The numbers M1 and M2 are from the Federal Reserve, ODL is a derivative of M2, described below.
The data in the chart above is from the Fed. H.6 Money Stock ReportPosted on January 24.
monetary definitions
- M1 consists of (1) currency outside of the US Treasury, Federal Reserve Banks, and depository institution vaults; (2) Demand deposits at commercial banks (excluding amounts held by depository institutions, the US government, and foreign banks and official institutions) less cash items receivable and Federal Reserve float ; and (3) other liquid deposits, consisting of other demand deposits (or OCDs, which comprised a Negotiable Withdrawal Order, or NOW, and Automatic Transfer Service, or ATS, accounts at depository institutions, giro accounts shares in credit unions and demand deposits in savings institutions) and savings deposits (including money market deposit accounts). The seasonally adjusted M1 is constructed by adding cash, demand deposits and other liquid deposits, each one separately seasonally adjusted.
- M2 consists of M1 plus (1) small denomination time deposits (time deposits in amounts less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail money market funds (MMFs) less IRA and Keogh balances in FMMs. Seasonally adjusted M2 is constructed by adding low-denomination time deposits and retail MMFs, each one separately seasonally adjusted, and adding the result to seasonally adjusted M1.
- ODL is described below
A better definition of money and Lacy Hunt’s thoughts on when a recession will start
I talked about ODL in A better definition of money and Lacy 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 a diminishing number of commercial establishments and simply cannot be used for large transactions. Retail money market funds never became a major medium of exchange. Both are becoming a much less used medium of exchange.
ODL has the additional advantage of being the main source of financing for bank loans and investments, making ODL both a monetary and credit aggregate. Friedman would not be surprised that the need to change the best definition of what constitutes money would change over the years.
Blocks above courtesy of Lacy Hunt at Hoisington Management.
Detail of M1, M2, Other deposit liabilities since 2019
M1, M2, Other Deposit Liabilities Percent Change from Prior Year
The Fed’s QE panic attack during and after the Covid pandemic seriously distorted percentage changes in the M1 money supply.
Percentage change in M2, other deposit liabilities from the prior year
monetary distortions
In the mid-1990s, the Greenspan Federal Reserve grossly distorted the M1 money measure through Sweep Count Programs.
Draws are the process by which banks take money from checking accounts and move it into accounts that pay interest. The interest did not go to consumers, of course, but to the banks.
Simply put, unknown to depositors, the money that people think is in their checking accounts and supposedly available on demand isn’t there.
For a time, the St. Louis Fed published data sweepthen stopped in 2012.
I believe the increasing use of sweeps kept M1 negative year over year from June 1995 to February 1998.
reverse rest
Reverse repos explain the rise in M1 relative to M2 on the main chart.
The Fed has seriously distorted the money supply. and in the process it is giving out huge amounts of free money to financial institutions.
Scroll down to Continue
With M1 so distorted, let’s go back to ODL.
M2, other deposit liabilities Percentage change from the previous year Detail
Not since 1932
Lacy Hunt on what it means
From the last quarter of 2021 to the same quarter of 2022, nominal ODL is estimated to have declined at a record annual rate of 2.8%, the largest annual decline in history. In real terms, ODL also contracted at a record pace.
Based on the Federal Reserve’s $96 billion monthly balance sheet drawdown and monetary policy lag, the rate of decline of ODL will accelerate in at least the first half of 2023.
If the Fed follows through with its plan to raise the Fed Funds rate another 75 basis points, the ODL rate of decline will be enough to neutralize the 2020/21 mountain of money by the second quarter of 2023, allowing for velocity.
The above is from Lacy Hunt ahead of the H.6 release on Tuesday.
Both Lacy and I believe that a recession started in November or December.
For more details, see A better definition of money and Lacy Hunt’s thoughts on when a recession will start.
loose ends
Veteran readers will remember that I came up with M’ (pronounced M-Prime) as a way of rebuilding M1.
M’ was my way of finding a better version of money that was supposedly available on demand, but actually isn’t.
The process became impossible when the St. Louis Federal Reserve stopped publishing sweeps data. Once again, money that you think is in your account and supposedly available on demand is actually not.
Lacy’s ODL should not be confused with the Fed’s report of “other liquid deposits.”
In retrospect, a name like M2-, M2′, or “m2 premium“The name could be better to convey Lacy’s message.
Free money
Ultimately, through all these manipulations, the Fed bailed out the banks over time while the ECB with its negative rates did not. How much free money?
Please watch How much free taxpayer money is the Fed giving to the banks? for details.
Confused? The central bankers want it that way.
This post originated from mishtalk.com
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