ODL vs M2 Chart Notes
- Other Deposit Liabilities (ODL see description below), is a monthly average.
- M2 is a monthly measure through February.
A Better Definition of Money
The main difference between ODL and M2 is that ODL does not include currency or retail money market funds.
Currency is accepted at an increasingly fewer number of business establishments and simply cannot be used for very large sized transactions. Retail money market funds never became an important medium of exchange. Both are becoming a far less used medium of exchange.
ODL has the additional advantage that it is the main source of funding for bank loans and investments, making ODL both a monetary and credit aggregate. Friedman would not be surprised that the need to change the best definition of what constitutes money would change over the years.
The above three paragraphs from Lacy Hunt at Hoisington Management.
Don’t confuse ODL with the Fed’s H.6 Money Stock Report line Other Liquid Deposits.
The Biggest Collapse in M2 Money Supply Since the Great Depression
My ODL numbers do not match the H.8 report because the St. Louis Fed (Fred) uses a Monthly Average calculation whereas the H.8 report is weekly.
The Fed appears to average complete weeks that fall within the month but Fred (the St. Louis Fed download) doesn’t.
ODL is headed for a 6th consecutive decline, every month starting October.
Constraints on Bank Lending
The contraction in money supply coupled with a rise in interest rates has reduced the desire of banks to lend and the desire of businesses and individual to borrow.
The key constraint on bank lending is not reserves or deposits but rather capital impairment.
If banks are not capital impaired, they will lend if they believe they have good credit risks who want to borrow.
Three Bank Failures
Since my last report on ODL, three banks, Silvergate Bank, Silicon Valley Bank, and Signature Bank, collapsed and were taken over by the FDIC because of duration mismatch losses and runs on the banks.
In addition, losses at regional banks are mounting due to implosions in commercial real estate.
The bank failures, commercial real estate woes, and recession risk all inhibit lending.
MishTalk Video, What’s the Real Risk Now, Is it Inflation or Deflation?
Given the obvious inflationary forces, that may seem like a silly question, but please consider this video discussion: What’s the Real Risk Now, Is it Inflation or Deflation?
The short answer is Credit Freezes Are Highly Deflationary. See the above link for details and discussion.
This post originated at MishTalk.Com
Please Subscribe!
Like these reports? I hope so, and if you do, please Subscribe to MishTalk Email Alerts.
Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.
If you have subscribed and do not get email alerts, please check your spam folder.
Mish
See: “Should Commercial banks accept savings deposits?” Conference
on Savings and Residential Financing 1961 Proceedings, United States Savings
and loan league, Chicago, 1961, 42, 43. By Dr. Leland James Pritchard, Ph.D.,
Economics, Chicago 1933, M.S. Statistics, Syracuse.
“Profit or Loss from Time
Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency,
United States Treasury Department, Irwin, 1963, pp. 369-386
monetary savings, income not spent. It’s stock vs. flow.
Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman and Anna
J. Swartz (“Money and Business Cycles”), monetary lags are not “long &
variable” (A Monetary History of the United States, 1867–1960, published in
1963).
flows, the volume and velocity of money, the proxy for real output in American
Yale Professor Irving Fisher’s truistic “equation of exchange” needs to fall for 10 consecutive months to start a recession.
“When interest
rates go up, flows into savings and time deposits increase” ( the ratio of M1
to the sum of 12 months savings ).