Saturday, July 3, 2010

Money, Money, Money

Money makes the world go round, so here's a simple question: how much of it is there, at least how many U.S. dollars?  Here are some charts.
  • First, M1 money stock (for detailed definitions see the bottom of today's post). 

M1 Money Stock

 A closer inspection shows that M1 shot up 20% in just twelve months during 2008-09 (see chart below).

 M1 Money Stock (detail)

  • MZM is short for money, zero maturity and is a better representation of  institutional money, i.e. the money that sloshes around investment banks, hedge funds, etc.  It, too, jumped 20% in the same period.

Money Zero Maturity
  • Since 1980 total debt outstanding, arguably the broadest possible definition of money, has kept pace with MZM.  In the last 30 years total debt rose from $5 trillion to a little over $50 trillion, and MZM went from $1 trillion to a touch under $10 trillion.  In other words, both increased tenfold (see chart below).

Total Debt Outstanding (USA)

Looking at debt in greater detail shows an interesting departure from this correlation during the 12 months of mid-2008 to mid-2009.  Total debt rose slightly less than 4% (see chart below, red rectangle).

Total Debt Outstanding (detail)

How is this possible? It's a direct consequence of the massive intervention by the Federal Reserve: it took problem loans and structured bonds onto its own balance sheet, removing them from the likes of Lehman, AIG, Bear Stearns.  In exchange, the central bank essentially "printed" money, i.e. obligations of the US federal government.  Many of those bonds have since proved to be worth a lot less than the money printed in exchange, and many of them are entirely worthless.

The increase in MZM in 2008-09 was $1.5 trillion, the same as total debt.  Net-net, therefore, zero.  Obviously, no 10X multiplier effect came into play here, since the Fed's money went to replace debt gone bad and not as high-powered money to make fresh bank loans.

And what about out and out deflation on a grand, monetary scale? 

Well, it obviously hasn't happened yet since total debt has not come down appreciably.  And such deflation won't happen for as long as people still trust that the "money" going around still acts as a safe storehouse of value.  In other words, for as long as people are still willing to believe that its issuer won't go belly up, too (Uncle Sam in this case).

But as the travails of Greece (and Spain, Ireland, Iceland, etc) show us, such trust can be a tricky thing, indeed.  No wonder the Chinese are stockpiling base materials as fast as they can, paying for them with their piles of dollars.

  • M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.  
  •  M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs).
  • MZM is M2 less small-denomination time deposits plus institutional money funds.


  1. The premise that Prechter has hold true is that what really counts for money is FRN, not airline miles, not travelers's checks, not bonds, not IOUS, not USTreasuries. That amount in FRN has not changed and so when there is panic in the system, everyone will be scrambling for FRN and I would guess UST.

    I'm leaning towards deflation in the things we don't need due to overcapacity and low labor costs (iPods, DVDs, houses and so on) but inflation in the things we need (food, water, energy) because the Fed will print under order from Obama and that money would only flow to the oligarchs (banks (includes IB), pension funds, insurance..) and the oligarchs would buy up real assets.

  2. I think your little bit about as long as people trust uncle same is way off. That is inflationary psychology and not deflationary. A massive deflationary psychology would be that our goods hold no value and too much faith in the good ole dollar.

  3. I agree with the second anonymous. I cannot simply understand your reasoning. If people do not trust money, it is very difficult to see how that is not (hyper)inflationary... Why trade your physical products for something you do not believe in (whose only value is belief)?

  4. Re: Inflation/deflation

    If people are not willing to accept your IOUs (money) in exchange for their goods and services, i.e. they lose their trust in your currency as a storehouse of value, it won't matter how many units of IOUs you attempt to print. People just won't take them - period.

    What happens then? Debt defaults on a massive scale and a sharp reduction in money stock, i.e. deflation in nominal monetary terms. This doesn't mean that things get cheaper, quite the contrary. Goods and services get much more expensive, in real terms.

