Tuesday, January 11, 2011

A Closer Look At Money Supply: MZM

Let's continue our look at money supply, with a look at MZM, which is

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."

At this point, it's important to define M2 as well, which is:

A category within the money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.

M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions.

So what we have is the money supply between M1 and M2. Let's take a look at the numbers.

First, note the year over year percentage change in MZM was slightly negative a bit ago, although it has just turned positive.

In addition, note the velocity has been decreasing for the last decade.

So -- why is this happening to MZM in comparison to M1? The answer is money market funds. MZM includes money market funds on the assumption that people use these funds as a bank account of sorts (which they do). However, short term rates have been incredibly low for the last decade, making money market funds very unattractive. Here is a chart of total money market funds: