Less Money, Mo Problems

Felix Salmon says I was too quick to assert that the Fed’s response to the crisis involved a sharp increase in M2:

M2 1

Yes, M2 rose in the wake of the crisis. But the sharp rise in M2 dates back much further than that — in fact, you can trace it all the way back to the mid-1990s. The red line doesn’t start rising more sharply when the crisis hits, nor do the blue lines get noticeably larger. There’s one big jump in M2 between August 2008 and January 2009, right at the height of the Lehman collapse, during which it rises from $7.79 trillion to $8.32 trillion, a rise of just under 7%. But we’ve seen that kind of thing before: between November 2000 and May 2001, M2 grew by more than 5%, and then between May 2001 and October 2001, it went on to grow another 4% on top of that.

Others feel the most appropriate measure is the MZM Money Stock:

FRED Graph 1

In this view, we’re stuck in neutral because monetary conditions are actually quite tight.