Money Talks

Yesterday we talked about “sticky” money.  The fact that it sticks in your pocket for some amount of time.  Maybe a day, or maybe a year.  If it sticks in your pocket for a year, it’s very sticky.

If you’re really making lots of money, you might think that you wouldn’t spend money very fast.  But it’s not so.  Some people with lots of dough do double duty and get that money in circulation – fast.

And here is where the big picture comes in.  Our Federal Reserve Bank is like the Supreme Court of Banks.  They are the bank that all the other banks bank with.

One of the best things for us is that the “Fed” gathers great statistics.  The one stat that is most interesting to us is the velocity of a few forms of money.  The first type of money is the kind that us regular people keep around: checking accounts, savings accounts, what’s in our pockets and rolling around in the cracks of our cars.

The other kind of money is a really big aggregate.  It includes all the money that is tied up in stocks, bonds, fancy investments, and things like that.  It also includes all the money of regular folk.

As you can imagine, the aggregate money includes everyone.  So, the people with no money are lumped together with people with lots of money.  The result is that it shows us what the big money people are doing.

Enough talk.  Here’s the graph.

If you can see this, you notice the red line represents MZM, that’s the big aggregate.  This includes the people with lots of money.  The number starts out at 2.6 and has dropped down to 1.4.  This means that the big money people and all the regular people together spend their disposable dollars about 1.4 times a year.  Every 8.5 months.  It used to be every 4 to 5 months before.  What happened?

Meanwhile the M2 line shows what regular people have.  It dropped from 2.2 to 1.5.  This means that the velocity of regular money went from 5.5 months to 8 months.

The overall conclusion is that money is getting a whole lot stickier than it used to be.  But there’s another interesting thing going on here.

Look at the second quarter of 2001.  See how the red and blue lines cross?  For the first time since the Fed has collected this information, the MZM has gotten stickier than M2.  Why?

Notice how it’s in the shaded area.  That means the economy was in a recession.  Hmmm.

Is it possible that people with lots of money stopped spending it as fast as they used to?  It is possible that they like holding onto it, even more than those of us without lots of disposable income?

Of course it is.  Perhaps it’s because of legislation.  Or maybe potential investments have dried up.  But it shows that one of the forces the Fed is fighting is that people simply aren’t spending money like the should be.

When people don’t spend money, it means there is very little pressure for companies to increase prices.  And if they can’t raise prices, then there’s little inflation.  And if there’s little inflation, then there’s no incentive for banks to give us interest.  So no savings.

Worse, the biggest tool the Fed has for stimulating the economy is pumping money into it.  Into us.  But if we hold onto the money instead, then the Fed has a problem.  They have to pump even more money.  And that can cause other problems.

So, there it is.  Sticky money.  Some of it is stickier than others.  And it tells us that people with lots of money don’t spend it as fast as those of us with less.

The money is talking.  Is anyone listening?

Stay tuned!





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