supposed to be available on demand but really isn’t.
The operation became impossible when the St. Louis Federal Reserve stopped publishing sweep data. Again, the funds that you think are in your account and are supposed to be available on demand, really are not.
Lacy’s ODL should not be confused with the Fed’s report on “other liquid sediment. ”
In the past, a name like M2-, M2′ or ‘M2 headIt might be a better name to convey the message of Lassie.
Finally, through all these manipulations, the Fed bailed out the banks over time while the European Central Bank with its negative rates did not. How much free money?
please look How much free taxpayer money does the Fed give to banks? For details.
shy? Central bankers want it that way.
This post originated in MishTalk.Com
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