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.
- 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.