Author Topic: M2 Money supply growing at 28.4%  (Read 9815 times)

JRM

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Re: M2 Money supply growing at 28.4%
« Reply #10 on: January 05, 2021, 06:32:23 AM »
Isn't there an argument to be made that the GDP growth was from the increase in debt?


Vish_ram

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Re: M2 Money supply growing at 28.4%
« Reply #11 on: January 05, 2021, 12:02:23 PM »
Increase in money supply should be viewed in relation to velocity of money. The velocity has been dramatically decreasing.

Given the backdrop of dramatic productivity gains due to technology, decreasing population growth, greater consumption of services compared to goods, dramatic capacity expansion in commodity production (during first decade of this century),
we are having lower real rates, lower fed funds rate, lower inflation, lower velocity & increasing money supply. The gold bulls have totally misread the situation and are purely engaged in mental masturbation.

The so called money printing hasn't increased inflation. It has only gone to support existing Treasury's mandatory spending.

Think of a couple with several kids (school tuition, books, clothing spending), supporting their parents (social security, medicare).. Now if wife is unemployed & husband works part time, then their rich uncle (Fed) uses his credit card to loan some money to this couple. The couple is not splurging on anything, just maintaining their usual spending without missing a beat.

LearningMachine

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Re: M2 Money supply growing at 28.4%
« Reply #12 on: January 05, 2021, 12:12:34 PM »
The velocity has been dramatically decreasing.

So far.  An interesting article on why velocity has been decreasing so far by the Federal Reserve Bank of St. Louis: https://www.stlouisfed.org/on-the-economy/2014/september/what-does-money-velocity-tell-us-about-low-inflation-in-the-us

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The answer lies in the private sectorís dramatic increase in their willingness to hoard money instead of spend it.
...
And why then would people suddenly decide to hoard money instead of spend it? A possible answer lies in the combination of two issues:

A glooming economy after the financial crisis
The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds

I wonder if it is a question of "when" people might stop hoarding money not a question of "if".


wabuffo

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Re: M2 Money supply growing at 28.4%
« Reply #13 on: January 05, 2021, 12:17:03 PM »
I wonder if it is a question of "when" people might stop hoarding money not a question of "if".

The problem is that one of the largest components in the calculation of "velocity" in the monetary base is reserves.   I can't seem to access my reserve account at the Fed so I guess I'm one of the hoarders.   8)

"Velocity" started to fall when the Fed expanded its balance sheet in 2008 by forcing the US commercial banking sector to hold over $3 trillion of reserves when they used to hold less than $5 billion pre-2008.  The quantity of bank reserves is a policy decision controlled by the Fed (banks as a total sector don't have any choice in the quantity of reserves the industry must hold on deposit at the Fed).  Reserves are "frozen" assets that do nothing but sit there to help clear payments.

If one is actually trying to measure velocity - I think you could look to the Federal payments systems (Fedwire, CHiPs) and measure the number of turns vs something like GDP.  I haven't updated this in awhile, but this is a chart I drew up comparing these two things ($ value of payment transfers & GDP)

Currently, the Federal Reserve payment systems settle over $1.1 quadrillion in payments per year.  Annual US GDP is $21 trillion - give or take.  So every $1 of GDP requires over $60 of payments to circulate on average through the US economy.   This doesn't include payments in cash - but they are small relative to non-cash so I ignore them.  Here's the historical chart. 



The ratio bobs around a bit but is up in 2020, FWIW - if my little home-grown "velocity" ratio actually tells us anything useful.

wabuffo
« Last Edit: January 05, 2021, 12:49:24 PM by wabuffo »

LearningMachine

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Re: M2 Money supply growing at 28.4%
« Reply #14 on: January 05, 2021, 01:53:29 PM »
"Velocity" started to fall when the Fed expanded its balance sheet in 2008 by forcing the US commercial banking sector to hold over $3 trillion of reserves when they used to hold less than $5 billion pre-2008.  The quantity of bank reserves is a policy decision controlled by the Fed (banks as a total sector don't have any choice in the quantity of reserves the industry must hold on deposit at the Fed). 

As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020.  This action eliminated reserve requirements for all depository institutions.

Source: https://www.federalreserve.gov/monetarypolicy/reservereq.htm

wabuffo

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Re: M2 Money supply growing at 28.4%
« Reply #15 on: January 05, 2021, 02:23:01 PM »
This action eliminated reserve requirements for all depository institutions.

This is related to REQUIRED RESERVES and was already essentially obsolete as a concept.  TOTAL RESERVES today are made up of REQUIRED RESERVES + EXCESS RESERVES.   Required reserves stopped being important after the GFC and the expansion of the Fed's balance sheet.  Look at this table - nothing's really changed just because for accounting purposes required reserves are marked at zero -- the numbers just shift over to the excess reserves column now.   
 
https://www.federalreserve.gov/releases/h3/current/default.htm

It sounds counter-intuitive, but reserves are a function of the Fed deciding how big a balance sheet it wants to carry.  Banks are just along for the ride as passengers collectively.  They have no choice. 

Don't believe me.  Let's hear from a former Fed governor (ex-NY Fed President Bill Dudley):
https://www.bloomberg.com/opinion/articles/2020-01-29/fed-s-repo-response-isn-t-fueling-the-stock-market

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when the Fed buys T-bills and increases the amount of reserves in the banking system, that liquidity canít go elsewhere. It can move from bank to bank as households and businesses shift where they hold their bank balances. The only exception is if bank customers decide to increase their holdings of currency. But if they do that, that reduces the amount of excess reserves in the banking system.

The Fedís T-bill purchases substitute a bank reserve (essentially equivalent to a one-day T-bill) for a slightly longer risk-free asset (a T-bill) that the Fed now holds in its portfolio. But thatís it. There are no funds created to purchase equities.

Dudley was talking to the issue that many market participants were blaming the Fed restarting its repo program in late Sept. 2019 as causing "liquidity to flood into the stock market" - but focus on the mechanics he's describing.   
1) The Fed increases reserves by buying stuff (strictly a swap of assets with a bank)
2) Those reserves go nowhere and stay in the Fedís clearing accounts for the banks.

So why did the Fed cut the required reserves to zero if banks can't actually change the total reserve levels held by the commercial banking system?  I believe there are calculations embedded within that reserve requirement that are affected by the types of assets banks hold on their balance sheet.  By setting it to zero, it was a very quick-and-dirty deregulation act for banks to free them up to change their asset mix.  Perhaps, the Fed hoped banks could more easily alter their asset mix towards riskier assets and help them better respond to the economic hardships businesses were facing because of the pandemic-related shutdowns.  I don't think it did much.

wabuffo

« Last Edit: January 05, 2021, 05:07:18 PM by wabuffo »

LearningMachine

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Re: M2 Money supply growing at 28.4%
« Reply #16 on: January 05, 2021, 06:04:14 PM »
It sounds counter-intuitive, but reserves are a function of the Fed deciding how big a balance sheet it wants to carry.  Banks are just along for the ride as passengers collectively.  They have no choice. 

Wabuffo, I'd like to understand deeper what you're saying regarding these two events.

#1. Fed buys Treasures, T-Bills and Mortgage Backed Securities in the amount of $X.
#2. Banks collectively put $X of their customer deposits (which are part of M2 money supply) into Fed Reserves

Are you saying that #1 effectively forces #2 to happen because banks don't have anywhere else safe to put their customer deposits?
« Last Edit: January 05, 2021, 06:18:37 PM by LearningMachine »

wabuffo

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Re: M2 Money supply growing at 28.4%
« Reply #17 on: January 05, 2021, 06:50:32 PM »
Are you saying that #1 effectively forces #2 to happen because banks don't have anywhere else safe to put their customer deposits?

