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VIDEODifferentiating Money Supply Measures
By
Mike Mish Shedlock
Jul 26, 2010 11:15 am
What TMS1, TMS2, and M2 mean. And why TMS1 is the best measure available.
Inquiring minds are once again digging deep into money supply questions. They are intrigued by the fact that money supply measures M2 and TMS1 are plunging toward zero, while TMS2 is still sporting a hefty 10+% year-over-year growth.
TMS stands for "True Money Supply." The suffix (1 or 2) stands for alternate measures, one including savings accounts and the other not. M2 is a widely used Fed aggregate for money.
This looks technical (and it is), but I'll explain in easy-to-understand terms exactly what's happening and why, along with what it all means.
TMS1 vs. TMS2 vs. M2 Growth
Source: Michael Pollaro. (Annotations and arrows by me).
The idea behind TMS1 and TMS2 is to sort credit transactions from actual money available on demand.
For all practical purposes, TMS1 consists of currency in circulation + checking accounts + sweeps of checking accounts. There's no dispute by anyone that the components of TMS1 represent money on demand.
Think of it this way: Cash in your pocket and cash in your checking account are there whenever you want, on demand. Indeed, the banking industry refers to checking accounts as "DDA" accounts, Demand Deposit Accounts.
Others want to include savings accounts, time deposits (CDs), and money market accounts in money supply measures.
TMS1 vs. TMS2. vs M2 Aggregates
Notes 1-3 From Michael Pollaro
1. To clarify any confusion for those readers familiar with Frank Shostak’s AMS metric, note that (a) as is the case with AMS, TMS1 excludes savings deposits but adds back bank deposit sweep programs, and (b) in contrast to AMS, TMS1 doesn't include the SFP account.
2. Time and Savings Deposits due Foreign Accounts and US Government Time and Savings Deposits at Banks have been excluded from TMS2 owing to fact that Savings Deposits aren't separately reported by the Federal Reserve Board and, given the fact that Time Deposits aren't money, it was deemed the more conservative formulation.
3. Sweeps of Transaction Deposits into MMDAs are included in TMS2 by virtue of fact that those deposits are included; i.e., a component part of the Savings Deposits, including MMDAs FRB aggregate
Comparison Analysis
M2 includes savings accounts + small time deposits (CDs) + money market accounts.
TMS2 includes TMS1 + savings accounts but not money market accounts or small time deposits.
With the exception of sweeps, the rest of the components have little effect.
The main dispute between the TMS1 and TMS2 camps is in regards to what to do with savings accounts. Proponents of TMS2 claim savings accounts represent money available on demand, while proponents of TMS1 take the tact that savings accounts are "credit transactions" and shouldn't be included in strict monetary aggregates.
I've sided with TMS1 along with Austrian economist Frank Shostak on this point.
We'll return to the debate later but first let's first explore why M2 and TMS1 are dropping rapidly while TMS2 isn't.
Part of the discrepancy can be explained by close analysis of Small Time Deposits and Savings Deposits.
Small time deposits are Certificates of Deposit -- CDs under $100,000. For comparison purposes, "Large Time Deposits" include "Jumbo CDs," amounts above $100,000.
TMS stands for "True Money Supply." The suffix (1 or 2) stands for alternate measures, one including savings accounts and the other not. M2 is a widely used Fed aggregate for money.
This looks technical (and it is), but I'll explain in easy-to-understand terms exactly what's happening and why, along with what it all means.
TMS1 vs. TMS2 vs. M2 Growth
Source: Michael Pollaro. (Annotations and arrows by me).
The idea behind TMS1 and TMS2 is to sort credit transactions from actual money available on demand.
For all practical purposes, TMS1 consists of currency in circulation + checking accounts + sweeps of checking accounts. There's no dispute by anyone that the components of TMS1 represent money on demand.
Think of it this way: Cash in your pocket and cash in your checking account are there whenever you want, on demand. Indeed, the banking industry refers to checking accounts as "DDA" accounts, Demand Deposit Accounts.
Others want to include savings accounts, time deposits (CDs), and money market accounts in money supply measures.
TMS1 vs. TMS2. vs M2 Aggregates
Notes 1-3 From Michael Pollaro
1. To clarify any confusion for those readers familiar with Frank Shostak’s AMS metric, note that (a) as is the case with AMS, TMS1 excludes savings deposits but adds back bank deposit sweep programs, and (b) in contrast to AMS, TMS1 doesn't include the SFP account.
2. Time and Savings Deposits due Foreign Accounts and US Government Time and Savings Deposits at Banks have been excluded from TMS2 owing to fact that Savings Deposits aren't separately reported by the Federal Reserve Board and, given the fact that Time Deposits aren't money, it was deemed the more conservative formulation.
3. Sweeps of Transaction Deposits into MMDAs are included in TMS2 by virtue of fact that those deposits are included; i.e., a component part of the Savings Deposits, including MMDAs FRB aggregate
Comparison Analysis
M2 includes savings accounts + small time deposits (CDs) + money market accounts.
TMS2 includes TMS1 + savings accounts but not money market accounts or small time deposits.
With the exception of sweeps, the rest of the components have little effect.
The main dispute between the TMS1 and TMS2 camps is in regards to what to do with savings accounts. Proponents of TMS2 claim savings accounts represent money available on demand, while proponents of TMS1 take the tact that savings accounts are "credit transactions" and shouldn't be included in strict monetary aggregates.
I've sided with TMS1 along with Austrian economist Frank Shostak on this point.
We'll return to the debate later but first let's first explore why M2 and TMS1 are dropping rapidly while TMS2 isn't.
Part of the discrepancy can be explained by close analysis of Small Time Deposits and Savings Deposits.
Small time deposits are Certificates of Deposit -- CDs under $100,000. For comparison purposes, "Large Time Deposits" include "Jumbo CDs," amounts above $100,000.
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