Tuesday, August 18, 2009

Money supply - shouldn't it be growing faster?


The monetary aggregates in the US do not seem to be growing at a pace that would suggest that the Fed is flooding the market. This could be a growing concern. The table shows the M2 money supply. The broader M3 which followed by the ECB was discontinued being measured in 2006. The money supply is actually falling since peaking at the end of January. Some of this is a function of money demand shifts but it is noticeable that the supply growing slower than was the case in the last recession. M1 has sky-rocketed and is only slightly lower then its high of 17% YOY which is more in line what some have expected.

The money velocity for M1 has fallen to levels seen in the mid 2000's period. The velocity of M2 is at the same level as present in the mid 1980's.

M1 includes currency in circulation, traveler's checks, demand deposits, other checkable deposits which include NOW accounts and credit union share drafts. Everyone is holding their money under the mattress.

M2 is M1 pus savings deposits, time deposits less than $100,000 and money market deposit accounts. This represents close substitutes for money.

Could it be that the Fed is not doing enough?

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