Wednesday, April 27, 2011

A Closer Look at MZM

Investopedia defines MZM thusly:

A measure of the liquid money supply within an economy. MZM represents all money in M2 less the time deposits, plus all money market funds.

MZM has become one of the preferred measures of money supply because it better represents money readily available within the economy for spending and consumption. This measurement derives its name from its mixture of all the liquid and zero maturity money found within the three "M's."
So this concept lies between M1 and M2.

The above chart is the total of MZM on a logarithmic scale. When the overall trend is up, there have been some noticeable sideways moves: the mid-1980s, the late 1980s , the mid-1990s and right after the last recession.

The above chart places total MZM and GDP on a 200 scale. Notice that -- like the other monetary aggregates, both have a general uptrend. However, MZM's overall pace of growth has been accelerating faster than GDP since the end of the last expansion.

Coming out of the early 1980s recession we see a big spike in MZM's YOY percentage change which correlates with a concurrent rise in GDP. However, MZM rose during the middle of the expansion with no rise in GDP. But, the MZM/GDP correlation returned coming out of the early 1990s recession, although the pace of MZM's YOY growth was far lower than that of the early 1980s recession.

The above chart shows MZM's and GDPs YOY percentage change for the years 1993 through 2010. In 1995 we see a dip and then rise in MZM which corresponds to the similar movement in GDP, but MZM's move is far more prounced. During the second half of the expansion MZM rises with no concurrent move in GDP.

As with the other monetary aggregates, I find it interesting that the YOY relationships are so weak; I would have expected a more solid relationship. However, the one to one relationships are still solid, which makes sense. In a $14 trillion economy, there has to be a sufficient amount of money to actually engage in transactions.