Reader’s question: What do you make of the surge in US M1 growth, now around 22% annual?
Answer: M1 comprises currency in circulation, demand deposits and “other checkable deposits”. Two special factors may have boosted the aggregate recently:
-
Unlimited FDIC insurance on demand deposits for 2011 and 2012 only, which has probably encouraged funds to shift out of savings deposits and money market mutual funds.
-
Repeal of Regulation Q preventing interest on demand deposits, making “sweep programmes” redundant – these programmes transfer institutional funds overnight out of demand deposits into interest-bearing money market funds, thereby depressing M1. (However, M1 was already picking up ahead of this change in July.)
These factors may have exaggerated recent strength but are unlikely to explain it fully:
-
The currency component of M1 – unaffected by the above changes – is growing by 9% annual, up from 4% a year ago.
- Broader aggregates – also unaffected by switches between different types of account – have picked up. The broadest available measure – derived from the flow of funds accounts – grew by 10% annualised in the second quarter. Business money holdings are up 15% from a year ago – see previous post.
Some argue that the US numbers have been boosted by large-scale capital flight from the Eurozone. However, this would be expected to depress the Eurozone money supply – the numbers have been weak but not sufficiently to offset US strength, so global money measures have accelerated. The capital flow argument also seems inconsistent with the stability, until very recently, of the euro-dollar exchange rate.
To sum up, US monetary acceleration is a significant stabilising force for the global economy IMO. The US could still go into recession if the Eurozone melts down but the downturn ought to be limited and short-lived (like 1990-91, when stocks ended the recession higher than when it started). If the Eurozone is somehow stabilised, and the Fed presses ahead with easing (including balance sheet expansion via dollar swap lending), the US economy and markets could surge next year.
