Sunday, May 17, 2015

I have to stop and check

For another post in the works, I want to say "circulating money is smaller than GDP, and growing more slowly". But I have to stop and check the "growing more slowly" part.

What I love about FRED.

Graph #1: FRED 1bzh

Circulating money is less than GDP, and the ratio remained on the low side from the 1970s to the crisis.

But something else catches my eye. Before the 1982 recession, it's clearly downtrend. Since the crisis, it's clearly uptrend. But from 1981 to oh, 2008, there is a definite uptrend infused with a business cycle-like pattern of ups and downs. Up during recovery, then down to recession.

I don't usually look at M1ADJ, circulating money "adjusted for retail sweeps". I'm trying to use it more often because I think it's more accurate than M1SL. With M1SL you'd want to argue the trend runs downhill to the crisis. I'm pretty sure now, that that's wrong.

But it's the regular, business cycle-like pattern that fascinates me, on the graph above.


The Arthurian said...

From now on, if I remember, I'm gonna call it "spending money" rather than "circulating money".

jim said...

In 1978 Congress added these words to the Federal Reserve Act:

"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."

According to Congress, the Feds job is to keep the monetary aggregates in proportion to GDP and then everything good will naturally follow from that. Or conversely you could say it means if the Fed does not maintain the monetary aggregates commensurate with long run potential to increase production, bad things will happen.

BTW, the difference between M1 and M1ADJ is spending. M1 does not include accounts that are sitting idle and not being used for spending.
In other words, if you have a checking account that acts like a savings account it may not be counted in M1 but
will be counted in M1ADJ.
M1ADJ includes all transaction accounts whether they are idle or not. The difference doesn't show up till about 1994

The Arthurian said...

Hey, Jim.

"In 1978 Congress added these words..."
"According to Congress, the Feds job is to keep the monetary aggregates in proportion to GDP..."

Yeah but around 1982 (I think) the Fed quit its experiment of trying to directly control M1, and went back to tweaking interest rates. Maybe that worked better and made the M1/GDP ratio more stable??? Hard to believe.

Hey the thing that really gets me is that Congress seems to think of "money and credit" as a single entity. They are not the same. We can spend a lot of money without creating a lot of debt. But we can't use a lot of credit without creating a lot of debt.

"the difference between M1 and M1ADJ is spending."

So if I put greenbacks in my wallet to last the week, but I only spend one fifth of that money each day, the balance is excluded from M1? I don't think that's correct.

I do understand that people who can afford it may increasingly want to keep savings in the form that is counted as M1. And that definitely screws up the stats. However...

"Swept funds from retail and commercial demand deposit programs provide the same transactions services as checkable deposits. But since they are recorded within the instruments that received the swept funds, measures of the monetary aggregates are distorted as a result... [T]he presence of commercial demand deposit sweep programs results in further underreporting of transactions deposits."

I got that link from you, Jim.

jim said...

I fail to see what the money in one's wallet has to do with the distinction between M1 and M1ADJ.

The sweep program allows deposit institutions to treat checking accounts that have been idle for the last 30 days to count as savings for internal accounting purposes. That means the money in those accounts don't contribute to M1. Similarly, money in savings accounts that are used for spending must be counted as transaction accounts that do contribute to M1.

The law is what matters. Congress writes the statutes and the FRB and deposit taking institutions are obligated to follow. The relevant portion of the statutes that define what is a savings account and what is not can be found here: