The two basic measures of the money stock continue to grow at rapid rates. The broader measure of the money stock has continued to grow at a relatively steady pace. In the fourth quarter of 2008, the M2 measure of the money stock grew at an 8.2% year-over-year rate of increase. (I use non-seasonally adjusted data in all cases relying on year-over-year calculations to take account of seasonal movements in each series. Thus, I don’t rely on the artificial statistical adjustments that produce the seasonally adjusted series.) In the first quarter of 2009 the M2 year-over-year rate of growth was 9.5% but the rate of increase dropped back down to 8.7% in the second quarter.
These growth measures are high historically, but only modestly higher than the rates of growth that were being achieved before the Federal Reserve began pumping up its balance sheet in September and October of 2008. The important thing is the changes that have taken place within this broad measure of the money stock. The movement has been from time and savings accounts to transaction accounts as people have moved their funds from accounts that are interest-earning to those that are basically used to make payments.
The first look at a smaller component of the M2 money stock is to examine the performance of the M1 money stock. For the first half of 2008, the M1 money stock hardly grew at all on a year-over-year basis. But, in the third quarter this measure began to increase as the financial meltdown occurred. For the third quarter the M1 money stock grew at a 3.1% year-over-year pace, but this jumped up to 11.4% in the fourth quarter, followed by a 13.4% growth rate in the first quarter of 2009 and a 16.3% rate of increase in the second quarter.
The monthly year-over-year growth rates for April, May, and June of 2009 were 15.1%, 15.3% and 18.4%, respectively. Something is happening within the M1 measure of the money stock that is not happening to the non-M1 component of the M2 money stock which remained relatively flat during these three months.
What is growing?
Well, demand deposits at commercial banks grew by 44.3% year-over-year, in June 2009, up from 33.1% and 34.5% in April and May, respectively. This is also up from slightly under 30.0% for the first quarter of the year. People and businesses are moving their money into transactions accounts in order to have funds available to meet their day-to-day spending needs.
We see a similar jump in “Other Checkable Deposits” at commercial banks and thrift institutions as these accounts were growing by more that 12.0% in June 2009, up from 6.5% and 7.2% in April and May, respectively. In the first quarter of the year these accounts were only increasing at around a 2.5% to 3.0% rate of growth.
Another component of the M1 money stock is also increasing quite rapidly. Coin and currency held outside of commercial banks has been steadily rising by more than 11.0% year-over-year every month in 2009. A year ago the pace of growth in coin and currency was about one-half of what it is now. Again, one can only draw the conclusion that people are buying more and more things with cash now than they were a year ago. This is another indication of the fact that so many people are unemployed or are going bankrupt.
Where are the funds going into transaction accounts coming from?
The sources of these shifts seem to have been from primarily two areas, Small-denomination time deposits and retail money funds. There has been a drop of about $90 billion in deposits in retail money funds over the past twelve months. The decline in these accounts, year-over-year, is now about 8.5%. The rate of increase in small-denomination time deposits has dropped by 50% in the last six months and there has been an outflow of about $110 billion from these accounts since December 2008.
The conclusions one can draw from these data, I believe, are very clear. People and businesses have become much more conscious of their need to have cash and deposits available for meeting their daily living needs. People and families are moving funds from their small, low interest-earning accounts where they have not been earning much at all. These same people and families seem to be leaving funds in bigger accounts that earn higher rates of interest. It will be interesting to see what happens to these accounts in upcoming months if unemployment continues to rise and bankruptcies remain at high levels. In addition, businesses have found that other short term sources of funds are not available and so have had to become more liquid in order to satisfy their cash demands.
One could argue that the actions of the Federal Reserve have had little stimulative impact through the banking system since the rate of growth of the M2 measure of the money stock has only increased slightly so that the rapidly increasing rate of increase in the M1 measure of the money stock has resulted from individuals and businesses redeploying their short term assets.
This conclusion is reinforced by the information repeated in my July 16, 2009 post on “The State of the Banking System.” (See this article.) Commercial banks are not lending except in to consumers and just to consumers that have pre-arranged lines of credit like equity lines on homes and credit cards. This just supports the argument that people are doing what they can to make day-to-day ends meet. And, commercial and industrial loans have actually declined on a year-over-year basis. The argument can be made that no one is going to do anything that would lead one to conclude that economic units are going to increase their spending in a way that will stimulate the economy.
We need to continually watch what is going on in the banking sector. We are going to watch for further changes in behavior that might indicate the changing decisions of families and businesses. Of course, things could get worse and we need to watch for that. But, if things are going to get better, one place to look for changes in behavior is to watch where people are allocating their short term funds and whether or not banks are beginning to lend again. However, it doesn’t seem as if this change for the better will appear soon.