A major shift in our macroeconomic landscape has changed in November and this chart represents that.
Terminology:
M1 = coins and currency in circulation + checkable (demand) deposit + traveler’s checks. ( liquid assets )
M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits.
some difficult math gives you:
M2 - M1 = savings deposits + money market funds + certificates of deposit + other time deposits.
M1: represents cash, checks, everything that is highly liquid. For example, if you have a $10 dollar bill you can go buy a chicken sandwich (buy Tyson TSN) pretty easily. But, if that money is in your savings account (M2), it is less liquid cause you can't just get a chicken sandwich like that, you have to go to the bank first.
M2 - M1: In English, it gives you an approximation of bank lending: Take out all the short term stuff, checking account, cash, take it out of M2. M2 - M1 has contracted very sharply in November. If you look at M1, it rockets in that month. Too much (cash) money chasing too few goods leads to inflation. Savings deposits fell in the banks the same month by -0.80%. The deposit side of the bank's balance sheet is shifting away from term loans to build up cash. With more people going to cash, banks need to be able to supply these dollar bills. By moving out of the term loans(savings), then they reduce that cash by going out and buying things.
Bank lending has dropped. Banks usually smell out trouble in the economy before it is realized by others. Look at the poor performance of banks across the board.... When Covid first started supply chains were halted and thrown into retardation. There were not enough funds for companies, businesses, and industries to maintain their supply chains. Containers are accumulating in America and Europe and are not getting back to China/India or wherever they get loaded up. It's a logistic nightmare that represents the supply chain mess. Everything has an equal reaction so, a supply chain mess means there is a payment mess. This leads to a decrease in gross output (GO), the measure of total economic activity in the production of new goods and services in an accounting period. Gross output has fallen 38 trillion to 34 trillion and now it is back up to 36 trillion. The banks have finally realized that the economic landscape is in shambles. The money lost in a broken supply chain system means there is a lot of money that is not flowing into companies balance sheets. The broken supply chain, airlines, restaurants, tourism, commercial real estate, transport, etc. it is just not just shipping containers. Banks are hustling to get all of these bad loans out of their books, reducing their exposure/obligation to this mess. The banks are so overleveraged into this mess and need money. Banks got to get this money from somewhere so they nudge their good buddy, Powell, and his goonies at the fed. The fed can't let banks go under for obvious reasons, so they give that narrow money to the banks causing a hyperinflation environment. In other words stimulus, or just transferring wealth to the government in the simplest term.
Questions are welcome.
Comment
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With M1 increasing we got short term inflation and that raised commodity prices. Now M1 is coming down so commodity prices will now follow the long term trend of deflation
Lol I don’t think any retail traders care or pay attention or even know what m1 m2 are.
MoneybagsMcGee
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this is deflationary, not inflationary. there is a demand for dollars, the debts get paid, and people sit with their dollars instead of investing or speculating.