    Keep in mind that we are not talking about Zimbabwean currency here but US dollars, the world's premier reserve currency. The rules are HUGELY different in this case.

    For example: say Obama wants to "inflate" US debt away. Inflate against what? Given that US debt is already enormous, NO ONE will be willing to buy those extra T-bills the Treasury would be attempting to sell. NO ONE.

    A global reserve currency CANNOT be massively inflated away and still remain a reserve currency, simple as that.

    Today we are getting quite close to having to choose: do we want the USD to remain THE global reserve currency, or are we going to go into our own little shell?

    The answer to this question has enormous geopolitical consequences.

  5. @ Hellasious

    I think some of the confusion in the comments on inflation/deflation is because of the duality of money - even fiat money - as both a medium of exchange and a store of value. If the economy is contracting sharply, people will buy fewer things so that the medium of exchange function is impaired (market liquidity evaporates and velocity of money contracts). Less money committed to speculative buying leads to lower prices and deflation.

    The store of value function might be enhanced as the economy contracts, as all other asset classes are deemed relatively more "risky" as they deflate. Hence the "cash is king" wisdom of holding cash reserves as debt deflation runs its course.

    Irving Fisher discusses how the dollar "swells" as debt deflation sets in in his Debt Deflation Theory of Great Depressions. Each dollar is able to buy more assets as the assets deflate and speculative appetite sours.

    The US dollar as a global reserve currency swells even though the Fed and Treasury exercise irresponsible policies because the rest of the world suffers more ill effects from the policies than the US. By this means, the US exports both inflation and deflation, and the dollar retains undeserved status as a reserve currency and store of value.

    It may not be a game that will work forever, but it probably has some way to go.

  6. Dear LB,

    I believe almost everyone gets confused with hyperinflation because they immediately think of Weimar Germany or LatAm countries in the 1970s and 80s.

    They see an irresponsible monetary policy (i.e. the Fed) and immediately envision wheelbarrows full of paper notes needed to buy an egg.

    Long before anything even near this happens in the US the federal government would have to either:

    a) Deflate away the massive debt, slowly if it can or fast if it must.


    b) Turn the US into a failed empire, reduced to a weak core domestic constituent.

    I'll say it again: a global reserve currency CANNOT be hyper-inflated.

    Weimar, Argentina, et. al. were small economies and their citizens had commensurately small amounts of domestic currency which they rushed to exchange for dollars, gold, diamonds, whatever.

    What can Americans do with 50 TRILLION dollars, an amount roughly twice as large as the rest of the world's GDP?

    No, when it comes to it deflation will be the only sane option, ideally coupled with a drive towards Sustainability.



    Roubini has certainly shot up to Global Doomer Star status, hasn't he? Hmmmm... I feel a certain contrarian spirit rising, he he.

  7. Fascinating read.

    "Long before anything even near this happens in the US the federal government would have to either:

    a) Deflate away the massive debt, slowly if it can or fast if it must."

    Hell could you explain a bit what these two deflation scenarios might look like, and what may make fast deflation necessary?

    Might it have to be fast if OPEC started to refuse dollars for oil? China refused to purchase treasuries? If interest rates on treasuries rose to double digit value?

    Would slow deflation be a new "get-tough" policy on insolvent banks?

  8. Hell (and LB):

    There may be less time for the center to hold than is frequently presumed.

    Two points that are emerging to support this view:

    1) Greater understanding and recognition of the implications by external creditors ( of the political failure associated with a "Deemed Budget" leading to more overt monetization, and hence a steeper yield curve rather than a flatter one.

    Combined with

    2) Increasing fiscal stress at the State level of government leading toward Federal "assistance", with an already bloated non-budget at the Federal level, requiring more debt issuance increasing the rate of approach toward the Reinhart-Rogoff breaking/tipping point.

    From whence will come buyers to support aggregate credit issuance?

    MZM is already in danger of turning down at faster rates.

