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Savings are now more liquid and part of “M1 money”

Regulation D has made savings deposits as convenient as currency

Money is marvelously nuanced. Because different assets can be used as money, we need several categories and definitions to keep track of it. M1 describes the most liquid and widely accepted assets used to easily settle transactions: currency, demand deposits, and highly liquid accounts.

A previous FRED blog post discussed how recent changes in the opportunity cost of money and the regulation of savings accounts have affected measures of the money stock (a.k.a. monetary aggregates). In this post, we tighten our focus on how these regulations have affected M1.

Before April 24, 2020, savings accounts were not part of M1. Limitations in the number of transfers from savings deposits made savings accounts less liquid than M1. M1 consisted of currency, demand deposits, and other highly liquid accounts called “other checkable deposits” (OCDs). An example of OCDs are the demand deposits at thrifts.

But the limitation on the number of these transfers was lifted on April 24 as an amendment to Regulation D, which specifies how banks must classify deposit accounts. Savings deposits are now just as liquid and convenient as currency, demand deposits, and OCDs. To reflect this fact, savings deposits are now included in M1.

The FRED graph compares the new M1 with what would have been M1 under previous regulations, when it included only currency, demand deposits, and OCDs. From May 2020 on, M1 comprises currency, demand deposits, and a new item called “other liquid deposits.” These are the OCDs plus savings deposits. Previously, the OCDs consisted about 17% of M1. Now, the other liquid deposits consist about 70% of M1.

As of May 2020, the old M1 would have had a value of around $5 trillion. The new M1 has a value of $16 trillion, a substantial increase and a clear break in the time series.

For all you data scientists and researchers: It’s no longer possible to reconstruct the old measure of M1 because OCDs and savings deposits are not reported separately anymore. They’re now reported as a sum under “other liquid deposits.” But the graph here shows the separate series for OCDs and savings deposits that were still available from May 2020 to January 2021.

The graph also shows that M1 is now close to M2. Before May 2020, the difference between M2 and M1 was large because a great portion of M2 consisted of savings deposits. These savings deposits are now part of M1, so M1 is much larger and closer to M2. M2 is still larger than M1 because it includes less-liquid assets such as time deposits.

How this graph was created: To graph the previous measure of M1, search for and select the seasonally adjusted series for “Currency component of M1.” Add the two other components to this line from the “Edit Graph” panel’s “Edit Line 1” tab: In the “Customize data” field, search for seasonally adjusted series for demand deposits and other checkable deposits. In the formula field, type a+b+c and select “Apply.” To add the current series of M1 and M2, use the “Add Line” tab to search for and select each aggregate: “M1 Money Stock” and “M2 Money Stock.”

Suggested by Andre C. Silva and Christian Zimmermann.

View on FRED, series used in this post: CURRSL, DEMDEPSL, M1SL, M2SL, OCDSL

How much money is the Fed printing?

We hear frequently that the Fed is printing money like crazy these days. This is not quite true. There are various definitions of money: For money that is being printed, one needs to look at currency in circulation, which actually counts all printed banknotes less those that have not left the Fed’s vaults. So, has the money in circulation increased like crazy since the start of the latest recession?

The currency in circulation (technically called the currency component of M1) is indeed increasing, but there is no indication that it is accelerating. To see this, we have taken the natural logarithm of the series. This means that if the slope is the same for two years, the growth rate is the same. Not taking the natural logarithm would show an illusion of acceleration, as a 1% increase in 2014 would look much bigger than a 1% increase in 1960 because the stock of currency has increased over time.

And why did it increase? One major reason is simply that the economy has grown and needs more currency to function. In the graph above, we divide the currency in circulation by nominal gross domestic product (GDP). While this ratio has indeed increased recently, it is nowhere near historical highs as some commentators seem to imply. In fact, it also seems to follow a neat U-shaped long-term trend. Thus, again, nothing special in recent years.

How these graphs were created: For the first graph, search for “currency” to find the right series. In the graph tab, expand “Create your own data transformation” and select the “Natural Log” transformation. For the second graph, undo the natural log transformation by selecting the empty transformation. Then search for GDP (not the Real one; we want a ratio of nominal series) and add it to series 1. Finally, use the data transformation “a/b” to obtain the ratio.

Suggested by Christian Zimmermann

View on FRED, series used in this post: CURRSL, GDP

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