Now I Know How Keynesians Felt in the 1970s

This is blowing my mind. The more I think about this, the more perplexed I become. Unless the Fed is just making this stuff up, M1 has been virtually flat for three years; see this graph.

Now here's what's crazy: The Fed has cut the fed funds target 300 basis points since September. At the same time, everybody is in panic mode, so you would certainly think that the demand for liquid assets (such as, um, reserves on deposit with the Fed?!) would skyrocket.

How is this possible? How can the yield on loans of overnight reserves with the Fed be dropping, when people want liquid assets and M1 is flat or even falling over the last few months?!

NB, you might be tempted to say, "What are you talking about? It's a rush to safety, so the fed funds rate is falling just like other Treasury yields."

But no, the fed funds rate refers to loans made between two banks; the government isn't involved on either end. So if banks are afraid of each other because they don't trust their reported asset values, why the heck would they be content with falling yields on these loans?


  1. History is not amenable to theoretical analysis, but only to historical analysis.

  2. Actually, banks are aggressively sweeping funds from checking accounts to various time deposits which are a part of M2.

    The reserve requirements are much less stringent on time deposits, thus giving banks greater flexibility.

    Over the last 3 months M2 is up at annualized rate of over 10%.

  3. Gene,

    I'm not 100% sure what you mean. I am not making a purely theoretical argument; I am using my "understanding" (Mises) to say that the demand for reserves increased since August, and that the supply of reserves has not increased. Then my theory tells me that the fed funds right should be higher than it was last summer. Yet it's lower.

    So now I'm asking, what is wrong? Either the supply/demand curves didn't move the way I thought, or my deductive theory is invalid.

  4. RW: OK that is helpful. I guess I should first of all look at the various components of M1. You're right, I was acting as if M1 = reserves, when it is more than that.

  5. Anonymous2:54 PM

    Since 06, there has been a split in the hard money logosphere as to whether the US Fed has been loose or tight with the money supply.

    Some like North and Shedlock claim M1 growth is flat therefore the US money supply is deflating.

    Some cite MZM or M3 and claim money and credit are balooning therefore total US money supply is loose.

    The former camp always sites the St. Louis Fed's adjusted monetary base chart.

    I find it ironic that anti state economists can argue that the government cooks the books when it comes to CPI, the unemployment rate, GDP etc., but those same economists take money supply statistics provided by the Fed as accurate? How does one think the government lies about just about everything also believe the Fed's data?

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