The Biggest Collapse in M2 Money Supply Since the Great Depression

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by Mish Shedlock, Mish Talk:

If your measure of inflation is money supply, then the economy is in a deflationary period right now.

Data for the above chart is from the Fed’s H.6 Money Stock Report, released January 24.

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Monetary Definitions

  • M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of other checkable deposits (or OCDs, which comprise negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, share draft accounts at credit unions, and demand deposits at thrift institutions) and savings deposits (including money market deposit accounts). Seasonally adjusted M1 is constructed by summing currency, demand deposits, and other liquid deposits, each seasonally adjusted separately.
  • M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (2) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing small-denomination time deposits and retail MMFs, each seasonally adjusted separately, 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 discussed 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.

Currency is accepted at an increasingly fewer number of business establishments and simply cannot be used for very large sized transactions. Retail money market funds never became an important medium of exchange. Both are becoming a far less used medium of exchange.

ODL has the additional advantage that it is the main source of funding 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.

The above blocks courtesy of Lacy Hunt at Hoisington Management.

M1, M2, Other Deposit Liabilities Detail Since 2019

M1, M2, Other Deposit Liabilities Detail Since 2019 as of 2022-12

M1, M2, Other Deposit Liabilities Percent Change From Year Ago 2022-12

The Fed’s QE panic attack during and after the Covid pandemic seriously distorted percentage changes in M1 money supply.

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