Category Archives: Monetary Activism

16/11/20: Velocity of Money and the Glaciers of Complacency

Last time I looked at the velocity of money, things were going South fast: And considering thee data through 3Q 2020, there is little improvement across the board:

You can barely notice 3Q 2020 uptick from the pandemic lows in all three measures, thee M1, M2 and MZM. And here are differentials:

Precautionary savings motives (blue line) remain extremely elevated, while investors' willingness to trade assets (in a bull market, a sign of more active management of portfolios) stays stubbornly low. Which implies that the shift from the pandemic impact to the recovery did not do much to alter demand for money, nor to break away from the monetary policy-supported glut of liquidity available to the economy as a whole and to the financial markets specifically. 

It is all as if we have frozen, from monetary policy point of view, in a singular tidal wave. A glacier of households' unease and investment markets complacency. 

13/6/2020: What Do Money Supply Numbers Tell Us About Social Economics?

What do money supply changes tell us about social economics? A lot. Take two key measures of U.S. money supply:

  • M1, which includes funds that are readily accessible for spending, primarily by households and non-financial companies, such as currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; traveler's checks; demand deposits; and other checkable deposits. 

  • MZM, which is M2 less small-denomination time deposits plus institutional money funds, or in more simple terms, institutional money and funds available for investment and financial trading.
Here we go, folks:

Does this help explain why Trumpism is not an idiosyncratic phenomena? It does. But it also helps explain why the waves of social unrest and protests are also not idiosyncratic phenomena. More interesting is that this helps to explain why both of these phenomena are tightly linked to each other: one and the other are both co-caused by the same drivers. If you spend a good part of 20 years pumping money into the Wall Street while largely ignoring the Main Street, pitchforks will come out. 

The *will* bit in the sentence above is now here.

27/5/20: Falling Velocity of Money

Despite massive money printing by the Fed in the years post-GFC and again since the start of the COVID19 pandemic, velocity of money in the U.S. is actually shrinking.

The latest bout of falling velocity of money started with what appears to be a new wave of precautionary savings by the households:

However, as the chart above also indicates, propensity to trade financial and real assets has been declining in recent years, from the start of the Global Financial Crisis on.

You can see a massive spike in precautionary savings in March 2020 in the following graph:

These charts indicate that the Fed's ability to support demand side of the economy is declining, as consumers have been drastically reducing their willingness to spend. They also suggest that investment markets liquidity has declined over time. All together, the above charts show the declining effectiveness of monetary policy in the age of ultra low interest rates.

$5.9 trillion and counting: the scale of Monetary Easing

Updating my previous post: listing all measures monetary authorities around the world have unleashed in response to the Covid19 crisis:

  • 23/3/2020 Federal Reserve Bank of the U.S.: 
  1. Commitment to continue asset purchasing program “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy”. Basically, an open-ended pledge, with no USD amount. This does not move the needle on its prior commitment if USD 700 billion in purchasing, for 2020. But it does expand the program, should the crisis continue unabated, and probably allows for bringing the committed purchases forward
  2. The Fed also will be buying corporate bonds, crucially the investment-grade securities in primary and secondary markets and through exchange-traded funds. Again, this has been pre-committed to, but 'primary' markets operations are something that is truly unprecedented.
  3. An unspecified lending program for Main Street businesses and the Term Asset-Backed Loan Facility implemented during the financial crisis
  4. There will be a program worth $300 billion “supporting the flow of credit” to employers, consumers and businesses 
  5. Two facilities set up to provide credit to large employers
  6. Issuance of asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and certain other assets
  7. Expanding Commercial Paper Funding Facility. The program now will include “high-quality, tax-exempt commercial paper” and the pricing will be reduced.
  8. Lower the interest rate on its repo operations to 0% from 0.1%.
  9. My estimate of the 1H 2020 net impact of new measures is in the region of USD200-400 billion.

  • 22/3/2020 Chancellor Angela Merkel’s government plans to increase borrowing up to EUR 150 billion in 2020 and pass a EUR 156 billion supplementary budget. Germany is also planning to set up a bailout fund for critical industries of about EUR 500 billion. While the measures are fiscal in nature, they require monetary policy supports to sustain low borrowing costs and demand for these securities.

These measures moves the needle for global measures from USD4.6 trillion to USD 5.9 trillion.