by Annaly Capital Management
The Fed’s weekly H.6 monetary aggregate report from two weeks ago released on 11/18/10 showed a $91.8 billion weekly increase in M1, an alarming 5.1% jump in a single week (annualize that one for us please). We eagerly awaited the following week’s report, to see if the trend continued. The 11/26/10 release showed that the surge had largely reversed itself. The chart below shows seasonally-adjusted M1 on a monthly basis, but with the two most recent weeks tacked on to the end.
Still, the trend remains higher, and at an impressive pace (year over year, the pace of growth is around 6.5%). M1 measures the most liquid forms of money, primarily currency and demand/checkable deposits. M2, which adds slightly less liquid cash, hasn’t quite kept up the same pace of growth as M1. It was with this in mind that we read this Bloomberg article. We quote from the opening paragraph, emphasis is our own:
“Profit margins at U.S. banks may get a boost from increasing deposits as customers show a preference for immediate access to their money and less appetite for risk with interest rates at a record low and the economy still seeking a bounce from recession.”
This is exactly what Keynes himself spoke of when he described a situation where “after the rate of interest has fallen to a certain level, liquidity preference is virtually absolute in the sense that almost everyone prefers cash to holding a debt at so low a rate of interest. In this event, the monetary authority would have lost effective control."
A time deposit is effectively a debt instrument where savers lend to a bank for a certain amount of time. Though the leap in readily accessible demand and checking deposits is large and steep, and the decline in time deposits is equally so, this kind of thing happens during and following recessions.
Notice how the two metrics tend to move in opposite direction, with time deposits declining and more liquid cash rising after the early 1990s recession as well as after the 2000 recession.
While this probably isn’t much proof of Keynes liquidity preference, at least in the extreme sense, it does help explain why M1 has grown significantly faster than broader measures of money supply, as cash simply shifts from M2 to M1.