Essential Economics

— Mark Frears

Miles, kilometers or money

While the new “Top Gun” is good, the 1986 classic was better. No matter whether you are talking about the jets, cars, motorcycles, ships or relationships, this movie is all about speed. Tom Cruise’s love interest drove one of the best classic cars of all time (my opinion). The cars (usually SUVs) these days have become more and more like clones, and pretty soon we won’t even have to drive them. Boring.

Speed in the markets bears a little more attention!

Money supply

The Federal Reserve measures the amount of money at various degrees of liquidity, or spendability, and prior to 2000, these measures were watched closely as they correlated well with economic activity. Since then, it is still watched due to the influence the amount of money, and speed that it moves, can have on the overall economy.

The M1 category measures the most liquid forms, primarily currency and readily available deposits in banks. M2 is M1 plus savings accounts, smaller time deposits and balances in retail money market mutual funds. This is considered the best measure to watch, as it covers a broad spectrum of money that can have an influence on the economy.
 

As you can see from the chart above, the amount of money in the M2 category has continued to increase as the economy has been on a long upward trend. The stimulus money had an immediate effect later in 2020, but the upward trend has continued. After a slight lull in 2023 and early 2024, we are back on an upswing.

“I feel the need, the need for speed”

We talked about the speed of cars; now let’s look at how that relates to money. The velocity is defined as the rate at which money is exchanged in the economy: the number of times one unit of money is spent to buy goods and services per unit of time. 

As you would expect, the velocity slows during the 2008–09 recession, shown in the shaded area to the left above. Right after this recession, due to stimulus provided to the economy, we saw the speed increase, but since then we have been gradually reducing the how fast money circulates. The primary driver of this lower velocity is the increasing amount of money in the system. As we entered pandemic time, velocity fell off a cliff as the economy was basically shuttered and money was dumped into the system to offset potential liquidity stress. Post-pandemic, we started out slow, but we have been on a solid upswing, with a small amount of flattening recently. 

Pace

If you combine supply with velocity (inversely related to demand), you get the graph below. The faster supply growth relative to demand can be seen in the positive sloping line below.

One of the concerns of monetarists is that the accelerated growth rate of supply relative to demand could cause inflationary tendencies. At the start of the pandemic, we saw this slow significantly, but there was a sharp upturn, and it has not slowed down! As the fiscal stimulus did not slow down, even when the FOMC was lowering rates, we are still seeing a continued strong upward trend. Given the action in the long end of the UST curve and “the pause” by the FOMC, the market will continue to watch for inflationary warning signals. 

Economic releases

Last week saw a Fed on hold, lower consumer confidence and PCE stalling. While the election uncertainty has passed, the markets are still treading water watching for next steps.

This week’s calendar is focused jobs, with JOLTS, ADP and nonfarm payroll. In addition, we will see preliminary February consumer sentiment and consumer credit. See below for other releases.