I did find a completely relevant discussion by Kasriel, but my Netscape browser wouldn't follow the links on the Northern Trust site. Got through with MS Explorer, and here is a (lengthy) quotation--will try to paste in URL, too:
northerntrust.com
(click on item on M2 money supply behavior for text and charts)
No, according to the best and the brightest economists on the Street. In their view, the surge in M2 growth is just a manifestation of the public's flight to safety from a declining stock market. But wait a minute, how does my sale of stock market shares increase the M2 money supply in the aggregate? Where does my increased M2 come from? It comes from the buyer of my shares. My increase in M2 is her decrease in M2. In the aggregate, then, M2 would not increase. Rather, its ownership would just change. I would not argue against the notion that the public may have increased its demand for M2 relative to stocks. But I do take issue with the notion that this increased demand for M2 has caused the supply of M2 to increase commensurately.
You see, a changein the M2 money supply is a byproduct of a change in the same direction of bank/thrift/money market fund loans and investments. It's old-fashioned double entry bookkeeping. Assets equal liabilities plus net worth. M2 is found on the liability side of the balance sheet of banks/thrifts/money market funds. Loans and investments on the asset side of the balance sheet. So, if M2 is growing more rapidly, then bank/thrift/money market fund lending must be growing more rapidly, too. Perhaps the buyer of my stock took out a bank loan to finance his purchase. In this case, then, M2 could increase.
As mentioned at the outset, the last time we witnessed such a surge in M2 growth was back in the fourth quarter of 1998. What was going on back then? Let's see, there was the Russian bond default, the foundering of LTCM and a US stock market making a beeline in the southerly direction. Couldn't it be argued that back in late 1998 the public wanted to increase its M2 holdings relative to other assets as might be the case today? What happened to domestic aggregate demand after the late-1998 surge in M2? Before answering that, let's take a look at what the relationship has been between price level-adjusted M2 growth, i.e., real M2 growth and growth in real domestic final demand for goods and services. This is shown in Chart 2 below. When year-over-year real M2 growth is advanced three quarters, it has a positive correlation of 0.67 with year-over-year growth in real final sales to domestic purchasers during the past 40 years or so. So historically, real M2 growth does seem to possess leading economic indicator characteristics of a relatively high degree. |
