Idle money, idle chatter

Graph #1: M1 Velocity (blue) and the FedFunds Rate (red)

If you go to FRED and look at M1V it doesn't look like the blue line on Graph #1 here. Here, the blue line uses M1 with "sweeps" added back in. "Sweeps" is the money banks take out of your checking account at night while you're sleeping and use it to make themselves money. The M1V you'll find at FRED is figured while you're sleeping, when the banks have that money out and the M1 number is low.

I guess they figure M1 is the money we spend, and we won't be spending while we sleep, so that money really shouldn't be in M1 anyway. I don't know what they figure. But if I have $100 in my checking account in the daytime, unspent, I expect to have $100 in my account while I sleep.

Anyway, the blue line here is based on the higher M1 number, the one that includes "sweeps". So the blue M1 Velocity line is different from what FRED shows.

Actually I don't like thinking of it as velocity. I think of it as GDP relative to the money we have for spending. Usually I do that ratio other side up: the money we have for spending relative to the stuff we buy with that money. Stuff = GDP. Goods and services. You know the drill.

When you look at it as the money we have for spending relative to the stuff we buy with that money, you can see if we have a lot of money in the economy, or little money in the economy. And actually, you can see the changes from lot to little. To me that's meaningful. When we have a lot of money the streets are paved with gold. When we have little, times are hard.

But economists don't look at it that way. They turn the ratio other side up, as it is on the graph above. This way we get to look at how much GDP we bought with each dollar we have. We bought about $5 of stuff with each dollar in the late 1960s. Then it went up, and we bought about $7.50 of stuff with each dollar in the early 1980s. Then it drifted down to about $6.50 of stuff by the time of the crisis. After that, quantitative easing increased the M1 number, and the blue line ends up about where it started.

I don't really find that useful information. Economists say we were spending money faster. I think that's bullshit. We were using more credit and accumulating more debt. Oh, but they can't say that, because they say debt doesn't matter. They say our debt doesn't matter. As opposed to the Federal debt.

You really shouldn't spend a lot of time listening to what economists say.

Anyway, the graph. Velocity went up regularly before 1981 while interest rates were spastic from the inflation of the time. But since 1981 the red and blue lines move together. Really quite remarkably together, I think.

Oh, and you see there at the end, after 2010, the blue line goes down a lot but the red line runs flat. The red line runs flat because that's the interest rate at the zero bound, where it won't go lower. Some economists say interest rates should have gone down below zero. You could see that. The red line would continue to run parallel to the blue, and interest rates would end up below zero. Other economists dispute that.

It's all idle chatter.