A surprisingly large amount of attention has recently been given to the slowdown in the growth rate of the M2 measure of the money stock. Around the first of the year, the year-over-year rate of growth of the M2 money stock was around 10%, a healthy rate of increase given the recession and the stance of quantitative easing on the part of the Federal Reserve.
Now, the year-over-year rate of growth in the M2 money stock measure has dropped below 8% and concern has been raised about the weakness in this particular indicator of the effectiveness of monetary policy. The question this weakness raises concerns the ability of the Federal Reserve to influence the real economy and the fact that the economy remains very, very weak.
The reason for this weakness, I believe, has less to do with the effectiveness of the Fed’s monetary policy and more to do with the shift in funds within the financial system. For one, the year-over-year rate of increase in the M1 money stock continues to be quite high, averaging more than 18% in the past month or two.
Whereas the M1 money stock increased about $260 billion over the past year, the M2 measure rose by $600 billion. Thus, the increase in the non-M1 part of the M2 measure was approximately $340 billion. The difference in growth rates for the aggregate measure obviously comes because the base for the M2 growth is much larger than the base for the M1 growth.
But, another interesting shift has occurred within these figures. Some deposit levels within the
non-M1 part of the M2 measure have actually declined over the past year. Note where the declines came: they came in time and savings deposits at thrift institutions and in retail money funds.
People are taking their money out of thrift institutions and money funds and putting them into deposits at commercial banks!
Time and savings deposits at thrift institutions fell about $130 billion over the past year and retail money funds dropped by almost $160 billion.
Note that time and savings deposits at commercial banks rose by $625 billion during the same time period.
This movement is reinforced by the shift in “other checkable deposits” over the past year. Other checkable deposits at commercial banks rose by about $50 billion whereas the same type of accounts at thrift institutions remained roughly the same. (Demand deposits at commercial banks increased by about $125 billion over the same time period.)
If one looks at the flow-of-funds accounts, the total financial assets at savings institutions dropped by about $420 billion from the second quarter in 2008 to the second quarter in 2009. Deposits at these institutions dropped by almost $200 billion and credit market instruments (supplying funds to these institutions) fell by about $280 billion.
What we seem to be observing is a massive withdrawal of funds from the thrift sector! This, I would suggest, is not a result of the monetary stance of the Federal Reserve System.
Very little attention has been given to the thrift industry over the past year. Maybe some more attention should be directed to the problems being faced by this industry.