    Should M2 turn down,

    Say hello to QE v2.0 as the only support for Treasuries as Austerity kicks in though-out the greater Eurozone.

    QE v2.0 will quickly erode "reserve" status, IMO.

  9. Off topic:

    Hellasious: I was wondering what you thought of this comment over at Calculated Risk:

    Which is worse - bankers or terrorists wrote on Sun, 7/4/2010 - 10:30 am

    mock turtle wrote:

    this is why i have argued on these pages going back almost 3 years, for what i used to call a 21st century manhattan-energy project...i changed the name a few years ago to apollo energy project because i did not want to invoke the imprimatur of the bombing of japan.

    Part of the problem, turtle is that renewable energy doesn't produce jobs like the military (providing for traditional energy). Coal mining produces lots of jobs.

    I just visited Fljotsdalur, a 690MW hydropower plant in Iceland a month ago. It added 50% to Iceland's total electricity capacity in 2008, almost all of it to support Alcoa's plant there, accounting for 1% of the world's total aluminum production at that one plant. Want to guess how many people it takes to operate that plant? Try 17 people. How many coal miners does it take to operate a coal plant? See the logic?

    Conventional energy is a jobs program, both through coal and oil mining and military protection rackets. If you want to see deflation....contemplate a renewable energy-based economy.



    Speaking of Reinhart-Rogoff, there is an article in the <a href=">New York Times</a> today about the pair, if you are interested.

  10. Dear Okie,

    We need to get our heads re-screwed on facing a different direction: away from Permagrowth and towards Sustainability.

    This means that "Jobs, Jobs, Jobs", i.e. create as much employment for as many people as possible on this Earth, is no longer the Mantra.

    Sustainability is inevitable. The real trick is how we manage the transition to it.

    For example, as an engineer I'll take 17 jobs and 500 MW of hydro over 1000 jobs and 500 MW of coal, any day. But politicians, in fact all of us, have to decide what we are going to do with the other 983 members of our community.

    Here's an idea: just like universal Social Security helps with the transition to old age and infirmity, we should establish a Social Sustainability fund to deal with the transition from Permagrowth.


  11. Hellasious,

    for some time now I am struggling with your deflationary conclusions. This post brings me nearer to understanding but my brain has still not snapped to it.
    What is the failing transmission mechanism that impedes further inflation by the FED/Treasury? Non-acceptance of dollars for oil ? F.e. 200-300 dollars per barrel (not as a price spike but for some months/years might break the US propensity to inflate). That would lead to your b) Failed-Empire-Secnario. I understand that.
    Can you elaborate on the a) slow / quick deflation scenario? Would it in your view include some form of default / new currency set-up ?

  12. But politicians, in fact all of us, have to decide what we are going to do with the other 983 members of our community.

    Here's an idea: just like universal Social Security helps with the transition to old age and infirmity, we should establish a Social Sustainability fund to deal with the transition from Permagrowth.

    While we wouldn't have to worry about that for another ten years (it would take us that long to complete a project to do just that), the problem you are going to run into is that you will have people complaining that they are paying taxes to support people "who aren't doing anything." I am not sure we will ever have the political will to transition to such a "sustainable" economy. I get the distinct impression that we will simply believe -- as a country -- that the 983 people in your example are just lazy bums who should "go get a job" or die of starvation.

    After all, that is what we are doing now by cutting off unemployment benefits.

    Lucky for me, I won't suffer the same fate: I was just hired by the U.S. Government to work as an attorney in a federal agency. I have been unemployed for about 18 months and I have worried since the beginning of the year whether I would ever get back to work. I beat out 500 other attorney applicants for the ONE position that was available.

    It will be a SUBSTANTIAL drop in pay, but the feeling is that my old job probably is not coming back anytime soon (or with any sustainability, if you will).

    My new job is limited to a maximum of two years, so at least I will be able to re-evaluate the market then, and as the attorney who trained me told me: "you are now in with the biggest employer in the world: the U.S. Government."

