M1+M2 Update, Or Does The Deflation/Hyperinflation Debate Hinge On The Propping Of Shadow Monetary Aggregates?
Together with the Fed's balance sheet, we are now convinced that the second most important developing metric for the economy is a granular analysis of the key public monetary aggregates: M1+M2. Within a month we also hope to develop our own definition of M3, to supplement such work elsewhere, in order to provide an independent opinion on what the true monetary growth is, now that increasingly more people are discussing the threat of outright hyperinflation. But before we get there, here is our first breakdown of M1 and M2 data. As a reminder, M1, or the monetary base, consists of the i) Currency in Circulation, ii) Demand Deposits, and iii) Other Checkable Deposits (technically it also includes roughly $5 billion worth of Travellers Checks each week, but this is merely a remnant of a bygone era and it rarely if ever changes). In the most recent week, total M1 was $1,700.7 billion, a modest decline from the prior week mostly due to a $12 billion drop in Other Checkable Deposits. Beyond pure M1, there are also i) Savings Deposits at Commercial Banks, ii) Savings Deposits at Thrifts, iii) Total Small Denomination Time Deposits and iv) Retail Money Funds. All these, in addition to the items listed under M1, make up M2, which closed the week ended September 8 at just over $8.7 trillion for the first time in history. For those who look at M2 as an indication of just how much liquidity is sloshing in the system, and use it as a proxy for inflation, the attached chart must be rather troubling.
The next chart shows the historical change in M1 and M2 by sub-components.
Of the non-M1 metrics, the biggest YTD move is in Savings Deposits at Commercial Banks (which includes money market deposit accounts), which despite the pleadings of Huffington Post's "move your money" campaign has grown from $3,999.1 billion to $4,287.5 billion. The comparable increase in Thrifts is much smaller, or only $44.6 billion. On the other hand, total small denomination time deposits have dropped substantially since the beggining of the year, or a total of $150.6 billion, split between a decline of $120 billion at commercial banks, and the balance from Thrifts. In other words, smaller deposits (under $100,000) have been withdrawn from the system, even as nearly double the amount was put right back in. Somehow we don't think banks will be too concerned about any more Pull Your Monay Compaigns (as for pull your stock trades, well, that's another matter altogether).
For those curious about the rate of weekly change by the various components, we present the following chart which shows the change in the 7 key M1+M2 categories.
Altogether, the M2 change since the beginning of the year amounts to $168 billion. Yet the biggest drop has been recorded in the Institutional Money Funds category, which declined by just under $300 billion YTD, yet which is not included in either M1 or M2 (oddly, as Retail Money Funds are part of M2). Obviously this, together with various other shadow banking components, such as Asset-backed Commercial Paper, which Russell Napier will excuse us, but just plunged to nearly the lowest reading in the past decade at $399 billion, all appear to be plunging.
In other words, as we have highlighted before, the debate over hyperinflation vs deflation will most likely revolve around just how effective the Fed will be to prop up the traditional monetary aggregates, in the form of M1 and M2, but rather the shadow banking aggregates, such as ABCP, which are plunging (and which as we pointed out previously, had a record drop of $1.3 trillion in Q1).
We will continue keeping a track of this data, and hope to expand into other additional monetary tangents in time. For the time being, M2 is at a record, yet this is offset by collapsing money aggregates elsewhere. If and when that collapse is stabilized, then run for the hills.