No - I am saying the two are linked in a payment flow.  The Fed's main job is to manage US large-scale payments clearing.  They do this by using reserve accounts.  All nationally-chartered banks have a "chequing account" at the Fed.  So when the Fed decides it wants to expand its balance sheet by buying a Treasury bond from JP Morgan Chase, this is the payment flow that happens.



This is very simplified and very high-level.  The tables show what happens to the assets and liabilities of the Fed and the assets and liabilities of JP Morgan Chase when the Fed buys a bond from JPM.  In the first table, JPM owns only $10m of US Treasury Bonds so its total assets are also $10m.  (This is obviously not what the entire balance sheet of JPM looks like).  The Fed at this point has no assets and no liabilities.  (again - not what the Fed balance sheet looks like).

Then the Fed buys $10m of US Treasury bonds from JPM.  The Fed makes an electronic accounting entry in JPM's reserve account at the Fed for $10m and takes possession of the bond.  Now the balance sheets have changed.  The Fed expanded its balance sheet and now owns $10m of Treasury Bonds but also has a liability of $10m via JPM's reserve account at the Fed.   JPM's balance sheet hasn't changed in total assets.  It still has the same $10m of total assets.  The difference is that instead of US Treasury bonds, its assets are on deposit at the Fed with an account balance of $10m. 

The issue is that these reserve accounts at the Fed can only be used to clear payments between JPM and other federally-chartered banks or between JPM and the US Treasury (ie, tax payments going to the US Treasury, spending from the US Treasury going to JPM).  See!  its a closed-loop system.  In aggregate the reserve balances can shift between banks but for the entire banking sector the total reserves at the Fed can't change unless/until the Fed changes them by selling assets back to the banks.

LearningMachine - I hope that makes sense.   You can't think of reserves as something banks can "withdraw" from the Fed, in aggregate they can't.  It is Fed decisions to buy assets (and expand its balance sheet) or sell assets (and reduce its balance sheet) that determine how much reserves that banks have stuck in these accounts.

If you want a slightly more complicated flow involving the US Treasury and MetaBank (CASH) and the CARES Act EIP debit card program for stimulus payments to the "unbanked" - I went over that payment flow last summer (a real world example).  Its shows how MetaBank's reserve account exploded when the US Treasury issued the order to the Fed to transfer money from the US Treasury's reserve account at the Fed to Metabank's.
https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/how-can-the-fed-unlimited-qe-be-deflationary/msg425263/#msg425263

wabuffo
« Last Edit: January 05, 2021, 07:01:11 PM by wabuffo »

Cigarbutt

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Re: M2 Money supply growing at 28.4%
« Reply #18 on: January 05, 2021, 06:59:38 PM »
^wabuffo's answer is excellent. There's a visual complement:
https://www.youtube.com/watch?v=lK_rYS8L3kI
In my limited understanding, velocity has been going down for a while and M1 (and M2) don't include reserves (required and excess).

LearningMachine

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Re: M2 Money supply growing at 28.4%
« Reply #19 on: January 05, 2021, 10:38:02 PM »
Thanks wabuffo for the very clear answer.  It helps me understand your perspective better.   

For this perspective to hold, all of the following have to be true:
* #1. JPM has to be required to sell its treasury bonds to the Fed
* #2. JPM's reserve account with the Fed can only be used to clear payments between JPM and other federally-chartered banks or between JPM and the US Treasury
* #3. JPM is not allowed to withdraw from its reserve fund at the Fed
* #4. Even when the asset bought by Fed from JPM matures, JPM is not allowed to withdraw from its reserve fund at the Fed

I can understand banks can be induced to do #1 if Fed is paying the highest price, but it is not required right?

Regarding #2, #3 and #4, any chance you would have a link to the actual regulation that has language stating each of these?
« Last Edit: January 05, 2021, 10:40:01 PM by LearningMachine »