    Wish me luck.

  13. Dear Okie,

    An attorney with the Feds, huh?

    Well, first off..

    I DIDN'T DO IT, I TELL 'YA, IT WASN'T ME! You ain't gonna pin this rap on me, 'ya hear?


    1 out of 500, huh? I always knew you were the smart one here ;)

    Best of luck ..and remember who your friends are when you reach the Supreme Court.


  14. H:

    Eh, I am not going to a criminal department ... so you don't have to worry about that ... from me. They told one of my references that I was put at the top of the list because I had "real world experience" in the private practice of law. They also said that 90% of the applicants didn't make it past the first cut.

    I figured that if I beat out that many people for the job, I would be dumb not to accept it.

    I will be leaving Oklahoma and establishing a residence (for the first time in my life) in another (bordering) state. The job I will be saying goodbye to sent me all over the country, but I am not sure it is coming back for a while.

    I see that the charts are indicating that things are turning around, but it is all of those contingencies that have me worried enough that I feel like maybe a little security is in order, at least for the next couple of years. I am just hoping that I can get back to the promised land after it is all over.


    This is one that worries me.

  15. WOW Congrats on the 1 in 500 job OkieLawyer!

    A sustainable/green economy would indeed require specialized people at the design level but if it indeed goes global, there would be many low level manufacturing and local farm jobs required. Just me 2 cents.

  16. Hellasious:

    Take a look at this YouTube video and tell me what you think of it. I am hoping that you could bring some of your Wall Street experience to bear on this (manipulation of the market allegation).

  17. I realize that what I'm about to say is not exactly germane to the latest post, but neither is it, far removed. We are not in a double dip recession, nor are we in a Great (er) Depression. In my view, our present miasma, for lack of a better term, may not be defined along such lines, because recessions and Depressions are both, in essence, passing bouts of ill health that are best understood as part of the fabric of Capitalism as a living, albeit deeply impaired, system of economic organization.

    Capitalism is now, well and truly, dead. And though it was born much earlier than Marxism, and managed to cut a far greater swath across the experience of human kind-for very understandable reasons-it has not survived the death of Marx's progeny by more than two generations. Now that it is permanently supine (its passing will not be acknowledged, let alone televised, simply brutally denied in the manner of "Weekend at Bernie's") the standard, or, for that matter, not so standard models we have heretofore employed to assess and understand "where are are", (and where we are going) are destined to amount to abject failures at predicting the repercussions on money/currencies, labor, and nature itself.

  18. "Capitalism is now, well and truly, dead. And though it was born much earlier than Marxism, and managed to cut a far greater swath across the experience of human kind-for very understandable reasons-it has not survived the death of Marx's progeny by more than two generations. "

    Crises of Capitalism

  19. Thanks, FP. That was well worthwhile.

  20. "money makes the world go round". Actually, that would be conservation of angular momentum. Money makes the hamster go round (the wheel).

  21. SPECTRE of DeflationJuly 12, 2010 at 7:41 PM

    The M1 Money Multiplier says there is no turnover in dollars. This is a broken system. If you give me a million dollars, and I stick it under the bed and keep it out of circulation, have we really accomplished anything in terms of growing our economy or expanding credit which we must always do in a fiat regime? It's dead money. Also, you may want to look at MZM and John Williams M3 for rate of change over the last several months. In the case of M3, the rate of change has been -10%+.

    It's perfectly clear that the last 18 months have been all about transferrng private losses to the American Taxpayer. Now the banks are flush with excess reserves, and ready for a KA-BOOM which will allow them, just like the last Depression, to buy assets for pennies on the dollar moving forward. The only fly in the ointment however is that there's been talk, ZERO HEDGE, that these excess reserves are being used to fund Treasury Auctions, and there may be some truth to this as excess reserves started falling right after QE by the FED was finished at the end of March.

    Oh what a very tangled web they weave to deceive.

  22. Name is incorrect in the post.

    Thomas L. Friedman.