Sometimes something strikes you

I clicked Random Eyes (see sidebar), then clicked random a few times and ended up with M2 velocity:

Graph #1: The Velocity of M2 Money
Click Graph for the FRED Page via Random Eyes

I've seen it before, of course. But this time it looked almost flat to me until that sudden, large uptrend that runs from 1991 to 1995.

Those dates ring a bell for ya? They do for me. That was the time of a strong increase in M1 money growth, and a fall in the debt-per-dollar ratio. With a strong increase in M1 growth, I think M1 velocity probably fell -- just the opposite of M2 velocity. That's odd, if true, and it's worth a look:

Graph #2: Velocity of M1 (red) and M2 (blue) Money
Shown on Right and Left Scales Because the Numbers are Quite Different

I left the data box visible, and maybe you can see just at the end of the 1991 recession, a one-pixel-wide, slightly darker gray vertical line. Where that line crosses the red and blue plot lines FRED has added pink and blue circles to highlight the first quarter of 1991 on those plot lines.

Sure enough, beginning in the first quarter of 1991, M1 velocity (red) trends down while M2 velocity (blue) trends sharply up. M1 continues down to fourth quarter 1993; M2 continues up till first quarter 1995.

Velocity of money is calculated by dividing GDP by the quantity-of-money number. GDP is GDP, the same for the red line and the blue. So the difference between the two lines is due to differences in the M1 and M2 money numbers. Compare growth rates:

Graph #3: Growth Rates of M1 (red) and M2 (blue) Money

As expected, M1 money (red) shows a big growth spike beginning just after that 1991 recession, while M2 money growth (blue) slowed to near zero. There is a similar red spike in the mid-1980s but the blue line is much higher then. So the "gain" in M1 (red) was not as big in the mid-1980s as in the early 1990s.

There was a change in M1 accounting in 1994 that reduced the amount of money reported as M1 money:

Sweep programs create distortions between reported data on the monetary aggregates and accurate measures of the money stock.

In order to correct for these distortions, Graph #4 duplicates Graph #3 using M1 that has "sweeps" added back in:

Graph #4: Growth Rates of M1 + Sweeps (red) and M2 (blue) Money

For the period from the mid-1990s to the most recent data, the two lines are noticeably closer on Graph #4 than #3. But the big difference between the two lines in the early 1990s remains.

To see the difference in growth rates, I took the two lines from Graph #4 and subtracted the one from the other. I'm trying to see how much faster (or slower) the one money measure was growing, than the other. I subtracted M2 from M1. That means that when the difference is above zero M1 is growing faster, and when the difference is below zero M2 is growing faster:

Graph #5: Growth Rate of M1 + Sweeps less Growth Rate of M2

The big gains for M1 show up as large mid-1980s and early-1990s peaks on Graph #5. There are two much smaller peaks in the 2000s, and some unevaluable activity since 2008. Other than that, the blue line is almost always below the zero-line: M2 almost always was growing faster than M1.

What makes this more interesting is that M1 money is a component of M2 money. If you take M2 and split it into the money we expect to spend and the money we hope to save, M1 is the part we expect to spend. The rest is money we're trying to save. So basically, Graph #5 shows that our savings have almost always grown faster than our spending-money, except during those two massive spikes and a few brief interludes.



If you take Potential GDP, which is a measure of best-case GDP, and put its growth rate on Graph #5, it looks like this:

Graph #6: Growth Rate of Potential GDP (red) Overlaid on Graph #5

The general trend of Potential GDP -- the red line -- is downhill. The one notable exception to this downtrend is the uptrend created (says I) by the massive spike in M1 money growth in the early 1990s.

Why? Because no matter what you want to do in this economy of ours, it takes spending money to do it.