Friday, September 17, 2010

M1 Monkey Business

Some odd developments appear to be taking place in the world of monetary statistics.  The Monetary Base (BASE) and M1 appear to be diverging.  BASE tailed downwards ever so slightly, while M1 made a sudden turn upwards:

While obviously not impossible, especially with bank reserves as high as they are, this is still strange behavior.  M2 shows nothing out of the ordinary, so the increase is probably not due to lending.  To me, that would mean that it is probably due to people pulling money out of time deposit (savings) accounts and into demand deposit accounts (checking).  Why would they do that?

Investigating the events surrounding the events of October 2008, I came up with the following graph:

Note that all quantities were indexed to their respective January of 2006 levels and plotted against separate axes to make them intelligible on a single graph.  That said, it appears that a rising M1 anticipated the crisis of the fall of 2008 by just a few weeks.

Why would that be?  I haven't the slightest idea.  Note that I am not trying to say that the one caused the other, which be doubtful anyway, nor am I suggesting that the same thing will happen again with any degree of certainty.  It may just be a coincidence, or this move may be just noise.  Or perhaps both were caused by something else the first time, and this time there is a different cause that will not induce the same chain of events.

But it might.  I really don't know.  I just thought the moves were worthy of note.

The monetary base is now flat to slightly down since November of last year.  The FED is tightening and it appears that funds are being moved towards more liquid positions.  Investors beware!

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