Fiscal Operations, TGA Mechanics, and Money Supply Aggregates

[Joe Leote]

I don't have time tonight to watch the end of this video but the beginning shows a decline in the TGA account with accurate description of the TGA mechanics:

https://youtu.be/xj6X-OOVsn0

The level of M1 money is directly impacted by TGA mechanics, however, the deals that banks make with non-banks cause M1 to increase or decrease. The level of M1 and M2 money is almost irrelevant. This is because the interest rate on CDs or other bank liabilities can go up and attract migration of funds away from M1 or M2. The level of bank credit (bank assets) determines the size of the aggregate commercial bank sector and the need for bank finance alters the mix of bank liabilities. The play between short and long term interest rates can easily alter the mix of bank liabilities. I will watch the end soon and perhaps post remarks.

Joe

[William Meyer]

Haven't see the video yet but will.  First step is getting a VERY precise definition of m2 which is surprisingly difficult.  Are MMFs part of m2?  I've read they both are and aren't.  

If I recall, eurdollar deposits are not?  But that at least makes sense since most of those are time deposits.

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[Joe Leote]

Below the link is the text of Table 1, Footnote 2. Including money market mutual funds in M2 is double-counting. If I move funds from my bank account to an MMF then the bank deposit ownership transfers to the MMF.  If the MMF buys Treasury bills or other short term liabilities then the ownership of the bank deposit moves to the previous owners or new issuers of those short term bills. Historically there was some correlation between GDP growth and M2 but that trend broke down and there is no justification to base monetary or fiscal policy on the level of M2.

Federal Reserve Board - Money Stock Measures - H.6 - April 23, 2024

M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (2) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing small-denomination time deposits and retail MMFs, each seasonally adjusted separately, and adding the result to seasonally adjusted M1.

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[Joe Leote]

Fed increased its balance sheet during Covid-19 crisis in part to replace the loss of private sector finance in the municipal bond markets:

How the new fed municipal bond facility capped municipal-treasury yield spreads in the Covid-19 recession - PMC (nih.gov)

The papers I wrote and posted on SSRN include the concepts that I called the Bank Generator and the Fed Generator of M1 money supply. The point that George Gammon is making in the video is that Fed is reducing its balance sheet, which means it is a sink rather than a source of new M1 money supply. This is "tight money" consistent with inflation reduction efforts and it is not necessarily a problem for the economy if credit formation is sufficient in the private sectors. I agree in broad terms with his understanding of the mechanics and his idea that Fed reducing its balance sheet is similar to a reduction in the aggregate bank sector balance sheet when one combines the Fed balance sheet with the aggregate bank sector balance sheet it would just be the combined public and private sector aggregate balance sheet. I don't understand the knock-on impacts of monetary policy at this point following the complexities of the public policy and private market reactions to the Covid crisis.

Joe