Happy Monday! I have taken a bit of a break from writing, due to final exams and traveling, but wanted to hop on and talk a bit about the Fed’s discontinuation of the M2 Money Stock data series and its replacement with the MS2L series, as I have seen an abundance of misinformation circling the web in both media and social networks.
Talks of unlearning things? The amount of money in circulation will always be relevant to a central bank, whose levers at the end of the day basically just move the machinery of fiat money. I work with data science, and it's almost unfathomable to me that we'd want to decrease the fidelity of such a basic metric.
The biggest error in the history of the world is that banks loan out deposits (that they are intermediaries). Not so. Deposits are the result of lending/investing, not the other way around. All bank-held savings are un-used and un-spent, lost to both consumption and investment, indeed to any type of payment or expenditure. That is the sole source of Alvin Hansen's secular strangulation, not robotics, not globalization, not demographics, not monopolization.
The demarcation between 1961 and 1981 was due to the end of the "monetization of time deposits". Everything that has happened was predicted in “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43
Excellent post. Thank you for your continued series, Allison! As someone who completed their undergraduate in economics not too long ago I’ve found your content to be both insightful and informative and presented succinctly - the last one which seems to sometimes be lost on academics in the field.
re: "since M2 is more relevant to inflation forecasting"
Dead wrong. Non-M1 components destroy the velocity of circulation, i.e., is deflationary. Non-M1 components ("other checkable deposits"), deposit turnover is 5:95 vs. M1.
Chairman Jerome Powell: "there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time"
Not so. Long-term monetary flows (exclusive of the "BASE EFFECT"), volume times transactions' velocity (proxy for inflation), peaked in April. Short-term monetary flows (proxy for real output), peaks in May (underweights Vt).
Stocks typically follow short-term money flows. The U.S. $ follows long-term money flows.
Over longer periods, the U.S. $ indices reflect FOMC ease or tightness in "total checkable deposits"
As an example, the price of oil troughed in Jan 2016 as long-term money flows fell by 80 percent from 1/2013 to 1/2016. Oil fell by 70 percent during the same period. The Trade Weighted U.S. Dollar Index: Broad, Goods and Services rose from 1/2/13 to 1/4/16 from 90.6941 to 114.1596. Gold fell by 57 percent from 1681.50 to 1072.70. And the real rate of interest rose dramatically off 2012’s lows (from -0.87 on 12/10/2012 to 0.86 on 9/10/2013).
Talks of unlearning things? The amount of money in circulation will always be relevant to a central bank, whose levers at the end of the day basically just move the machinery of fiat money. I work with data science, and it's almost unfathomable to me that we'd want to decrease the fidelity of such a basic metric.
The biggest error in the history of the world is that banks loan out deposits (that they are intermediaries). Not so. Deposits are the result of lending/investing, not the other way around. All bank-held savings are un-used and un-spent, lost to both consumption and investment, indeed to any type of payment or expenditure. That is the sole source of Alvin Hansen's secular strangulation, not robotics, not globalization, not demographics, not monopolization.
The demarcation between 1961 and 1981 was due to the end of the "monetization of time deposits". Everything that has happened was predicted in “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43
Good read. I think lockdowns depressed the circulation of money, now its picking up again and will contribute to inflation.
Excellent post. Thank you for your continued series, Allison! As someone who completed their undergraduate in economics not too long ago I’ve found your content to be both insightful and informative and presented succinctly - the last one which seems to sometimes be lost on academics in the field.
Great post - learned some new things!
Link: Dr. Philip George's "The Riddle of Money Finally Solved"
re: "since M2 is more relevant to inflation forecasting"
Dead wrong. Non-M1 components destroy the velocity of circulation, i.e., is deflationary. Non-M1 components ("other checkable deposits"), deposit turnover is 5:95 vs. M1.
Chairman Jerome Powell: "there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time"
Not so. Long-term monetary flows (exclusive of the "BASE EFFECT"), volume times transactions' velocity (proxy for inflation), peaked in April. Short-term monetary flows (proxy for real output), peaks in May (underweights Vt).
Stocks typically follow short-term money flows. The U.S. $ follows long-term money flows.
Over longer periods, the U.S. $ indices reflect FOMC ease or tightness in "total checkable deposits"
As an example, the price of oil troughed in Jan 2016 as long-term money flows fell by 80 percent from 1/2013 to 1/2016. Oil fell by 70 percent during the same period. The Trade Weighted U.S. Dollar Index: Broad, Goods and Services rose from 1/2/13 to 1/4/16 from 90.6941 to 114.1596. Gold fell by 57 percent from 1681.50 to 1072.70. And the real rate of interest rose dramatically off 2012’s lows (from -0.87 on 12/10/2012 to 0.86 on 9/10/2013).