Friday, November 28, 2003

Money Supply Dropping?

Nathan Newman points us to this interesting article about the possibility of a falling money supply.

As Newman states, it's too early to make too much of this. But, the fact is that Greenspan doesn't have godlike control over the money supply. While certain monetary aggregates can be essentially directly influenced if the Fed so wishes (and, as the article correctly states, the Fed has focused on influencing the price of money), the other ones really can't be. So, while the measures of the most liquid forms of money - M1 and M2 might be increasing, other measures incorporating more illiquid assets, could be falling.

Quick primer - there are various measures of the amount of "money," as it isn't entirely clear what exactly money is. The lower the number X in the measure MX, the greater the degree of liquidity (speed at which the asset can be converted to cash) of what is being counted. From the Fed:

The money supply measures reflect the different degrees of liquidity -- or spendability - that different types of money have. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds. M3 includes M2 plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada.
There are also M4, M5, ...